Furniture sector set for boom as State applies new incentives

The Indian Ocean breeze blows through the workshop as carpenters fashion their latest pieces in Mombasa-based Likoni Quality Furniture.

This is one of the few enterprises still engaged in manufacturing furniture, here at the coast.

Soon it might get a windfall if a new government policy on locally made furniture is fully implemented .

A policy circular that took effect on March 1, instructed all ministries and state agencies to buy only locally made furniture, a move that provides a huge incentive for investment the sector, given the assured demand from the state — the biggest spender in the economy.

In implementing the policy, the government plans to spend millions annually on the local furniture sector in a bid to increase employment opportunities.

The exotic furniture business is seen as creating comparatively lesser employment opportunities owing to its thin value chain structure.

A total of Sh500 million will be spent in the public sector to buy furniture in the near term, a statement accompanying the circular said.

The directive, if held for the long-term, may be the catalyst needed to revive the ailing furniture sector, especially if the proposed draft constitution is passed, analysts say.

The draft law expands government budget, functions, and bureaucracies.

It is however emerging that there is a thin line between imported and local made furniture, forcing the government to mull a criteria of determining what will provide the distinction.

“While we are aware that some components have to be imported, we are only going to consider the firms which import wood as a raw material or special furniture parts that are used to complement a piece that is largely made by local artisans. Those who import every part of a furniture piece only to assemble them here can forget government supply contracts,” Ms Pamela Dede, the deputy director of industries at the Industrialisation ministry said.

Her office is currently spearheading efforts by the government to vet furniture dealers and compile a list which the entire public sector will refer to when buying furniture beginning the next financial year.

Virtually all furniture makers depend on imported timber products following the 1999 government ban on logging and unlicensed ferrying and export of timber.

Analysts say the ban is likely to stay in place for several more years, citing the recent rush to protect water catchment areas after a painful drought that drove millions to starvation and hit water supply and hydro-based electricity generation.

The government has said it plans to increase the country’s forest cover to 10 per cent from the current 1.7 per cent, signalling a longer ban on lumbering.

Players say sourcing raw materials is one of the biggest challenges facing them.

The ban has left sawmills with insufficient timber, a deficit that has risen to hit furniture manufacturers as well.

“The timber we use comes from countries like the Democratic Republic of Congo which have expansive forests. The transportation cost for such a long distance drives up prices, especially now that fuel prices are rising,” Albert Mutua, a manager at Likoni Quality Furniture, said.

While the government initiative opens up a mass market for local manufacturers, those who fit the description are sleeping as the opportunity dangles before them.

According to Ms Dede, the informal furniture makers, popularly known as ‘jua kali’, represent the most authentic definition of local sources. “They have quality products to sell but have not organised themselves to benefit from the government directive.”

Most of the small entrepreneurs are unregistered sole proprietorships or joint ventures by individuals.

The procurement law requires parties seeking government contracts to have “the legal capacity to enter into a contract for the procurement,” meaning formal registration as a company, for instance.

Ms Dede says the entrepreneurs associate formalizing their setups with paying more taxes, a phenomenon that has limited their growth and left them with the dubious role of supplying formal furniture dealers who buy at low prices and attach sell expensively once the pieces enter glossy showrooms.

“This is one of the challenges we are facing. Most dealers passing themselves off as manufacturers are in fact buying from players in the informal sector who are doing what we are interested in, which is direct manufacturing,” she said.

While manufacturers are upbeat over increased demand, a number of challenges continue to confront them, with lack of capital being the major impediment, especially for small firms.

Fulfilling large orders will need hiring more workers, investing in more efficient equipment, and spending heavily on raw materials, all of which need a capital outlay running into millions.

It is yet to be seen whether, going by the government’s strict criteria of short listing only direct manufacturers, the lucky firms will have the capacity to fulfill all the government furniture needs in good time.

“We have been handling big contracts, worth up to Sh10 million at a time. If we find even larger contracts, we can phase out the delivery and finish in acceptable time,” Mutua said.

The government is also considering working with formal furniture dealers though it is keen to establish to what extent they engage in actual manufacturing.

Some of the dealers dabble in both local and imported furniture.

Furniture dealers under the Kenya Association of Manufacturers, an industry lobby, are in the frontline, with KAM set to recommend those engaged in direct manufacturing.

The Industrialisation ministry is already considering 14 formal players from the Nairobi region, according to documents seen by Business Daily.

Both the informal and formal players are up against major competition from furniture produced in correctional facilities.

Inmates have for years been supplying the public sector with quality furniture, with analysts predicting a possible upscaling of the prisons’ production capacities should the government experience supply hitches from the other players.

Apart from creating labour intensive jobs, the government intends to save millions by sourcing furniture locally.

Common exotic office furniture pieces are generally more expensive, with some exceeding the price of local versions by a margin of over Sh100,000.

The diversion of furniture orders to local manufacturers is also set to boost the plan to create constituency-based industrial development centres (CIDC), which is part of the Sh22 billion stimulus package meant to spur employment, especially in rural areas.

Each constituency is to receive a total of Sh3.5 million, Sh2.5 million for construction of buildings (jua kali sheds) and Sh1 million for equipping the sheds with the requisite tools and equipment.

Wood and metal work industries are emerging as the most preferred. Small businesses engaged in furniture making can pay a fee to use the tools and infrastructure in the sheds as they go about their daily operations.

The directive has however ruffled feathers among exotic furniture dealers who will now be left to gun for a share of the private sector market only.

While they agree with the objectives of the plan in principle, they are questioning its viability, saying it comes at a time when most furniture makers have closed shop due to high operational costs.

In an earlier interview, Mr Michael Mwangi of Slims East Africa Ltd, a firm dealing in imported furniture, said the policy opens up a significant potential for investing in local furniture, but pointed at the huge capital needed.

“Local makers of furniture don’t have the capacity to make furniture in large quantities, barring them from fulfilling big orders from the government or corporate buyers. It is also difficult to standardise the quality of the furniture because the machines needed to make good furniture in industrial quantities are expensive,” he said.

Capital outlay

An investment in making standard quality furniture requires a capital outlay of over Sh100 million, Mr Mwangi said. “We welcome the move, but since firms that make furniture are essentially small businesses plagued by thin capital, there is need to help in financing the sector so that the necessary machines, the biggest cost items, are in place.”

Mr Rahul Haria, the managing director of Furniture Palace, a major dealer in imported furniture, said the policy will puncture the sector, but adds that the tax imposed on timber and machine imports, among other capital goods, is prohibitive to investors wishing to engage in making furniture in a bid to capture the multibillion shilling government contracts.

“If the government zero-rates timber and machine imports, then we can consider venturing into making of furniture as opposed to importing finished pieces,” he said, adding that importers of furniture are waiting to see the full impact of the policy unravel.

The exclusion of exotic furniture from government contracts is set to heighten rivalry for the private sector, the remaining window for furniture importers.

While players are optimistic about rise in corporate spend on furniture, citing the expansion of banks as an example, they say the heat in competition is set to place price and quality as the major competitive factors.

Most imported furniture are sourced from Turkey and Asian powerhouses like China and Indonesia.