Unlocking the Future of Vehicle Production
Despite policy reforms and new investments, Kenya’s local car assembly industry still lags behind used imports. Could the tide finally be turning?
For a country considered to be the biggest and richest economy in East Africa, Kenya performs poorly in terms of the local production and assembly of vehicles.
Let’s put this into perspective. Only about 5% of new car registrations in the country are of locally produced or assembled vehicles. Annual data between 2008 and 2020 indicates that the rate has been below 2.5% each year in the last three years. Just check the graph below.
As of 2020, 80% of the 3.28 million1 vehicles that had been registered in Kenya were second- hand vehicles. That means that the vehicles plying the country’s roads are predominantly imported used vehicles, implying that there is more demand for second-hand imported vehicles than locally manufactured products.
Why the Preference for Imported Used Cars?
So why does a country known to be the best economy in East Africa perform so dismally in terms of local manufacture? A study conducted by Nzuri Strategy – a consulting firm that integrates analytics and research to provide automotive aftersales strategy, customer experience design, omnichannel outreach testing, and insight-focused performance reporting – revealed that the Kenyan vehicle manufacturing and production industry faces three major hurdles:
- The lack of dedicated legal structure or a proper institutional regulatory framework,
- The importation of parts by franchise holders instead of procuring from local parts manufacturers, and
- The influx of used second-hand vehicles.
What the Government is Doing About It
The Kenyan government made the move to restrict imports to vehicles that are 3 years old or newer by 2021, a change from regulations that had previously allowed the importation of cars up to 8 years old. The goal was to gradually but systematically reduce and substitute the market share of used vehicles and used parts with those that are newly manufactured or assembled in Kenya.
As a move to encourage production and assembly in the country, the government is now providing incentives such as tax breaks of imports duties for parts making it inexpensive to assemble vehicles locally. At the same time, the government moved to cut second-hand car imports by by increasing taxation of imported vehicles, making second-hand imports more expensive for local consumers.
Another initiative to accelerate production efficiencies, the government has dedicated high-power lines for the industry and subsidies electricity during low peak hours. Further, governmental departments and parastatals are required to buy or lease from the local assemblies, providing additional market local assemblers.
The effects of the regulatory shifts and government incentives are substantial. Already, we can see Peugeot and Volkswagen re-opening their manufacturing and assembly plants in Kenya and Mobius Motors opening its plant in Kenya to manufacture vehicles made for Africa’s terrain. Latest on this list is Mahindra Motors with the launch of its two vehicle models which are assembled at the Associated Vehicle Assembly (AVA Kenya) plant in Mombasa.
Local Assembly Potential
Kenya boasts of three assembly plants:
- The Associated Vehicle Assemblers (AVA) in Mombasa,
- Kenya Vehicle Manufactures (KVM) in Thika, and
- Isuzu East Africa in Nairobi.
These assembly plants produce over 12 brands and 50 models of motor vehicles in Kenya, but all three are operating below their capacity, producing an average 6,600 vehicles every year. This is only a fifth of the installed capacity of 34,000 units. 2014 and 2015 recorded the highest units of locally assembled vehicles which mainly constituted heavy commercial vehicles (HCVs) such as trucks and buses. The recent automotive policy by the Kenyan government seeks to revive the industry that has been down for decades after Kenya opened imports for used cars. With this new policy, we project a continued growth in locally assembled units.
The Emerging Opportunities for Manufacturers
Automotive manufacturers can take advantage of the regulatory shifts to gain a foothold in the Kenyan market. Manufacturers of station wagons and sports utility vehicles (SUVs) are especially advantaged. This category of vehicles has the highest number of new vehicle registrations. The demand for station wagons and SUVs has more than doubled over the last ten years. Although the Saloon Car category comes in second in terms of vehicle registrations, there has been a decreasing demand for saloon cars with 2020 recording the lowest numbers of vehicle registrations in the ten-year period.
The electric vehicle manufacturers also have a market that they could tap into. For instance, in a bid to reduce carbon emission in line with the UN sustainable development goal on Climate Action, a group of environmentally minded entrepreneurs set up an electric vehicle conversion company (Opibus) in Kenya in 2017 that can substitute any fossil fuel powered drive train and subsequently convert any internal combustion engine vehicle into an electric vehicle. Their mission is to expedite the transition to sustainable transport and energy solutions in East Africa.
Other EV bus manufacturers have also entered the scene by producing environmentally friendly buses for public transport in the country. For instance, BasiGo and Roam Electric are currently building electric buses to meet the needs of the local population. Such entrepreneurial ventures could be beneficial to the local production and assembly industry.
Why Would an OEM Invest in Kenya?
Kenya plays a vital role in the East African region’s automotive market. Kenya’s liberal business environment, regional market access, favorable business policies and history of automotive assembly and manufacture positions the country well as a center for East African automotive innovation.
There is a huge demand for automotives in the country. Motor vehicles are Kenya’s fourth largest import commodity overall, making up 7% of total imports by value. From 2008 to 2020, Kenya’s number of new vehicle registrations stood at 287,151 units, a 7.4% compound annual growth (CAGR) in new vehicle registrations.
According to data from the International Organization of Motor Vehicle Manufacturers, Kenya’s Motor Vehicles Sales for passenger cars and light commercial vehicles (LCVs) which includes pickup trucks, vans and three-wheelers recorded 5,643 units in 2019 compared to 7,416 units in 2018. 2017 experienced decreased vehicle sales because of the general elections but vehicle demand increased slightly the following year by over 2,000 units.
Other OEMs have already excelled in the country. With over 50% in all motor vehicle sales in Kenya, Japanese automaker Toyota owns the largest market share for used and new models. Kenyan automotive industry is biased towards Japanese firms including Nissan Motor Corporation, Honda Motor Corporation and Isuzu Motors accounting for over 40% in total vehicle sales in Kenya. In 2020, Isuzu saw new vehicle sales raising market share to 40.1% according to Kenya Motor Industry of Association (KMI) selling commercial vehicles including pick-ups, busses and trucks. Toyota came in second at 23.5% selling passenger cars, pick-ups, minibuses and Hino trucks. Simba Corporation including Mitsubishi, Renault cars and Mahindra commercial vehicles came in third at 15.5%.
What the Government, OEMs Ought to Do
At Nzuri, we understand that the Kenyan automotive industry is largely driven by the government and key industry stakeholders through policies and interventions geared towards creating a favorable market and conducive environment local assembly and production.
The government should sustain its efforts to address over-reliance on second-hand vehicle imports. It needs to slowly and gradually decrease the attractiveness of vehicle imports and increase access to new vehicles.
Subsidizing prices for locally assembled vehicles would make them more attractive. Kenya is a low-income country, and it is difficult for many consumers to afford locally assembled vehicles due to their “high” prices. The price factor outweighs the other benefits of locally manufactured vehicles including newness, safety, mileage, and durability.
Sources:
The data used in this report is sourced from the Kenya National Bureau of Statistics, Leading Economic Indicator monthly reports, and The Kenya Motor Industry Association statistical reports.