By Luke Mulunda of the Financial Standard

Why are Kenyan manufacturers having sucha hard time making enough profits to grow? Ask Mr Vimal Shah, the CEO of Bidco Oil Refineries, a leading manufacturer of edible oils, fats and hygiene products in the region and you will begin to understand the complexities.

"It boils down to competitiveness," says Shah. "This is a very big issue that authorities have taken for granted. The cost of power, labour and other inputs is too high here."

As a poor nation struggling to compete in an increasingly globalised economy, Kenya has little to offer factories like Bidco.

Electricity is erratic and overpriced, Shah says. Traffic along the road to the Port of Mombasa includes a winding jam of vehicles. If a truckload of Chipsy, one the company’s cooking fat brands, doesn’t reach the port on time, it may be days before the consignment is cleared for shipment to its destination in Southern Africa.

This, together with a raft of other expenses like taxation, has ensured that production costs for manufacturers like Bidco remain high. With a turnover of Sh12 billion, it pays taxes to the tune Sh2.1 billion, or 33.6 per cent of its revenues.

To remain nimble in an economy that is growing at a slow rate of 2.4 per cent with inflation at a double-digit level, factory managers are reluctant to pass the extra costs to consumers whose earnings hardly match inflationary pressures.

"Our products would become too expensive both locally and on the international market because production is cheaper in countries where our competitors operate," Shah said during an interview at Bidco’s plant in Thika. "The cheapest suppliers always carry the day. The Government should wake up."

Bidco’s range of products includes Elianto, Golden Fry, Chipo, Chipsy, Kimbo, Cow Boy, Mallo, Gold Band margarine, Gental detergent, and Yellow Star bar soap, among others. Ever so dependent on agriculture, Bidco, and indeed many other local manufacturers like sugar millers and cotton ginneries, has had to fight another war: apathy among producers. Due to rising costs of farm inputs, earnings from farming have been on the wane and debts have grown.

Many farmers, miffed by low returns, have given certain crops a wide berth and opted for profitable ones like Maize and tea in order to retire their debts.

So, to reduce import costs, Bidco has launched a programme to encourage farmers to plant maize, soybeans and sunflower, the raw materials for the Elianto, the edible oil business it acquired from Unga Group seven years ago. "Many farmers would rather plant maize, which is safe. We are trying to encourage them to plant sunflower by providing extension services, which the Government has failed to."

In the face of adversity, however, Bidco has managed to keep steady growth, though mild, by its own standards, and continues to expand its presence in the region.

Overall consumption stagnated last year because according to Shah, "the Government is not spending and people don’t have money."

The rosy prospects of economic recovery painted in early 2003 as the new government took over have all but had an impact on family incomes. "To us there’s been no economic recovery. We are going five steps forward in some places and five steps backwards in others. The prospects haven’t translated into increased sales. We want to do 100 miles per hour yet the economy is moving at 30 miles (per hour)."

At the moment, overall inflation stands at 14 per cent, yet there hasn’t been a reciprocal increase in incomes for the purchasing public. Beside, Kenyan consumers have to pay Value Added Tax on almost all food items in a market where Shah’s firm controls 40 per cent of consumption expenditure.

"It’s only in Kenya where food is taxed. The cost of living is too high; transport, health and every other service come at exorbitant prices. If this is reduced, people will have more disposable income," Shah said.

The growth of Bidco from a Nyeri-based garment-manufacturing firm founded by Mr Bhimji Depar Shah in 1970 is a study in business success on the African continent.

Following the liberalisation of the textile industry in the mid 1980s, and the subsequent flooding of the domestic market with second-hand clothes from the West, Bidco changed lanes to soap manufacturing. Six years later, it opened the edible oil plant in Thika.

"This marked the turnaround as it now concentrated on its core competencies of manufacturing edible oil, fats and soaps," Shah says. Since then, it has been a sprint for a company with eyes set on attaining at least 51 per cent share in the 14 African countries where it has a presence.

Between 1994 and 97, Bidco increased its business five-fold, culminating in the acquisition in 1998 of the then Nakuru-based Elianto Oil operated by Unga Group. One year later, the business had grown by a margin of 400 per cent.

This did very little to whittle down its appetite. In 2002, Bidco, in an effort to firm its grip of the local market, acquired leading brands — Kimbo and Cowboy — from Unilever Kenya. Its own Gold Band margarine has scored little success in wresting the market from Unilever’s Blue Band. "We are not promoting it in a big way locally. It’s not necessary because very few people can afford bread." Shah says the margarine segment is a shrinking market, a development he attributes to high taxes that have pushed such products, considered a luxury, beyond the reach of the majority.

If taxation and inflation aren’t good for the purchasing power, a fluctuating currency is bad for manufacturers who transact business in international currencies. Bidco exports to the Common Market for Eastern and Southern Africa (Comesa), all of which have different exchange rates. "We would like to see a stable currency because instability leads to speculative tendencies.

For exports, Sh76 to the dollar is good but Sh80 would be much better," Shah said. He said that while the wild fluctuations in the Kenya shilling don’t significantly reduce Bidco’s profits from exports, it makes its products less competitive abroad. The shilling, which has lately weakened against major foreign currencies in what is said to be a self-correction, went wild in the past three months, gaining 10 per cent against the US dollar.

In this case, importers had a field day while local manufacturers cried all the way to bank. The safest way out is to pass the burden to the consumer, a counterproductive move that in turn makes products less competitive.

A good example of how a strong local currency can affect competitiveness is South Africa, where the appreciation of the Rand from 14 to the dollar to R5 over the past five years has made the country’s exports expensive and uncompetitive in the regional markets.

East African Community (EAC) members have different currency rates, with the Kenya shilling as the strongest. And with the January 1, 2005, launch of the East African Customs Union -— which allows duty-free movement of goods between Kenya, Uganda and Tanzania — comes the fear of losses from exchange rates in cases of volatile fluctuations.

Bidco appears to have hedged against these vagaries early enough by opening operations in the other two EAC member-states.

In Tanzania, Bidco acquired Shivji and Sons Ltd, a soap manufacturing plant in Dar es Salaam, in 2001. And perhaps to prove that nothing can stop this oil-making juggernaut, Bidco entered Uganda in 2003, where it has invested Sh120 million in the continent’s largest palm oil plantation spanning 30,000 hectares.