Uhuru orders State agencies to buy locally-made vehicles

President Uhuru Kenyatta Wednesday directed ministries and government departments to buy locally assembled cars as part of a plan to expand the new vehicles market and attract more global automakers to invest in Kenya.

The presidential directive means that the government will guarantee companies assembling cars locally minimum volumes and allocate them a significant portion of the new car market revenues.

The government accounts for a quarter of all new vehicle purchases annually.
Mr Kenyatta’s directive is in line with a comprehensive motor vehicle industry policy that seeks to promote local assembling and gradually reducing imports of used vehicles that currently dominate the market.

German automaker Volkswagen became the first beneficiary of this policy, after the government committed to buy 300 of its Polo Vivo cars annually.

READ: Locally assembled VW Vivo priced at Sh1.65m

The vehicles will be made at the Thika-based Kenya Vehicle Manufacturers assembly plant, which Mr Kenyatta officially opened on Wednesday.

“Priority must and will always go to that which is manufactured, assembled or value-added to some level here,” Mr Kenyatta said.

“With the opening of this facility, I expect to see a lot of VW government vehicles. I hope the county governments will also buy Volkswagen cars.”

READ: Volkswagen unveils Sh1.65m car as it launches plant in Thika

Industrialisation secretary Adan Mohamed told the Business Daily that the government has signed an agreement with the Wolfsburg-based automaker to buy 300 of the Polo Vivo hatchbacks each year.

That would automatically give Volkswagen’s local franchise holder, DT Dobie, a 10 per cent market share in the new passenger car market and intensify competition against Toyota which sold 969 units in that category last year.

The policy is already piling pressure on rival vehicle manufacturers to follow Volkswagen with local assembly lines that also qualify for exemption from import duty and excise taxes that are levied on fully-built imports.

Completely knocked down (CKD) vehicles headed for assembly plants are exempt from import duty (at 25 per cent) and excise tax (20 per cent of a vehicle’s value), giving them a price advantage.

Japan’s Toyota, America’s General Motors and French automaker Peugeot S.A. are currently seeking similar incentives offered to Volkswagen as they plan to start assembling their cars locally.

“We are in consultations with Peugeot, Toyota and GM. That is why we are working on an integrated motor vehicle policy that works for all. But whatever incentive that we’ve given (to Volkswagen) will be given to everyone,” he said, adding that the government will strictly enforce the “Build Kenya, Buy Kenya” policy on the automotive industry.

Formal announcement

Mr Kenyatta hinted that talks with one of the vehicle manufacturers has succeeded, saying that he will soon be back at KVM to formally announce it.
Peugeot is weighing its options whether to build its own assembly plant or sign a contract with one of the existing assemblers.

Mombasa-based Associated Vehicle Assemblers (AVA) and KVM are the only facilities that offer contract production, with General Motors East Africa (GMEA) running a facility exclusively for its Isuzu brands. Toyota is said to be interested in assembling its cars at AVA where it has been producing its brand of buses, pick-ups and light trucks.

It was not immediately clear whether GMEA plans to start local assembly of cars or pick-ups, which it transferred to South Africa in 2013 seeking larger economies of scale and better incentives.

The move has left the dealer’s assembly plant to produce only Isuzu buses and trucks as it imports Chevrolet cars and Isuzu pick-ups fully-built from South Africa.

Besides tax exemption and preferential treatment in government tenders, local assembly of cars will further be promoted by regulations curbing the import of used vehicles.

“At the same time we will be working on and developing a programme on what to do with the second-hand motor vehicles. The timing has to be such that as new vehicles come up we try and reduce the second-hand imports,” Mr Mohamed said.

Imports of second-hand cars could be curtailed by imposition of higher taxes or limiting their age.

Used cars, which sell from as low as Sh700,000 depending on the model, year of manufacture and its condition, are popular among the price-sensitive middle class.

This has narrowed the customer base for new car dealers to the government, private companies and wealthy households.

Lower prices of second-hand imports have also served to accelerate depreciation rates for new cars, a move that also discourages leasing among individuals.

While Kenya is keen on offering incentives to attract more automakers, these are still dwarfed by the wide array of support offered to vehicle manufacturers in countries like South Africa, which has one of the most vibrant auto industries on the continent.

The incentives in South Africa include a non-taxable cash grant of 20 per cent for assemblers/manufacturers and 25 per cent for component producer and tooling companies on the value of qualifying investment.

An additional non-taxable cash grant of five per cent is given to firms maintaining their base year employment figure. South Africa requires companies to achieve a minimum annual output of 50,000 units or a turnover of R10 million (Sh72 million) to qualify for the incentives.

The incentives have seen South Africa produce more than 600,000 vehicles annually — 60 times Kenya’s output — which it sells to the domestic market and tens of other African countries.

Ethiopia has also announced a raft of incentives, including tax breaks, in an ambitious plan to build its vehicle assembly industry for internal sales and exports.

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