How to unlock the local motor vehicle industry value chain

Kenya has made significant efforts to spur the motor vehicle industry. Attracting investments in medium to high technology industries, job creation, exports drive and reducing imports of vehicles, components and spare parts are core to this policy agenda.

The effort to develop this industry is anchored in Sessional Paper No. 1 of 2022 on National Automotive Policy. Kenya seeks to position itself as a regional hub for motor vehicle assembly, parts and components manufacture.

Economic Survey 2023 reveals that in 2022 Kenya spent Sh96 billion on imports of motor vehicles, parts and components. The exports of the same amounted to Sh3.3 billion.

The number of motor vehicles locally assembled was 13,473 against 99,239 that were imported. To bridge trade deficits, fast-tracking the development of this industry is vital.

A recent research on the motor vehicle industry value chain in Kenya, published by the Kenya Institute for Public Policy Research and Analysis (KIPPRA) shows that new entrants into this industry, including Mexico, Indonesia, South Africa and Morocco have all pursued strengthening the value chain as a strategic shift.

Value chain encompasses sourcing of raw materials, manufacturing and delivery of the final product to customers.

While Kenya is attracting private sector investments in this industry, more needs to be done. In June, Isuzu launched its electro-deposition paint plant in Nairobi.

This state-of-the-art plant in the region will make use of electric current in painting motor vehicles for a superior look. In July, the launch of the Toyota Fortuner assembly line in Mombasa was a step forward.

The motor vehicle industry value chain is clustered into input, processing, and market levels. The input level comprises the manufacture of base raw materials such as iron, steel, aluminium, rubber, glass, and textile fibre.

The processing level, also known as core motor vehicle manufacturing, comprises parts and components manufacture, coachwork and motor vehicle assembly.

The market level comprises the sale of parts and components as well as assembled vehicles.

The KIPPRA research shows that the manufacture of parts and components offers opportunities for the integration of micro, small and medium enterprises (MSMEs) into the value chain. This would spur jobs and increase local content to 40 percent as envisaged in the National Automotive Policy.

The research further provides pathways to promote the development of a competitive motor vehicle industry value chain. At the input level, industries such as iron, steel, glass, and rubber are fundamental.

At the core motor vehicle manufacturing level, parts and components made locally include air filters, air brakes, oil filters, leaf springs, wiring harnesses, exhaust pipes, silences, batteries, radiators, U bolts, disc brake pads and shock absorbers. The current production levels are insufficient to harness market opportunities.

Manufacture of parts and components requires intensification of innovation, technology transfer, research and development investments and skills development.

Attracting original equipment manufacturers (OEMs) to set up plants locally is imperative. The OEMs have advanced technical and technological expertise and experiences for technology transfer to MSMEs.

Accelerating the development of the motor vehicle industry thus requires policy commitments that employ a value chain approach coupled with an ecosystem of fiscal incentives, infrastructure, skills, technology, and access to markets.

It is also worthy to keep pace with emerging developments such as a shift to electric mobility and scrappage policy.

The Finance Act 2023 provides that newly established motor vehicle assemblers that realise local content of 50 percent of the ex-factor price value of motor vehicles are to benefit from an extension of lower tax rate of 15 percent for further five years.

This would strengthen value chains through local content. This legislation further defines local content for purposes of the motor vehicle industry to include parts designed and manufactured in Kenya by OEMs operating in the country.

Other important interventions at the processing level include competitive industrial clusters that offer fiscal incentives and integrated logistics for accessing export markets.

South Africa and Morocco have made strides on this front. In Morocco, the Casablanca Industrial Zone, Tangier Med Zone, and Kenitra Free Zone hosts about 200 parts and components manufacturers that supply local assemblers.

This industry is capital-intensive, and economies of scale help lower unit cost. To support access to domestic markets, the Preferential Procurement Master Roll No. 1 of 2022 identified parts and components to be supplied locally.

These include air filters, air brakes, oil filters, leaf springs, wiring harnesses, exhaust pipes, silences, buses, and passenger transport vehicles. Opportunities exist to expand the range of locally manufactured parts and components.

Access to regional markets such as the East African Community, the Common Market for Eastern and Southern Africa (COMESA) and the African Continental Free Trade Area (AfCFTA) are strategic.

Environmentally conscious customer preferences, costly fossil fuels and policy compliance are further shaping the development of the motor vehicle industry. This is accelerating a shift towards electric mobility and the adoption of a scrappage policy.

Scrappage policy has benefits including safe disposal, recycling of materials for re-use, increased stock of more energy efficient and environmentally friendly vehicles.

Over 20 countries including China, Japan, Sri Lanka, the UK, Denmark, and Norway have already set timelines to completely shift to electric mobility within the next two decades.

Within the region, Rwanda has prioritized the transition to electric vehicles as part of its commitment to be carbon neutral by 2050. Kenya’s Finance Act, 2019 reduced excise duty on motor vehicles that are fully electric from 20% to 10%.

Kenya has further prioritized this agenda through the national climate change action plans and the Integrated National Transport Policy, 2012.

The Bottom-up Economic Transformation Agenda also underscores priorities in rolling out of electric vehicle infrastructure, and tax incentives to encourage retrofitting.

The author is a senior policy analyst in the Private Sector Development department at the Kenya Institute for Public Policy Research and Analysis (KIPPRA).