|Exporting Africa: Technology, Trade and Industrialization in Sub-Saharan Africa (UNU, 1995, 434 pages)|
|Part II. Country studies|
The main sub-sectors in Kenya's metal industry are steel smelting and hot rolling and the manufacture of wire and wire products, galvanized and cold-rolled steel products and pipes. These subsectors are interrelated, as they depend upon each other for the supply of inputs.
The Kenyan metals industry is relatively old, the first firm having been established in 1948. The industry is today dominated by a few Kenyan Asian-owned firms such as Kenya United Steel Company, Steel Africa, Mabati Rolling Mills, Insteel, Kaluworks, Galsheet and Doshi. The two leading Asian families in this industry are the Chandaria and Bhattessa groups, who also have extensive links in India and a number of other African countries.
The base metals industry started by manufacturing mainly nails, then gradually integrated backwards into wire drawing, followed by galvanizing, hot-rolling and remelting, cold-rolling, galvanized sheeting and pipe manufacture. The technology in the metals industry is largely embodied in the equipment and requires considerable skill for maintenance. There has been a conspicuous absence of indigenous Kenyans in the ownership, except for the minority shareholding they have acquired in a few firms recently. The firms rely partly on imported equipment and expatriate technicians but have built up considerable local know-how and skilled manpower.
History of firms covered in the sample
Origins, ownership and structure
The study covered three large-scale firms involved in the manufacture of wire and wire products, steel smelting and hot rolling: Kenya United Steel Ltd (KUSCO), Rolmil (Kenya) Ltd and the Associated Steel Company Limited. KUSCO, the pioneer in the industry, started the first wire products (nail) plant in 1949 and also the first steel rolling and smelting plant in Kenya in 1967.
KUSCO has the biggest mills, controlling about 40 per cent of the domestic market and accounting for about 30 per cent of Kenya's total exports of base metal products. KUSCO's nail plant faces intense rivalry from Nalin Nail Works, another wire products firm. During the 1970s these two firms integrated backward into wire drawing from imported rods. In 1983, Nalin Nail Works set up its Special Steel Mills for wire-rod drawing from billets. KUSCO's steel rolling and smelting plant was set up in an attempt to integrate backwards from nail manufacture, but the company has not been able to utilize this plant fully. Utilization rates in the two plants range between 50 and 60 per cent.
KUSCO has two electric arc furnaces for smelting, one of which has been completely idle since installation due to lack of local scrap and problems in importing scrap. The company has plans to venture into ship breaking to generate scrap locally. It has built expensive billet-making (continuous casting) facilities with the intention of acquiring wire-rod rolling facilities.
Rolmil is a relatively new operation owned by a Kenyan Asian group together with a foreign company (Cloris Co. Limited of Bermuda).
Established in 1966, Wire Products Limited produces mainly semi-processed products, drawn wire and various finished products such as nails, wire mesh, fencing wire, etc. It is one of the five companies owned by a holding company, Industrial Promotion Services (IPS) and the Aga Khan Fund for Economic Development (AKFED). IPS manages four other Kenyan manufacturing companies, i.e. Wakulima Tool Limited, Leather Industries of Kenya, the Plastic and Rubber Company Limited and a textile firm. IPS has a 45 per cent shareholding in Wire Products Limited, the oldest of the four companies. The Industrial Development Bank (IDB) had 30 per cent of the shares with the rest held by AKFED.
In spite of its recent establishment, Rolmil has made inroads in the export market. While only 12.4 per cent of its total production was exported in 1988, the proportion had risen to 17.1 per cent by 1990. It uses modern technology and does not operate with much excess capacity, unlike the bigger firms in the industry. Rolmil operates in a competitive environment with six other firms which have similar rolling facilities.
Rolmil has integrated its production backwards by developing its own arc furnace for smelting, largely to reduce dependence on other local firms for supplies of inputs. Although the investment in the new arc furnace is likely to create excess capacity, Rolmil justifies it by arguing that dependence on domestic competitors for the supply of its inputs resulted in high costs of production. The firm has captured a significant market in neighbouring countries where it has retained customers by offering them competitive prices and by ensuring that orders are filled on time.
Wire Products Limited exports about 15 per cent of its products directly, while another 25 per cent is exported indirectly by Kenyan middlemen to neighbouring countries. The firm has developed markets in Uganda, Sudan and Somalia where it sold semi-processed wire. It also sells finished products such as nails, welded mesh, fencing wire and reinforcement fabrics to Rwanda and Burundi. Political instability in Uganda, Somalia and Sudan has adversely affected the firm's exports to these countries. The demand for Rolmil's products is, however, generally high and it is at times unable to satisfy the domestic and export demand adequately. While the larger part of the company's products were sold domestically, it has developed a stable export market in the region. The firm's export drive was partly due to export compensation and other export incentives provided by the government. The firm has plans to expand its operations and export to the larger regional markets, especially following more recent export incentives, which now allow exporters to retain 50 per cent of their foreign exchange earnings.
Kenya's metal and engineering industry was initially reliant on the domestic market, where building and construction was rapidly expanding. But the region's relatively under-developed metal industry provided substantial export opportunities for Kenyan metalworking enterprises.
Technology, productivity and human resources
Characteristics of demand in target markets
The success of Rolmil's exports is largely due to the nature of the export market (Uganda, Tanzania and Rwanda). Importers from these countries have not been very discriminating in terms of quality. This has permitted the use of less expensive local steel technologists and engineers, allowing the Kenyan firms to modify their production processes to raise capacity and reduce processing costs. But these were only short-term solutions and some of the firms are realizing that, in the long run, quality will be a decisive factor
if their export shares are to be maintained or increased. These firms are already facing a growing challenge from Zimbabwean firms, which are more competitive due to the domestic availability of raw materials.
The Kenyan firms had a comparative transportation advantage in the Eastern Africa region, particularly to Uganda, Rwanda and Burundi. The transportation costs of these landlocked countries inhibited the importation of bulky products from other more distant countries. Their domestic markets are also too small to justify the establishment of steel rolling or wire products mills. These factors have enabled Kenyan firms to retain considerable power in the markets of these countries.
Human resources and skill development
In the last three decades, Kenya has established a large number of technical schools, polytechnic institutions and village polytechnics. These institutions have become a base for supplying the skilled labour required in the metal industry. All three metal industry firms studied had benefited from these institutions.
With an annual turnover of about KSh80 million in 1990, Rolmil had a labour force of about 215 employees. The number of permanent employees has remained more or less the same over the last 10 years. Machine operators are employed with just the basic knowledge acquired in schools and colleges. The firm has a well-established training programme for production staff. Employees are released annually for training in polytechnics and other training institutions. The impact of the training is evaluated by monitoring staff performance. The company also has an active on-the job training programme and participates in specialized seminars, especially for management staff.
The firm accorded training opportunities to virtually all its senior staff, which had raised the morale of the staff. Factory staff were awarded monthly production bonuses for departments which achieved set targets. Over the past five years, only 12 people had been dismissed and only five had resigned - showing high stability in the workforce. The company's salary level was generally above average for Kenyan industrial employees. The company had generally fair working conditions, which government factory inspectors found satisfactory. Noise and pollution were, however, serious problems, because workers did not seem to use the devices provided to protect themselves.
To cope with unpredictable fluctuations in production, Wire Products Limited has maintained a regular workforce of permanent employees and a relatively large number of casuals, from 50 to 70 at any one time. The biggest handicap of such a high proportion of casuals was inadequate training.
Technology and productivity
The production capacity of Wire Products Limited is 900 metric tonnes of steel products per month. But the actual production is about 500 tonnes per month, a 55 per cent utilization rate. Optimal capacity utilization has been hampered by raw material shortages, due to delays in processing import licences, and breakdowns of production equipment.
Until 1977, when it installed a multi-block wire-drawing machine, the company did not have any wire drawing capacity. It now has three wire-drawing machines. Before 1977, the main input was drawn wire, imported from France, the UK and Germany. Since 1977, the company's main input has been wire rods, imported for the manufacture of construction bars and reinforcement fabrics. For the last 12 years, Zimbabwe has been virtually the only source of wire rods. South Africa, a new entrant, has become an important source because of its more competitive prices and quick delivery of imported materials.
Wire Products uses the cold drawing process, a conventional technology which is being phased out in developed countries. The company obtained second-hand machines at cheap prices. The competitiveness of the firm's products in the export market was based on the inability of neighbouring countries to establish a wire-drawing plant because of the large amount of capital required and their small domestic markets and lack of skilled human resources. This made it difficult for these countries to justify installation of a wire-drawing machine. The firm is, however, aware that this is only a temporary situation and is trying to raise its efficiency and quality in order to retain its share of the regional market. It is also intensifying its marketing efforts in the region and has recently strengthened and reorganized its marketing department for this purpose.
Wire Products mainly exports semi-processed products as dictated by the importing countries' IS policies. Some of the neighbouring countries have already acquired the capacity to produce finished wire products, as the machines used to manufacture end products are generally smaller and cheaper and, therefore, are affordable in some of these countries.
The company also attributed its competitiveness in the export market to the quality of its products. Since inception, the company has maintained a fairly strong quality control department which uses both domestic and international standards. For products destined for the domestic market, the quality control department relied on benchmarks set by the Kenya Bureau of Standards (KBS), while for export consignments customers usually gave their own specifications. The specifications, did not, however, include the chemical composition of the materials, since it had already been determined by the manufacturer of the raw material. The cold drawing process does not change the chemical structure of the material. For products used in big projects employing international specifications, the company relied on higher-quality billets. This market differentiation enabled it to reduce manufacturing costs.
One of the limitations for the company's exports has been a rather conservative marketing strategy pursued in the past. The firm avoided working through established agents or distributors outside the country. It also did not use consulting firms. It relied largely on marketing personnel from the parent holding company, IPS. Due to its dependence on IPS, the company had not fully established a department to market products in the region, but with the present greater focus on export markets it is in the process of creating such a department.
Because of its broad connections in East Africa, IPS handled the publicity for products from its associated companies but the costs were met by the companies themselves. The management staff was also provided by IPS. Due to the considerable level of IPS specialization in marketing in the region, its companies benefited from lower advertising costs and greater knowledge and familiarity with the regional markets.