Leather and footwear industry
The leather and footwear industry in Kenya was dominated for most
of the 1950s and 1960s by a subsidiary of a Canadian multinational, East African
Bata Shoe Company, established in 1943. In the 1970s competition from small- and
medium-scale producers of leather products and from imported finished products
continued to be felt by the larger firms. An increase in the production of
synthetic products also posed a considerable challenge to the more expensive
Leather production receives low protection domestically. Therefore
only foreign subsidiaries, or those linked to export markets through
subcontracting, were able to compete effectively. The technological threshold is
one of the main factors limiting the entry of more firms.
History of firms in the sample
Origins, ownership and structure
Orbitsports was established in 1968 and is fully owned by four
members of a Kenyan Asian family. At that time the domestic demand for sports
items was rising rapidly, met largely by imports, yet leather was readily
available and the skills needed to set up and operate such a firm were not
prohibitively expensive. The start-up capital required was also moderate,
approximately KSh6 million, excluding the cost of land and buildings. The firm's
promoters were already quite familiar with the sports industry, as they used to
be key importers of sports equipment. At that time, there was no local firm
producing sports equipment.
It is now one of the leading African manufacturers of balls and
other sports equipment. Between 1970 and 1990 its total sales increased
six-fold, from KSh7 million to 41 million, while total employment rose almost
six times from 64 to 352 persons. The total assets of the company in 1992
amounted to KSh42 million, including land and buildings.
For the first six years, Orbitsports remained the only
manufacturer of sports items in the PTA region. Since then, one more firm has
been established in Kenya but it does not yet pose serious competition to
Orbitsports because of the relatively low quality of its products. A major
breakthrough for Orbitsports occurred in 1974 when it entered into a technical
cooperation agreement with Adidas, the world's largest supplier of leather
balls. The firm paid royalties to Adidas for technical services, including
training of the company's workers at Adidas in France, evaluating the quality of
raw materials, checking the quality of final products and providing technical
advice on the purchase of machinery and equipment.
Investment in new machinery in 1974 doubled the firm's production
capacity, to 40 000 balls, from its 1968 level. Further investments in machinery
in 1980 and 1985 raised the capacity to 65 000 and then to 110 000 balls.
In 1986, Orbitsports' exports to Africa and Europe amounted to
KSh10.5 million, 45 per cent of total sales. By 1990 this had grown to KSh27
million, some 60 per cent of total sales. In the 1990 soccer world cup,
Orbitsports supplied almost all of the 300 balls required. Of the total exports
of the company in recent years, 70 per cent went to Europe and 30 per cent to
Africa. The projection for 1992 was lower, at KSh21 million. The decline was
attributed to lack of import licences, which take 4 to 5 months to acquire
(problems related to import licences led to the loss of an export order of KSh7
million during the year), import duties on synthetic materials, and the
declining competitiveness of the firm due to low labour productivity and
inflexible labour arrangements.
Technology, productivity and human resources
Production' linkages and subcontracting
Manufacturing balls is highly labour intensive. Due to the high
labour costs in developed countries, Adidas found it more profitable to
subcontract the manufacture of balls to firms in developing countries.
Orbitsports' subcontracting arrangement with Adidas in 1974 was the single most
important factor behind its phenomenal success in the export market. Through it,
Orbitsports acquired highly sophisticated machines which are still in good
working condition, partly due to the company's policy of preventive maintenance.
The firm has a full-time engineer whose responsibilities included preventive and
breakdown maintenance of the machines, which are overhauled at the end of each
The firm's strategy is to market its products aggressively, both
in Africa and North America, and to avoid relying too much on subcontracts with
Adidas. The firm has already appointed an agent as a first step in this new
direction. One of the constraints with regard to North and South America is that
Orbitsports cannot export there under the Adidas label because Adidas has
another appointed agent there.
To maintain its market share, especially in Africa, the company
has adopted the strategy of appointing a large number of distributors to counter
competing imports and of giving their agents special terms such as 60 days'
credit. The company found credit terms to be the most effective strategy.
Technology and productivity
The company's entry into the export market was attributed to its
technical cooperation agreement with Adidas in 1974, which has enabled the
company to modernize its technology and pay greater attention to quality
control. Between 1976 and 1979, most of the firm's exports went to African
countries, with exports to Europe starting in the early 1980s and reaching a
peak in 1986, when they surpassed exports to Africa. In 1980, Orbitsports
scrapped most of the old machines and replaced them with new ones. This shift
followed Adidas' policy of progressively reducing its own production and relying
more on subcontracting in various parts of the developing world. By the early
1980s, the quality of the company's products had improved tremendously.
The main competitors in the export market include Pakistan, India,
Indonesia, the former Yugoslavia and Hungary. All the main ball manufacturers
have technical agreements with Adidas. A number of recent developments have
adversely affected Orbitsports' competitiveness in the export market. Some of
these are associated with technological changes in the manufacture of balls. Up
to 1990, leather was the main raw material. This gave Orbitsports a competitive
edge due to the domestic availability of cheap, high-quality leather. The main
imports included special chemicals used to coat leather to make the ball water-
and scratch-resistant and to stabilize its shape. Up to 1990, the imported
content in an Orbitsports football was 33 per cent. Thus, under the
circumstances prevailing up to 199O, the firm had the competitive edge over many
other Adidas agents.
Since 1990, Adidas has recommended a shift to synthetic, non-women
fabrics in the manufacture of balls. The shift has raised Orbitsports' imported
content to 76 per cent, as it has to import its main raw materials. This has
immensely reduced the firm's competitiveness against European firms, where the
synthetic materials are cheaper than leather. The problem has been aggravated by
high import duties on imported synthetic materials. The company has subsequently
lost its bids for some export orders to competitors from Asia and Europe.
Another change that affected the competitiveness of Orbitsports in
the export market in 1981 was the introduction of a new technology that enabled
mechanical punching of holes in leather. This permits stitchers to make more
balls per day. Under the previous technology, the holes were manually punched.
With the old technology, average productivity per worker was 2.5 balls per day.
The average productivity using the new technology is 3.5 to 4 balls per day per
worker. Orbitsports is, however, unable to enjoy the full benefits of the new
technology because the workers, through their trade union, have strongly
resisted revision of a 1968 Collective Bargain Agreement which specified that
workers were expected to achieve a target of 2.5 balls per day. The firm has
been trying to negotiate a new target of about 3.5 or 4 balls per day in order
to match competitors in countries such as Pakistan and India but has thus far
had no success. The workers insist that the target should not be raised, arguing
that when the company receives large urgent orders it should give the workers
more overtime work. Unfortunately overtime work has the effect of raising the
labour costs of the firm significantly. When workers are given overtime, many of
them are able to achieve much higher productivity, of between 4 and 5 balls per
The effect of the existing Collective Agreement between the union
and the employer has thus been to raise the labour costs per unit in the firm
substantially above those of its main competitors. This, coupled with the shift
to synthetic materials in the manufacture of balls, has made the Kenyan firm
lose ground to other firms. If the company was able to negotiate higher labour
productivity it would be in a position to offer more competitive bids for Adidas
subcontracts and to increase its market share in Africa and the rest of the
world. According to the information provided by the company, its labour costs
were, for instance, more than 40 per cent higher than those of sports equipment
manufacturers in India and Pakistan.
Apart from the subcontracting arrangement with Adidas, another
factor which explains the company's success in exporting was the priority given
to marketing. The overall marketing department was well staffed, with a manager
specifically in charge of exports, enabling the firm to focus on the export
market more effectively than most manufacturing firms in the country.
In spite of its relative export success, the company is highly
cautious in its future plans. It is, for instance, against venturing into
high-technology fields because the import content of such ventures would be very
high. The management cites the problem of obsolescence as a result of quick
technological changes and fears that many Kenyan firms would find it difficult
to compete in high-technology fields. The firm intended to continue giving
priority to products for which 80-90 per cent of raw materials can be obtained
domestically. so reducing its import dependence. Foreign exchange constraints
create immense problems in meeting production targets and schedules, due to
delays and uncertainties in obtaining import licences.
The loss of the company's export competitiveness to its rivals in
Asia and Europe was forcing it to adopt new strategies. One of these is to
change its employment policy so that permanent employment and time-rate payment
are gradually replaced by more contractual and piece-rate arrangements as a way
of raising labour productivity and reducing costs. The firm has also been trying
to diversify into the production of other leather products and sporting goods to
reduce the risk of continued dependence on ball manufacture in a rapidly