The Standard Group Plc is a multi-media organization with investments in media platforms spanning newspaper print operations, television, radio broadcasting, digital and online services. The Standard Group is recognized as a leading multi-media house in Kenya with a key influence in matters of national and international interest.

Standard Group Plc HQ Office,
The Standard Group Center,Mombasa Road.
P.O Box 30080-00100,Nairobi, Kenya.
Telephone number: 0203222111, 0719012111
Email: [email protected]

NEWS & CURRENT AFFAIRS

The Nairobian

Premium

CMC exit: Is Kenya turning into a graveyard for industries?

Financial Standard

By Brian Ngugi | Jan 21, 2025

**Butali sugar managing director Sanjay Patel testing the New Holland tractors delivered by CMC** . [Jackline Inyanji,Standard]

The recent announcement that Dubai-backed Al-Futtaim Group will be shutting down CMC Motors Group, the region’s automotive and agricultural sectors powerhouse for over four decades, has rekindled concerns about the state of Kenya’s business environment.

This decision, linked by the former giant auto dealer to “unsustainable” market conditions, adds CMC Motors to a growing list of companies that have either exited the Kenyan market entirely or significantly scaled back their operations. Established in 1985, CMC Motors played a pivotal role in mechanising Kenyan agriculture and distributing renowned car brands.

However, the company has faced mounting challenges in recent years, including the loss of key vehicle dealerships like Ford, Mazda, and Suzuki, despite its expected boost from the Al-Futtaim acquisition.

The impending closure of CMC Motors is not an isolated incident, according to our spot check.

Keep Reading business

Kenya has over the last few decades witnessed a concerning trend of businesses, both local and multinational, either exiting the market or significantly scaling down operations.

This exodus extends beyond the automotive sector, encompassing manufacturing, consumer goods, and other key industries. The departure of multinational giants such as Procter & Gamble, Reckitt Benckiser, and GlaxoSmithKline, which have either relocated manufacturing operations or adopted distribution models, further underscores the gravity of the situation, players say.

Others are Colgate Palmolive, Cadbury and Johnson & Johnson, all of which have instead adopted a distribution model.

This means they produce goods in “low-cost manufacturing” countries such as Ethiopia and Egypt and then supply Kenya through a third party.

Others are Sameer Africa’s Yana Tyres, Athi River Mining, TSS Grain Millers, Flora Printers, Packaging Manufacturers, Avon Rubber, Spring Industries Ltd, Mash Bodybuilders, Flower City Ltd, Softa Bottling Company, Shiv Enterprises and Munyiri Special Honey.

The manufacturing sector, once a cornerstone of the Kenyan economy, has seen its contribution to the country’s Gross Domestic Product (GDP) decline significantly, from 11.8 per cent in 2011 to 7.6 per cent in 2023.

Affected players and manufacturers say this decline can be attributed to several factors, including high operational costs as cited by CMC in its statement.

“CMC Motors Group has announced its decision to gradually wind down operations in Kenya, Tanzania, and Uganda in full compliance with local regulations and distributorship agreements. This decision follows a thorough evaluation of the business in light of sustained market challenges, including economic pressures, currency depreciation, and rising operational costs,” said the company.

Over the past 40 years, CMC Motors Group has played a vital role in supporting East Africa’s agricultural sector through the delivery of quality service, mechanisation solutions, and steadfast support to its customers. However, despite restructuring efforts and a transformation programme initiated in 2023, the market conditions have not provided a sustainable path forward.”

Rising energy costs, currency depreciation, and a challenging business environment have significantly increased operational costs for businesses.

According to manufacturers, an unfavourable business climate marked by high tax rates, cumbersome regulations, and inadequate infrastructure has also created a less-than-ideal environment for businesses to thrive.

There is also competition from cheaper Imports marked by increased competition from cheaper imports, particularly from Asia, which has eroded the market share of many local manufacturers.

“Our energy costs are roughly three times higher than those in Tanzania. This disparity affects our global competitiveness. If we could reduce energy costs, we would see a substantial impact on our ability to compete on a global scale,” the Kenya Association of Manufacturers (KAM), the umbrella body representing manufacturers said earlier.

It pointed out that in other countries, such as Egypt and South Africa, production costs are much lower, which places Kenyan manufacturers at a disadvantage.

Regulatory costs also pose a challenge, it said. KAM described the cumbersome nature of regulatory requirements, noting that businesses face various levies and tariffs when operating across different counties.

“In Kenya, companies often encounter high costs related to regulatory compliance, which hinders their competitiveness,” said the lobby.

This issue contrasts sharply with the goals of the African Continental Free Trade Area (AfCFTA), which aims to reduce trade barriers across the continent, KAM noted.

Financial Standard could not immediately reach KAM or Government officials leading the Trade and Investment dockets for this article.

Some smaller players, however, said the dominance of large players has also affected them.

The dominance of a few large players in certain sectors, they pointed out, has created barriers to entry for new businesses and stifled competition they said.

A fledgling business climate is not unique to Kenya however as a spot check by The Standard realised.

Many African countries are grappling with similar challenges, including an unfavourable business environment, infrastructure bottlenecks, and competition from cheaper imports.

Analysts however caution that latest the exodus of major players like CMC Motors from the Kenyan market serves as a stark reminder of the urgent need for policy reforms to address these challenges.

These companies, once key players in the Kenyan market have either scaled down or now prioritise production in lower-cost manufacturing hubs and more could follow suit if no action is taken.

“Companies are saying that the business environment in the country is not friendly for business,” said Dr Patrick Muinde, an economist in an earlier interview.

“Probably they would be referring to policies that have been implemented over time and made the environment harsh.”

He further pointed to recent tax policies, emphasising that stringent compliance requirements can significantly impact businesses, particularly small and medium-sized enterprises.

Improving competitiveness

Addressing these challenges requires a multi-pronged approach. Analysts say the government must focus on improving the business environment.

This includes streamlining regulations, reducing bureaucratic hurdles, and improving the ease of doing business.

They add the government must continue Investing in infrastructure: Enhancing infrastructure, such as roads, energy, and telecommunications, is crucial to reducing operational costs and improving competitiveness.

“Fostering innovation and technological advancements can help businesses increase productivity and adapt to changing market dynamics,” said independent economist Ian Njoroge.

“Providing targeted support to local businesses, including access to finance, training, and market linkages, is essential for their growth and survival.”

Mr Njoroge added: “The closure of CMC Motors serves as a stark reminder of the urgent need for action. The government must take decisive steps to address the challenges facing businesses in Kenya, create a more conducive business environment, and ensure the long-term sustainability of the Kenyan economy.”