Multi-national companies operating in Kenya have stepped up expansion plans, lured by the country’s attractiveness as more African nations embrace borderless trade.
British American Tobacco (BAT), Nestle Kenya, Weetabix East Africa Limited, Bata Shoe Company and Cadbury East Africa have announced multi-billion shilling expansion plans in the race to tap new demand in Eastern Africa region and part of North Africa.
The expansion looks set to shore up the contribution of the manufacturing sector to Kenya’s GDP and the share of new jobs in Kenya’s recovering economy in line with the goal to make the country a middle income economy by 2030.
The rising interest in Kenya is linked to the formation of the common market in East Africa, which is expected to create a market of about 126 million people and allow the free movement of factors of production, goods and services among the five member states.
Plans by Southern African Development Community (SADC) EAC and Comesa in 2008 to form a free trade area (FTA) covering more than 527 million people with an estimated combined gross domestic product of about $624 billion have also enhanced Kenya’s appeal to manufacturers as a business hub.
As a result, the multinationals are redrawing their territories, opting to have larger factories to feed different economies a move that has seen Nairobi emerge as a trading hub because of its proximity to a wider market including Central Africa, North Africa and Middle East markets.
This is a departure from earlier trends where multinational companies have either scaled back new investments in their operations in Kenya or moved their manufacturing plants to countries such as Egypt, which had emerged as a low cost producer, preferring to export finished goods back to Kenya.
“It marks a major about-turn for multi-national firms. Kenya’s profile as a hub for the regional markets has brightened with the new integration arrangements that have come through,” Mr Robert Shaw, an independent analyst said.
This has seen Kenya slowly emerge, though at a lower scale, as the third manufacturing destination in Africa after South Africa and Egypt
Some of the firms that have left the Kenyan market in recent years include Reckitt Benckiser, Colgate Palmolive, Johnson & Johnson and Procter & Gamble, which have either transferred or restructured their operations.
Egypt had emerged as the favoured destination for the multinational firms leaving Kenya, but the emerging political instability in the northern Africa country coupled with lack of proximity to central and parts of southern African countries including Malawi, DRC Congo and Zambia, have made it unattractive to investors.
Egypt has used heavy subsidies in the power and petrol products - which costs it $12 billion (Sh960 billion) annually to lure industrialists, but the country is set to withdraw the sweeteners by 2014, according to reports in the Financial Times.
BAT, for instance, has spent more than Sh5 billion in upgrading its Nairobi plant from where it serves about 17 markets within the Common Market for Eastern and Southern Africa and Indian Ocean Islands.
The firm closed its manufacturing plant in Rwanda and Uganda and made the Kenyan plant one of the group’s four strategic factories in Africa and Middle East.
“Kenya remains critical to our operations in terms of its strategic location for supply of our markets,” Ms Julie-Adel-Owino, BAT head of regulatory affairs said.
“The factor of proximity to raw material sources also makes Kenya vital for us because Uganda is our centre of excellence for growing tobacco,” she said.
Kenya is spending billions of shillings on infrastructure projects include airports, sea ports and roads, which seek to connect the manufacturing plants to local and regional market as the networks connect the port of Mombasa to Nairobi, Uganda, Rwanda, Burundi, South Sudan and DRC.
The British multi-national Cadbury Kenya Ltd has also announced a multi billion expansion plan, putting to rest fears that it is planning to transfer its manufacturing operations to Egypt to cut costs following its acquisition by American food giant Kraft.
Late last year the firm sent out international tenders for consultants to help upgrade its plants as it looks to tap new demand from the EAC markets.
“The investment will position Kenya as a centre of excellence for the manufacture of food beverages and dry powders in the region,” said the firm in the tender notice on November 15.
This will include the automation of its foods drinks manufacturing line and establishment of a new distribution centre.
The World Bank estimates that East Africa will receive new investments in excess of $25 billion (Sh1.8 trillion) in the next five years following the launch of the common market.
Prospects in Southern Sudan — set to be the world’s newest nation after a referendum two weeks ago that favoured separation from Sudan — have brightened with multinationals increasingly eyeing to serve the market from their Kenyan bases.
Southern Sudan has said it will apply for membership of the East African Community, spurring investors to reap the dividends of peace after 25 years of instability and opening the way for foreign traders to tap into the country’s oil reserve and infrastructure projects.
“With the integration of East Africa into a common market and the re-emergence of Southern Sudan, people are beginning to see the region’s potential with Kenya as an entry point,” Mr Shaw said.
Firms such as Nestle Kenya and Unilever East Africa have expressed their intention to get a larger foothold of the Eastern Africa market with south Sudan emerging prominently in their business plans.
“Obviously our intention is to grow and expand to keep in step with competition,” Mr Yaw Nsarkoh, the managing director of Unilever East Africa said.
The firm—which sells products such Royco, Omo and Vaseline—is investing Sh3 billion in Kenya to boost production, distribution and sale processes.
Nestle Kenya, on its part, is set to boost its Nairobi factory’s production capacity eightfold over the next five years at Sh2.4 billion to expand the volume and range of products and boost sales in Kenya and regional countries such as Tanzania, Uganda, and the Democratic Republic of Congo that are served from Nairobi.
Mr Pierre Trouilhat, the regional head of Nestle Equitorial African region, said the food firm will introduce new products after its upgrade and target the low end of the market across the region where it has little presence.
This emerging opportunities and Kenya’s strategic location—which makes it easier to attack the Middle East, South Africa, East Africa and North Africa—has caught the eye of Britain’s cereal maker Weetabix Limited.
The UK firm will next month complete the acquisition of its local trading partner, Breakfast Cereal Company Ltd, for an undisclosed fee as its seeks Kenya’s manufacturing plant to serve the Middle East and Eastern and Northern Africa markets, which it serves with its European based plants.
Previously, Breakfast Cereal Company Ltd has manufactured Weetabix Limited products such as Weetabix, Weetos and Alpen under license from the British firm, which is now seeking a larger role in the Nairobi business.
It is seeking to pump additional expansion cash, introduce its full range of Weetabix branded products and transfer technology to the local plant, which from next month will be known as Weetabix East Africa Limited.
“This new development will avail more opportunities for growth within the East Africa Community bloc for Weetabix East Africa,” said Mr Ahsan Manji, the managing director of Breakfast Cereal Company, adding that the firm is currently working with executives from UK to develop its new growth plan.
Some analysts said the fresh round of expansion by multi-nationals could bring some relief for government technocrats who have been forced back to the drawing board following the country’s recent dip in ease of doing business.
A joint review by the World Bank and its private sector-lending arm, the International Finance Corporation (IFC), for instance established that the burden of frequent paying of tax had made doing business in Kenya more difficult.
Kenya was ranked in position 98 in the Doing Business 2011 report down from the previous year’s position 95 — adding to a downward trend since 2009 when the country was raked in position 84.
“Kenya increased the administrative burden of paying taxes by requiring quarterly filing of payroll taxes,” the two institutions said in their latest report for 2011, presenting a challenge to the government that is seemingly fast losing grip on the reform agenda it kicked off five years ago.