The closure of Sameer Africa tyre factory in Nairobi was not unexpected. That’s what an economy gets when it fails to create a competitive business environment. You can’t fault Naushad Merali, the chairman of Sameer Group, nor its management. They are in business to make a profit. Not to keep people’s jobs nor machines running.
Like in any business, if you can’t make money, you have no businesses running the machines. Unless of course you are a government or an NGO. Sameer Africa has simply done what smart businesses do.
Outsourcing production of tyres to China is a strategic move that will keep it in business and, hopefully, get shareholders greater value. China has something that eludes most governments, including even the United States.
That is cheaper production costs. From labour to power to regulation, China is a pace-setter. Most US companies, including phone and computer makers, have outsourced production to China. Chinese companies invest substantially in research and development (R&D). This is the engine of China’s blistering outsourcing industry.
They are always discovering new ways of not only cutting costs but also increasing efficiency levels. Many Kenyan companies invest more in flambouyant strategies, management and board perks, expensive marketing and less in research and innovation.
We can’t blame the cost of power and labour forever. In any case, these costs are not coming down any time soon. Our industrial power costs stand at an average Sh17 per kilowatt hour compared to Sh12 per kilowatt hour in Tanzania and Sh11 in neighbouring Ethiopia and you can bet they are likely to increase.
Kenyan companies should find creative ways of making up for what labour and power takes away. It boils down to innovation—right from processes to managing and planning resources. Most of China is mechanised, while Kenya still relies heavily on unreliable but expensive humans.
Unless CEOs and boards step out of the comfort zone, we haven’t seen the last of factory closures. Eveready East Africa shut down its Nakuru battery factory in 2014 due to competition from cheaper dry cell imports. Eveready wasn’t efficient enough to compete, running on obsolete plant.
Cadbury, Procter & Gamble and Reckitt Benckiser could not identify the secret to counter high cost of business so they too moved to cheaper markets. Shifting production to more friendly environments is the easiest way out that requires little thinking.
But as some firms will soon find out that isn’t sustainable because a low-operating environment is not always assured. The situation is simple. We either think ahead of the Chinese or stop complaining about export jobs to China. The writer is the managing editor of businesstoday.co.ke. Email: [email protected]