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Is Counterfeiting Hurting Kenya As Destination For Global Firms?

Is Counterfeiting Hurting Kenya As Destination For Global Firms?

The decision by Eveready East Africa, a subsidiary of the American-based battery maker, to close down its factory in Nakuru in October was greeted with shock by Kenyans who regard the battery maker as a household brand.

However, people peering beyond the emotional veil observed that this closure was just one of many in recent years by multinational firms with operations in Kenya. These closures raise a red flag about the Kenya’s suitability as an investment destination for global firms.

Just two weeks after Eveready sounded its death knell, confectioner Cadbury announced that it too was preparing to take similar action at its Nairobi plant.

The two well-known companies were adding to a list of multinationals that have called time on their Kenyan units in the past 10 years.

Procter and Gamble (P&G), a U.S. household consumer goods manufacturer, shut down its Kenyan factories in 2000, following years of losses.

U.K.-based Reckitt Benckiser, another global manufacturer of household consumer products such as Dettol and Jik also fully exited the Kenyan market in 2010 citing high operational costs.

Colgate-Palmolive similarly ceased manufacturing in Kenya in 2006, shifting its operations to South Africa, two years after computer giant Mecer made a similar decision with its local factory at the export processing zone.

Johnson & Johnson and Bridgestone complete the list of other multinational firms that have in the past decade closed their Kenyan plants.

Some companies blame counterfeiting

“I am particularly worried and the government should be too,” said Betty Maina, CEO at the Kenya Association of Manufacturers, in an AFKInsider telephone interview. “Companies shutting down their factories is never a good sign for any economy whether they are Kenyan-owned or multinationals which have set up shop locally.”

While Eveready’s main grievance has been an unfavorable working environment – high energy and staff costs as well as restrictive regulations – the company has been brought to its knees due to counterfeiting.

The battery maker’s management has for years complained that cheap fake D-size battery imports from Asia were choking its business, eventually pushing it to close down.

The firm’s appeal to Kenya’s government to secure the country’s borders and ports, strengthen quality checks and curb counterfeits, fell on deaf ears and was not acted upon.

As counterfeit battery imports persisted unchecked, Eveready, which also imports and markets other brands of dry cells including Energizer, saw its annual production fall sharply.

Jackson Mutua, Eveready’s managing director, said in an AFKInsider interview that at its peak – about 10 years ago – Eveready’s Nakuru factory averaged production of about 180 million D-size batteries annually.

Now, this figure has dropped to between 40-to-50 million dry cells a year.

“These illicit traders import their products illegally and therefore they do not pay taxes like the rest of us,” Mutua said, adding that Eveready Kenya would start importing the product from its sister company in Egypt.

“They are therefore able to set prices of their products at even half the price of our batteries,” Mutua said. “Our main customers who are low-income earners are very price sensitive and they are attracted by these lower prices.”

Eveready’s pleas were not far-fetched.

Kenya’s Anti-Counterfeit Agency said in 2013 that counterfeits cost Kenya’s economy $778 million. Items most affected include electronics, cables, pharmaceuticals and mobile handsets.

Phillips, a global technology firm, in October launched a product verification system in Kenya in its own fight against counterfeits, highlighting the severity of the problem locally.

In Cadbury’s case, the company said it pulled the plug on its Kenyan office in line with a global restructuring plan to streamline the company’s supply chain.

The chocolate manufacturer, which operates through U.S.-based parent company Mondelez International, plans to maintain Kenya as its regional hub to build a commercially focused business in East Africa.

Whatever the reason given by all these firms, industrialists agree on one this — that the Kenyan government should be concerned and move to arrest the trend.

Kenya’s industrialization principal secretary Wilson Songa was quoted in Business Daily saying that it was unfortunate that multinationals were shutting down factories, and the government had taken note of their complaints.

Kenya recently rebased its gross domestic product for 2013 at KES 4.75 trillion ($52.72 billion US), 25 percent higher than the earlier estimate of KES 3.8 trillion ($42.2 billion US).

With this “improved,” GDP indicator, Kenya is now ranked as a middle-income economy, hence the urgent need for multinationals to continue investing locally as opposed to exiting the market.

 “The rebasing of the Kenyan economy is something we should all welcome,” said Carlos Lopes, executive secretary of U.N. Economic Commission for Africa, in a statement. “I welcome the fact that both Tanzania and Uganda are also planning to rebase their GDP estimates before the end of the year.

“It will imply an appreciable revaluation of the size of the East African Community’s economy — and hopefully this will entail a much better appreciation by investors of the potential investment opportunities within one of Africa’s most dynamic markets.”