Unlocking our industrial potential through contract manufacturing

Global context: Lessons from manufacturing leaders

China serves as the quintessential example of how contract manufacturing can lead to explosive growth.

By allowing foreign and local companies to produce goods at their facilities, China has built a formidable manufacturing hub that attracts investment and generates employment.

Chinese contract manufacturers have thrived by leveraging underutilised capacity, transforming idle factories into hubs for diverse production, and creating jobs and opportunities across the spectrum. India echoes this success story, where its government has incentivised contract manufacturing through initiatives like the Production-Linked Incentive (PLI) scheme.

By encouraging micro-small and medium enterprises (MSMEs) to partner with larger manufacturers, India has fostered an ecosystem where small enterprises can gain access to advanced technologies and markets without the burden of significant capital outlays.

Vietnam has also followed suit, becoming a preferred hub for contract manufacturing in Southeast Asia. The Vietnamese government has actively promoted the “Make in Vietnam” initiative, facilitating a conducive environment for foreign investment and local entrepreneurship. By combining idle capacity with skilled labour, the country has attracted major international brands to establish production facilities while simultaneously boosting local MSMEs.

Opportunities arising from recent economic agreements

 Kenya stands to benefit significantly from the recent economic partnerships that provide preferential access to over 50 per cent of the global market valued at over $50 trillion (Sh6.45 trillion).

These agreements not only open doors for more diversified exports but also create a burgeoning opportunity for the manufacturing sector:

1. Economic Partnership Agreement with the EU: This agreement allows Kenyan products to enter the European market of 27 countries (a Euro 17 trillion economy) with reduced tariffs. By leveraging contract manufacturing, local MSMEs can manufacture goods tailored for specific European markets, enhancing export volumes and diversifying product offerings.
2. AfCFTA: This presents a tremendous opportunity for intra-African trade. With reduced trade barriers, Kenya can boost its manufacturing output for regional markets.

By establishing contract manufacturing partnerships, Kenyan MSMEs can scale production to meet the growing demand across Africa.

3. Agoa: The deal offers preferential treatment for African goods entering the United States.

By enhancing local manufacturing through contract agreements, Kenyan businesses can tap into a lucrative market, positioning themselves strategically within the global supply chain.

However, out of 6000 tariff lines or opportunities for Kenya’s exports to the US, for 24 years, Kenya has only utilised less than six tariff lines.  

4. UAE: The UAE has emerged as a critical trade partner for African nations, providing access to the Gulf and Asian markets. Kenyan manufacturers could utilise contract manufacturing to create products specifically catered to this market, including textiles, agro-based products, and value-added goods. Despite these opportunities, Kenya’s total exports are less than $15 billion (Sh1.94 trillion).

To capitalise on these agreements, we need to uplift our manufacturing sector, focusing on scaling existing capabilities and inspiring innovation through contract manufacturing.

Harnessing Kenya’s idle manufacturing capacity

Kenya possesses a vast reservoir of about 40 per cent underutilised manufacturing facilities, particularly in sectors like food processing. For instance, numerous idle maize milling plants throughout the country signify the potential that remains untapped.

Instead of remaining dormant, these facilities can be revamped to offer contract manufacturing services for MSMEs keen on entering the food market without the burden of hefty investments in machinery and infrastructure.

With access to over 100 factories across diverse sectors—including maize flour, wheat flour milling, noodles, plastic pipe manufacturing, cooking oil processing and juice manufacturing—there is a wealth of existing resources eager to connect with aspiring entrepreneurs.

Others are macadamia production, honey processing, peanut butter production and water processing.

By fostering partnerships between larger firms that own these facilities and MSMEs, we can create a win-win scenario: larger manufacturers utilise their resources more efficiently while MSMEs gain access to vital production capabilities. This approach can resonate across various sectors, from textiles and consumer goods to pharmaceuticals.

 Raising awareness and healthier mindsets toward manufacturing

To entice young people and MSMEs into manufacturing through the contract manufacturing model, we must elevate awareness about its potential benefits.

1. Education and skills training: Collaborate with local technical institutions to offer training programmes focused on manufacturing skills and entrepreneurship. Empowering youth and MSMEs to capitalise on contract manufacturing opportunities will create a more dynamic manufacturing ecosystem.
2. Awareness campaigns: Launch social media campaigns highlighting success stories of local entrepreneurs who transitioned into manufacturing through contract agreements. Engaging the youth on social media platforms like TikTok and Instagram will make the possibilities more relatable and inspiring.
3. Mentorship opportunities: Pair experienced manufacturers with youth interested in starting ventures. This mentorship can illuminate the intricacies and potentials of the manufacturing sector, increasing confidence among new entrants.
4. Policy advocacy: Encourage government initiatives to support contract manufacturing frameworks. Initiatives might include tax relief for larger firms engaging with MSMEs and subsidies to enhance MSME capabilities.

 A call to action

 The time is now for Kenya to harness its existing manufacturing potential through contract manufacturing. By learning from the successes of China, India, and Vietnam, and leveraging recent favourable trade agreements, Kenya can rejuvenate its industrial landscape.

 Interested entrepreneurs, investors, and aspiring manufacturers should explore these existing resources. Connect with the large network of over 100 factories across critical sectors, eager and equipped to collaborate with you in contract manufacturing. Together, we can build a resilient manufacturing sector that not only uplifts our economy but also achieves our ambitious goal of a 20 per cent manufacturing contribution to GDP by 2030.

The writer is a public policy expert and former CEO, Kenya Association of Manufacturers.