Kenya auto assemblers feel the heat as Addis engages top gear

Kenya’s motor vehicle assembly industry runs the risk of being overtaken by Ethiopia’s as poor policies and lukewarm government support contrasts an ambitious plan by its northern neighbour to transform its tiny auto sector.

Kenya’s assembly sub-sector remains stagnant due to unwillingness to offer tax breaks and deter importation of second-hand cars, a study by consultancy Deloitte shows.

Contrastingly, Ethiopia is looking to building capacity for assembly with a view to raising domestic and regional sales as it works to develop vehicle manufacturing factories in next two short decades.

“Despite new investments in the country, Kenya’s automotive sector is relatively stagnant and runs the risk of being sidelined in the long-term by other regional players such as Ethiopia, which has a more progressive approach to industrialisation,” Deloitte observed says.

Data from the Kenya National Bureau of Statistics (KNBS) shows that the number of locally assembled vehicles in Kenya has been rising from about 5,700 in 2010 to about 10,000 last year.

But the first quarter production this year dropped sharply by 35 per cent, a development that industry players attribute to the imposition of excise tax on the locally assembled vehicles.

The bulk of locally assembled vehicles in Kenya are pick-ups and trucks that previously did not attract excise tax until December last year when a duty of Sh150,000 was introduced.

This has since been revised to 20 per cent of the value of the vehicle, further pushing up prices.

Ms Rita Kavashe, the chief executive of General Motors East Africa (GMEA), one of the major local assemblers, says the sub-sector is regressing and when compared against Ethiopia, Kenya loses.

“Other than the zero import duty (on complete knock-down kits) there is no other incentive for local assemblers,” she said.

“The incentives are being eroded by taxes like those (excise). This is going to challenge the viability of local assembly in Kenya. New players want to come but they are not going to come when it’s not attractive to produce in Kenya.”

Most of the automotive investment in Ethiopia is coming from China with newly assembled vehicles competing on equal price footing with second-hand models imported from Japan.

Assemblers in Ethiopia are churning out Chinese brands such as Geely, FAW and BYD as well as Lifan.

A Reuters report says Ethiopia is producing about 8,000 locally assembled vehicles in industrial zones around Addis Ababa and the northern city of Mekelle. The growth is supported by several incentives which encourage local input and export.

“For example, new investors in the manufacturing sector, including automotives, are exempt from paying income tax for a period of five years if more than 50 per cent of their products or services are exported, or if more than 75 per cent of their product is supplied to an exporter as a production input,” Deloitte further says.

“Investors who only supply the local market or export less than 50 per cent of their product are tax exempt for two years.”

Semi knock-down kits are charged import duty of five per cent with no excise tax if they are for trucks, pick-ups and public transport vehicles. The Value Added Tax (VAT) is 15 per cent compared to Kenya’s 16 per cent.

READ: Kenya-assembled vehicles hit 10,000 units on tax incentive

Notably, Ethiopia is producing sedans compared to Kenya where they are imported fully built, either new or second-hand.

“The aim is to become a leading manufacturing hub in Africa,” State Minister for Industry Tadesse Haile told Reuters. “We want to become the top producer of cars on the continent in 15 or 20 years.”

The sluggish growth in Kenya and the rise of Ethiopia appears starker as the former has for a long time had the infrastructure to develop local assemblies but has been hindered by policy.

Kenya has three major assembly plants: General Motors East Africa (GMEA) plant in Nairobi, the Associated Vehicle Assemblers (AVA) plant in Mombasa and the Kenya Vehicle Manufacturers (KVM) plant in Thika.

The three have a combined capacity of producing 32,000 units annually but the KNBS data shows they are operating at a third of their potential.

“Ethiopia is going to provide a threat to production yet Kenya had already developed the right infrastructure with three plants. If we had the right policies we could position Kenya to serve the entire region including Ethiopia,” Ms Kavashe said.

Among the policies suggested for Kenya to become more competitive is to decrease the age of cars coming into the country to about five years.

Deloitte further says that the taxes on second-hand vehicles should be raised while simultaneously giving more tax breaks to local assemblers.

“South Africa has used tax incentives to promote its fledgling auto industry while Ethiopia has a policy that requires the government to use only locally-assembled cars as a way to boost sales,” an East African Community (EAC) official told The EastAfrican newspaper in the past.

Uganda and Tanzania are also building their automotive capacities and Kenya is facing more competition for the regional market both from her EAC partners and the north.