Auto-Ancillary Industry in Kenya the Study of the Manufacture of Leaf
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AUTO-ANCILLIARY IKDOSTRY IN KENYA THE STUDY OF THE MANUFACTURE OF LEAFSRPINGS, EXHAUST SYSTEMS, FILTERS, RADIATORS BRAKE PADS AND BATTERIES BY OBERE J. ALMADI Research, paper submitted to the Department of Economics, University of Nairobi, in partial fulfilment of the Requirement for the Degree of Master of Arts in Economics. AUGUST, 1987 (ii) I DECLARE THAT THIS RESEARCH PAPER IS MY ORIGINAL WORK AND HAS NOT BEEN PRESENTED IN ANY OTHER UNIVERSITY. DATE ALMADI J. OBERE This research paper has been submitted for examination with our approval as University Supervisors. ~ ««..!*/?/?7 Dfrr-srTTlASAI (2) Zi'/f/fo2- DATE .......... DR. P. E. COUGHLIN (ill) ACKNOWLEDGEMENTS Much thanks to all individuals, firms and institutions who provided Information for writing this research paper. Particularly, I am greatful to my Supervisors, DR. S. W. MASAI and DR. P. W. COUGHLIN who through their constructive comments kept me on the 'move1. I also thank Kenyatta University for the generous financial support for my post-graduate studies. Special thanks also go to my family members, especially Dad* Rev. Jackson Obere-Oloo, Mum, Elsa, and brother Eliud for their prayers and inspiration throughout my studies. Lastly, I remain accountable for all mistakes in the paper. ALMADI JOHN OBERE AUGUST 1987 (iv) A B S T R A C T The domestic production of auto-ancilliaries (motor vehicle components) in Kenya is an import-substituting strategy aimed at increasing the domestic content of the locally assembled vehicles as well as to offer maintenance services to the already existing vehicles. This study investigates the problems facing the auto-ancilliary industry especially the firms manufacturing leafsprings, radiators, exhaust pipes and silencers, brake pads, filters, and batteries. The issues investigated relate to capacity utilization, economies of scale, protection and export promotion, and acceptability of these components by motor vehicle assemblers. Results from the study show that there is capacity to make more motor vehicle components in Kenya. On the average only 27$ of the capacity is utilized. This represents massive underutilization of resources. The underutilization is mainly due to inadequate demand and having many vehicle and component models in Kenya. Economies of scale can be achieved with expansion of output. The study also shows that there exists an opportunity for export promotion. Due to the present export compensation of 20$, four components manufacturing industries have effective rate of export promotion between 1i*-15$. However there is need to reduce bureaucracy involved in obtaining export compensation and rebates oh sales tax. Also shown is the fact that most motor vehicle assemblers in Kenya are reluctant to use the locally-produced components. The majority of assemblers only use locally-manufactured items mainly because the government bans the importation of such components. Lastly the study recommends various options of assisting the auto-ancilliary industry. (V) TABLE OF CONTENTS PAGE TITLE ............................................... i DECLARATION ............................................ ii ACKNOWLEDGEMENT ........................................ iii ABSTRACT ............................................... iv TA3LE OF CONTENTS ..................................... v LIST OF TABLES ......................................... vii LIST OF APPENDICES .............................. viil CHAPTERS I INTRODUCTION........... ..................... 1 1.2 Statement of the Problem ............. 3 1.3 Objective of Study .................... 5 II LITERATURE REVEIW ........................... 6 Introduction ............................... 6 Literature Review .......................... 6 III METHODOLOGY AND ANALYTICAL FRAMEWORK ........ 15 3.1 Introduction ............... 15 3.2 Analytical Framework .................. 18 3.3 Acceptability of the Components ...... 18 3.4 Rate of CapacityUtilization .......... 19 3.5 Effective Rate of Protection and Export Promotion . .......................... 27 3.6 Economies of Scale .................... 30 3.7 Data Limitations ...................... 31 (Vi) PAGE IV EMPIRICAL RESULTS AND PROOF OF HYPOTHESES . 32 4.1 Introduction ......................... 32 4.2 Proof of Hypotheses ................ 32 Hypothesis one ....................... 32 Reasons for capacity Underutilization. 38 Hypothesis two ....................... 40 Export Promotion ................... 44 Hypothesis Three ................... 47 Effect of proliferation of vehicle and component models ............... 47 4.3 Acceptability of Local Components .... 51 V CONCLUSION AND RECOMMENDATIONS .......... 55 5.1 Conclusions ......................... 55 5.2 Recommendations ...................... 57 NOTES .................................... ............ 68 SELECTED BIBLIOGRAPHY .. 70 (vii) LIST OF TABLES TABLE NO. TITLE PAGE 4.1: Actual and Potential Production Time in Component Manufacturing Firms (1987) ......... 33 4.2: Cost Structure of a Leafspring Manufacturing Firm ................ 35 4.3: Cost Structure of a Filter Manufacturing Firm , 36 4.4: Cost Structure of a Battery Manufacturing Firm . 37 4.5: Reasons for Underutilization of capacity ...... 41 4.6: Major Inputs for the Manufacture of Selected Motor Vehicle Components ...................... 43 4.7: Effective Rate of Export Promotion ...... 45 4.8: Quality Rating of Selected Locally Manufactured Components ..................................... 52 5.1: Comparing Expenditures on Exhaust Systems Between Quantity Demanded of Metal Sheet Currently Used and Alluminized Steel ......... 63 (viii) LIST OF APPENDICES APPENDIX NO. TITLE PAGE 1. Questionnaire for components Manufacturers 72 2. Questionnaire for Motor Vehicle Assemblers and CKD Importers ........... 84 ^ 3. Letter of Introduction ................... 90 ^ 4. Makes and Models of Vehicles Assembled in in Kenya as per February 1987 (Summary of Numbers) ..................... 91 ✓ 5. Makes and Models of Vehicles Assembled in Kenya as per February 1987 .............. 92 ^ 6. Firms Visited ............................ 96 ✓ CHAPTER ONE INTRODUCTION In motor vehicle manufacture, numerous components are used. A small car may include upto 2,500 major parts and assemblies. About sixty different materials are used and almost all manufacturing processes are involved. Motor vehicle components industries fall within a cross-section of 4-digit U.N. standard industrial classification codes and comprise a range of firms manufacturing original motor vehicle parts and accessories used to replace old ones. Motor vehicle components can be classified based on their use or the categories they belong to such as: tyres and wheels, bodyworks, filters, chassis, engines, cables, brakes, trans mission, instrumental pannel, electrical and exhaust systems. Components can as well be classified as those made outside by independent component manufacturers. The design of every com ponent however must be approved by the motor vehicle manufacturer. The finished motor vehicle components' distribution con sists of replacement sales through distributors other than the manufacturers as well as the sale of original equipment parts to motor vehicle assemblers. The allocation of finished products to the two channels diffen among firms; however, the year-to year fluctuation in the volume of sales is usually smaller where original equipment comprise all sales'^. 2 In the replacement business, the independent parts manufacturers usually compete with automobile manufacturers who also have their own replacement outlets through their dealers where importation of components is not restricted. To protect their replacement business, automobile manufacturers require their dealers not to handle parts from independent producers without approval from the motor vehicle manufacturers The development of the motor vehicle component industry pertains to the second stage of import substitution that pro motes, not only the motor vehicle industry, but also other industries with which the motor vehicle components industries have linkages. In recognition of these linkages for the domestic markets, most LDCs' governments levy tariffs or even impose bans on imported components to protect domestic indus tries. Where a ban on importation of a component has been imposed or where the component is purchased from another source the overseas automobile manufacturer gives an allowance or rebate for the item excluded from the completely knocked down kit purchased by the assembling firm. In Kenya, the production of motor vehicle components is growing slowly. The component manufacturers are unable to achieve economies of scale mainly due to low production runs. The components industry is oligopolistic with the market not being shared equally. Some firms also produce more than one component or engage in more than one activity. The motor vehicle market is characterised by numerous vehicle makes and models with little standardization of most of the components 3 between various vehicle models even of same make. This has led to production of many components in low quantitites. Most vehicle component manufacturers plan to deversify e.g, Auto Spring Ltd. has started to produce wire harness, Varshani Brake Linning LTD is starting to produce pressure tubes and Associated Battery Manufacturers LTD sells lead to other manufacturers. Most components’ manufacturers in Kenya are either agents of or operate under licence from multinational firms. This sometimes restricts the source of inputs since the licensor influences