Markets & Finance
Higher wages may kill fragile textile industryMonday May 06 2013
The decision by President Uhuru Kenyatta to increase the minimum wages on May 1 was unfortunate. It maintains an unnecessary tradition of ceremonial wage increases on Labour Day, which do not take cognisance of the entire production chain and implications for job expansion.
In addition, this Labour Day speech was at variance with a lot of promises to reduce production cost and increase productivity in an effort to create more jobs.
The President has also indicated that he wants to address the cost of living but is at the same time giving in to social pressures from workers fighting to afford the costs to live.
The two issues are different and give different signals to investors and labour-intensive value chains. Perhaps we are just unaware of the strain of manufacturing in Kenya.
Pay increases never raise the standard of living; rather they increase inflation. It is an unending vicious loop we need to snap away from.
If the cost of labour goes up, the cost of goods rises as the increase is factored into the product price. This forces employers to either lay off workers or increase use of machines and other efficiencies to cut down operating costs.
Foreign investors on the other hand look elsewhere for cheaper labour — especially in the case of labour intensive industries like textile, apparel and agriculture.
The Kenya Association of Manufacturers (KAM) has persistently called for wages to be pegged on productivity. An increase in productivity lowers inflation and increases purchasing power due to lower prices.
(Read: Industrialists warn of increase in prices after wage changes)
This can be done through adoption of piece-rate pay measures where workers are paid per unit to motivate them while boosting production.
Ceremonial wage increases on Labour Day are disastrous to industry and to the economy as a whole. Unions do not want to admit that the pay rise will lead to layoffs and even plant shutdowns, but that is the reality.
One of the hardest hit sectors is the textile and apparel industry. A walk down memory lane to the 1980s shows that Kenya had a vibrant textile industry that employed thousands of people directly and millions more down the supply chain.
Textile was the leading manufacturing activity in the country, ranking fifth in foreign exchange earnings. It encompassed all activities in the value addition chain, from cotton growing and ginning, to fabric and apparel manufacture. Liberalisation soon brought all this to a grinding halt as tonnes of second-hand clothing were shipped in, making it difficult for locally manufactured fabrics to compete in the market-place.
To salvage the sector, the Export Processing Zone (EPZ) was set up in 1990 to attract investors and create jobs because the industry, like agriculture, is labour intensive.
In 2008, 50,000 people were directly employed in 44 factories and five million or 1.1 per cent of the population were indirectly supported as a result of the activities of these companies.
But now a repeat collapse of the apparel sector is in the offing. The industry has taken yet another blow while it was still down on its knees recovering from the global economic downturn that left a large portion of its customers in the US crumbling to bankruptcy. According to the latest figures, exports were down 17.9 per cent in the industry in 2009.
The sector is beset by a myriad of problems. Energy is a hot button issue. In Kenya, 35 per cent of total production costs go to energy while in India, that cost is halved at 16 per cent.
Our energy costs are also higher than any other in the region. In comparison to other African countries, power in Kenya at USc 20/kwH costs about six times more than in Ethiopia. In Tanzania it is USc 12/kwH and in Uganda it is USc 10/kwH. Need we mention the frequent power blackouts and the quality of power?
Further, there is stiff competition from Asian markets such as China, Bangladesh and India that have faster turnaround rates. Bangladesh rakes in $23 billion per annum in revenues and currently pays workers less than half of what will be paid to workers here after the pay raise.
Bangladesh does not enjoy duty free entry into the USA as our country does for textiles. Kenya’s revenue is only $292 million per annum on duty free entry. This means the unit cost of production is higher in Kenya and for this reason our exports are stagnant making us miss out on the duty-free advantage.
Delays in importing inputs also affect the industry due to port congestion and poor infrastructure. Then, there is the import of second-hand clothing and uncustomed goods in the domestic market, creating a spiral downward effect — an undying gravy train for the textile industry.
The recent Labour Day pay rise bears the danger of being the straw that breaks the camel’s back.
The Jubilee manifesto clearly states the party’s intent to actively grow the manufacturing sector and create one million jobs through tax incentives and by encouraging foreign investment.
It recognises that the industry is hampered by high production costs. Add to this the fact that the Vision 2030 cannot be achieved without reviving the industrial sector and you begin to understand the importance of the textile industry.
Is it not ironic then that we are not yet 100 days into the new presidency and as we speak 2,000 jobs in the clothing industry are already going to fall under the axe while a number of factories have made the decision to shut down and relocate to other countries?
A number of measures could revive the industry if effected quickly, for example, a tax exemption for the next 10 years to give industries a recovery period from the global recession. This will allow the industry to stabilise, break even on the initial investments and build profits.
The government should also reduce the work permit fee and allow EPZ to operate as authorised economic operators with a green channel for cargo both inbound and outbound.
In the short term, the industry can be cushioned further through state subsidy of energy costs to create the much-needed jobs that Kenyans desire. These are the only measures that can save this sinking ship. It is your call, Mr President?
The writer is former chairman of Kenya Association of Manufacturers and can be reached at [email protected]