Big manufacturers on the spot for sidelining smaller players

Large manufacturers are on the spot for their reluctance to do business with small and medium-sized entities, which the government has noted is dragging the growth of the sector.

Principal Secretary of the State Department for Industry Dr Juma Mukhwana noted this, saying it should not be the practice, considering that other economies that have grown their manufacturing are willing to sub-contract.

While the Cabinet Secretary, Ministry of Investments, Trade and Industry Salim Mvurya says that there is a policy on sub-contracting, a fact that is supported by Kenya Association of Manufacturers (KAM) acting chief executive Tobias Alando, the latest Kenya Economic Report shows that many small businesses trade more within themselves than with their larger counterparts.

PS Mukhwana, speaking during a recent consultative forum with private sector players arranged by the ministry, said the structure of the current local manufacturing industry does not benefit every player.

He stated that in other jurisdictions, larger manufacturers do sub-contract for intermediary products from medium producers. "When you look at how manufacturing is structured in other countries, there are a few major factories, then medium enterprises and small-scale industries. This is so that it is not only the major factories doing everything including procuring of raw materials,” he said.

“The challenge we have with our market is that we have a lot of major factories.”

He noted the way the local manufacturing industry is structured cannot allow healthy competition.

“We have major factories trying to do everything,” he said. “They are not providing opportunities for anyone else beyond them. In fact, what we do is crowd out and push out small people. You cannot then create a proper competitive environment.”

The PS referenced a visit to Japan, where he learnt that while Toyota assembles the vehicles, many of the parts are outsourced. “How do we structure our manufacturing to benefit everyone? We cannot have a manufacturing sector that benefits just a few,” he said.

“We need big industries that are buying intermediate products from the small people.”

 Mvurya told The Standard that this is a challenge the government has noted. “As a government, we have noted that issue and we now have a sub-contracting policy that can allow big manufacturers to work with medium-level businesses,” said the CS.

According to KAM, 52 per cent of its members are small and medium enterprises (SMEs). Mr Alando said SME development is a priority to KAM, adding that the sub-contracting policy is already in practice among its members.

He mentioned the automotive sector where assemblers outsource motorcycle parts from small businesses for assembly. “Sub-contracting is happening but it has not been at that bigger level. We are conscious about it and ready to support SMEs who are ready to work,” he said.

According to the Kenya Economic Report 2024 by the Kenya Institute for Public Policy Research and Analysis (Kippra), one of the reasons why small businesses choose to work among themselves than with larger counterparts is the administrative costs that come with having formal relationships.

The report notes that most micro, small and medium enterprises (MSMEs) do business without even signing contracts.

“The contracting arrangements of MSMEs for procuring goods or securing orders show a wide variation, with many relying on informal or non-structured arrangements, especially prevalent among small enterprises,” reads the report published September 2024.

It adds that while a considerable number of MSMEs opt for non-contractual agreements for inputs or orders, there is a notable presence of formal contracts with the sector.

However, this lack of formalisation, the report notes, also denies small businesses the opportunity to take advantage of the government’s policy on procurement, Access to Government Procurement Opportunities (AGPO), which provides that 30 per cent of contracts be awarded to women, youth and persons with disabilities.

The majority of these businesses are MSMEs.

“What is the benefit of (micro and small enterprises) trading with medium and large enterprises? Is the fact that you can have technology transfers? What is the benefit of trading with the government? It is the fact that you have a ready market through AGPO,” said Kippra executive director Dr Rose Ngugi during the launch of the report.

The report shows that 87 per cent of MSMEs sell directly to individual consumers, which shows how little business they do with larger businesses.

“Individual consumers emerge as the primary market for MSMEs across all firm-size categories. Specifically, micro-enterprises make the highest percentage of sales to individual consumers, accounting for 88.29 per cent, followed by small enterprises at 76.92 per cent, and medium-sized enterprises at 66.67 per cent,” the report says.

Kippra states that small enterprises play a role in supplying non-MSMEs, with 2.02 per cent of small enterprises selling their products to larger businesses this is while sales to non-MSMEs, which likely include larger corporations or entities outside the MSME category, vary across firm size categories.

Micro-enterprises make 2.46 per cent of their sales to non-MSMEs while medium-sized enterprises make 11.11 per cent.

“This indicates that MSMEs are an essential source of supply for larger businesses in Kenya,” the report says.