Sameer Africa has closed its Yana tyres manufacturing factory in Nairobi citing increased competition from cheaper imports, dealing yet another blow to Kenya’s ambition to industrialise.
The company, through a notice to the Capital Markets Authority (CMA), said its board had decided to discontinue local tyre production at its factory on Nairobi’s Mombasa Road.
The tyre maker had earlier warned of a possible shutdown, citing the government’s failure to curb dumping of cheaper and low quality tyres in Kenya.
It will now outsource its tyres from producers in low-cost China and India – a double whammy for the Kenyan economy in terms of job losses and waning momentum to industrialise.
“At a meeting held on Monday 29 August, the board of directors resolved to cease the manufacture of tyres and allied products at the Sameer Africa in Nairobi and to commence off-shore production by tyre manufacturers domiciled in China and India,” the company said in the note to CMA.
Sameer expects its balance sheet to take a hit owing to the closure and has consequently issued a profit warning. This means it expects its profits to drop by more than 25 per cent in the current financial year ending December 31.
“The company will incur a one-off charge in respect of plant and inventory impairment and employee severance cost estimated at Sh725 million,” Sameer said, adding there will be layoffs, especially among employees directly involved in manufacture of tyres and tubes.
Sameer is majority owned by businessman Naushad Merali who has a 72.15 per cent stake in the company.
Closure of the factory, which has been in operation for decades, adds to a long list of manufacturers who have left the Kenyan market citing a harsh operating environment.
Eveready East Africa closed its Nakuru-based battery factory in September 2014 in what the company attributed to increased competition from cheap dry cells imports, resulting in massive job losses.
A month later, chocolate maker Cadbury shut down its factory in Nairobi, dealing a blow to Kenya’s quest to industrialise by 2030.
Other manufacturers that have recently closed production lines in Kenya include Procter and Gamble and Reckitt Benckiser.
Most had cited high cost of doing business partly mainly driven by high cost of energy as reason to relocate.
Kenya’s industrial power costs are higher than most of its African competitors, blunting the country’s competitive edge, according to Kenya Association of Manufacturers (KAM) – a lobby for industrialists.
Kenya’s industrial power costs stand at an average of Sh17 per kilowatt hour (kWh) compared to Tanzania’s Sh12 per unit ($0.12), Egypt’s $0.11 (Sh11) and Ethiopia’s $0.09 (Sh9).
South Africa, the most industrialised economy on the continent, is $0.06 (Sh6).
Globally, Chinese industrialists get power at the cost of $0.03 (Sh3) per unit while India is at $0.09 (Sh9). Local manufacturers also shoulder the burden of erratic power supply, which stalls production and saps employee morale.
Sameer said it was in the process of finalising contract manufacturing agreements with companies in India and China as it shifts production from Nairobi.
In 2014, the local tyre manufacturer contracted a Chinese firm to produce Summit tyres for the low-end market.
Asian makers are also subsidised up to 80 per cent of their sales, allowing them to gain market share in East Africa where cheaper tyres are in high demand.
The World Bank early this year warned that increased Chinese imports could lead to Africa’s de-industrialisation even before the region enters the industrialisation stage.
Analysts reckon that there is need for a policy rethink to lock out imports that local manufacturers can make, and letting in only capital goods such as machinery.
Manufacturing’s contribution to Kenya’s gross domestic product (GDP) has averaged 11 per cent in the past 10 years showing a general stagnation of the sector.
Sameer’s bid to form a joint venture with a technical investor –to modernise its tyre factory in Nairobi— collapsed last year after the parties failed to agree on the valuation of the business.
The firm plans to diversify to the real estate market in the wake of flagging fortunes in the tyre manufacturing business.
The planned projects include an office block in Nairobi’s Westlands while its land on Mombasa road will host a shopping mall and hotel.
Sameer booked a 9.1 per cent drop in net profit to Sh43.5 million for the six months ended June.
Its revenues shrunk 15.8 per cent to Sh1.4 billion in what it attributed to increased competition from subsidised tyre imports from India and China.
The company exports to regional markets such as South Sudan, Tanzania, Uganda and Burundi.
Sameer has over the years said that Kenya has failed to implement anti-dumping policies to counter influx of cheaper products from the East, stifling growth of local industries.
It has also blamed its woes on rampant under-invoicing by tyre importers across the region which makes the playing field uneven for local manufacturers.