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Leather and footwear industry
The leather and footwear industry in Kenya was dominated for most of the 1950s and 1960s by a subsidiary of a Canadian multinational, East African Bata Shoe Company, established in 1943. In the 1970s competition from small- and medium-scale producers of leather products and from imported finished products continued to be felt by the larger firms. An increase in the production of synthetic products also posed a considerable challenge to the more expensive leather products.
Leather production receives low protection domestically. Therefore only foreign subsidiaries, or those linked to export markets through subcontracting, were able to compete effectively. The technological threshold is one of the main factors limiting the entry of more firms.
History of firms in the sample
Origins, ownership and structure
Orbitsports was established in 1968 and is fully owned by four members of a Kenyan Asian family. At that time the domestic demand for sports items was rising rapidly, met largely by imports, yet leather was readily available and the skills needed to set up and operate such a firm were not prohibitively expensive. The start-up capital required was also moderate, approximately KSh6 million, excluding the cost of land and buildings. The firm's promoters were already quite familiar with the sports industry, as they used to be key importers of sports equipment. At that time, there was no local firm producing sports equipment.
It is now one of the leading African manufacturers of balls and other sports equipment. Between 1970 and 1990 its total sales increased six-fold, from KSh7 million to 41 million, while total employment rose almost six times from 64 to 352 persons. The total assets of the company in 1992 amounted to KSh42 million, including land and buildings.
For the first six years, Orbitsports remained the only manufacturer of sports items in the PTA region. Since then, one more firm has been established in Kenya but it does not yet pose serious competition to Orbitsports because of the relatively low quality of its products. A major breakthrough for Orbitsports occurred in 1974 when it entered into a technical cooperation agreement with Adidas, the world's largest supplier of leather balls. The firm paid royalties to Adidas for technical services, including training of the company's workers at Adidas in France, evaluating the quality of raw materials, checking the quality of final products and providing technical advice on the purchase of machinery and equipment.
Investment in new machinery in 1974 doubled the firm's production capacity, to 40 000 balls, from its 1968 level. Further investments in machinery in 1980 and 1985 raised the capacity to 65 000 and then to 110 000 balls.
In 1986, Orbitsports' exports to Africa and Europe amounted to KSh10.5 million, 45 per cent of total sales. By 1990 this had grown to KSh27 million, some 60 per cent of total sales. In the 1990 soccer world cup, Orbitsports supplied almost all of the 300 balls required. Of the total exports of the company in recent years, 70 per cent went to Europe and 30 per cent to Africa. The projection for 1992 was lower, at KSh21 million. The decline was attributed to lack of import licences, which take 4 to 5 months to acquire (problems related to import licences led to the loss of an export order of KSh7 million during the year), import duties on synthetic materials, and the declining competitiveness of the firm due to low labour productivity and inflexible labour arrangements.
Technology, productivity and human resources
Production linkages and subcontracting
Manufacturing balls is highly labour intensive. Due to the high labour costs in developed countries, Adidas found it more profitable to subcontract the manufacture of balls to firms in developing countries. Orbitsports' subcontracting arrangement with Adidas in 1974 was the single most important factor behind its phenomenal success in the export market. Through it, Orbitsports acquired highly sophisticated machines which are still in good working condition, partly due to the company's policy of preventive maintenance. The firm has a full-time engineer whose responsibilities included preventive and breakdown maintenance of the machines, which are overhauled at the end of each year.
The firm's strategy is to market its products aggressively, both in Africa and North America, and to avoid relying too much on subcontracts with Adidas. The firm has already appointed an agent as a first step in this new direction. One of the constraints with regard to North and South America is that Orbitsports cannot export there under the Adidas label because Adidas has another appointed agent there.
To maintain its market share, especially in Africa, the company has adopted the strategy of appointing a large number of distributors to counter competing imports and of giving their agents special terms such as 60 days' credit. The company found credit terms to be the most effective strategy.
Technology and productivity
The company's entry into the export market was attributed to its technical cooperation agreement with Adidas in 1974, which has enabled the company to modernize its technology and pay greater attention to quality control. Between 1976 and 1979, most of the firm's exports went to African countries, with exports to Europe starting in the early 1980s and reaching a peak in 1986, when they surpassed exports to Africa. In 1980, Orbitsports scrapped most of the old machines and replaced them with new ones. This shift followed Adidas' policy of progressively reducing its own production and relying more on subcontracting in various parts of the developing world. By the early 1980s, the quality of the company's products had improved tremendously.
The main competitors in the export market include Pakistan, India, Indonesia, the former Yugoslavia and Hungary. All the main ball manufacturers have technical agreements with Adidas. A number of recent developments have adversely affected Orbitsports' competitiveness in the export market. Some of these are associated with technological changes in the manufacture of balls. Up to 1990, leather was the main raw material. This gave Orbitsports a competitive edge due to the domestic availability of cheap, high-quality leather. The main imports included special chemicals used to coat leather to make the ball water- and scratch-resistant and to stabilize its shape. Up to 1990, the imported content in an Orbitsports football was 33 per cent. Thus, under the circumstances prevailing up to 199O, the firm had the competitive edge over many other Adidas agents.
Since 1990, Adidas has recommended a shift to synthetic, non-women fabrics in the manufacture of balls. The shift has raised Orbitsports' imported content to 76 per cent, as it has to import its main raw materials. This has immensely reduced the firm's competitiveness against European firms, where the synthetic materials are cheaper than leather. The problem has been aggravated by high import duties on imported synthetic materials. The company has subsequently lost its bids for some export orders to competitors from Asia and Europe.
Another change that affected the competitiveness of Orbitsports in the export market in 1981 was the introduction of a new technology that enabled mechanical punching of holes in leather. This permits stitchers to make more balls per day. Under the previous technology, the holes were manually punched. With the old technology, average productivity per worker was 2.5 balls per day. The average productivity using the new technology is 3.5 to 4 balls per day per worker. Orbitsports is, however, unable to enjoy the full benefits of the new technology because the workers, through their trade union, have strongly resisted revision of a 1968 Collective Bargain Agreement which specified that workers were expected to achieve a target of 2.5 balls per day. The firm has been trying to negotiate a new target of about 3.5 or 4 balls per day in order to match competitors in countries such as Pakistan and India but has thus far had no success. The workers insist that the target should not be raised, arguing that when the company receives large urgent orders it should give the workers more overtime work. Unfortunately overtime work has the effect of raising the labour costs of the firm significantly. When workers are given overtime, many of them are able to achieve much higher productivity, of between 4 and 5 balls per day.
The effect of the existing Collective Agreement between the union and the employer has thus been to raise the labour costs per unit in the firm substantially above those of its main competitors. This, coupled with the shift to synthetic materials in the manufacture of balls, has made the Kenyan firm lose ground to other firms. If the company was able to negotiate higher labour productivity it would be in a position to offer more competitive bids for Adidas subcontracts and to increase its market share in Africa and the rest of the world. According to the information provided by the company, its labour costs were, for instance, more than 40 per cent higher than those of sports equipment manufacturers in India and Pakistan.
Apart from the subcontracting arrangement with Adidas, another factor which explains the company's success in exporting was the priority given to marketing. The overall marketing department was well staffed, with a manager specifically in charge of exports, enabling the firm to focus on the export market more effectively than most manufacturing firms in the country.
In spite of its relative export success, the company is highly cautious in its future plans. It is, for instance, against venturing into high-technology fields because the import content of such ventures would be very high. The management cites the problem of obsolescence as a result of quick technological changes and fears that many Kenyan firms would find it difficult to compete in high-technology fields. The firm intended to continue giving priority to products for which 80-90 per cent of raw materials can be obtained domestically. so reducing its import dependence. Foreign exchange constraints create immense problems in meeting production targets and schedules, due to delays and uncertainties in obtaining import licences.
The loss of the company's export competitiveness to its rivals in Asia and Europe was forcing it to adopt new strategies. One of these is to change its employment policy so that permanent employment and time-rate payment are gradually replaced by more contractual and piece-rate arrangements as a way of raising labour productivity and reducing costs. The firm has also been trying to diversify into the production of other leather products and sporting goods to reduce the risk of continued dependence on ball manufacture in a rapidly changing environment.
This study has examined the role of technology, government policy, marketing strategies, management, labour productivity, ownership structure and the size and structure of the domestic market as determinants of Kenyan firms' export performance. The enterprise case studies were drawn from the textiles and clothing, food processing, pharmaceuticals, metal, paper and packing materials and leather and footwear industries.
Technological dynamism was found to be one of the most crucial factors determining efficiency and export competitiveness. Most firms that had failed to modernize their industrial processes found themselves unable to increase or maintain their export market shares. Other factors were subcontracting export arrangements, the availability of domestic raw materials and competitive labour costs.
Successful exporting firms in the textile, clothing, leather and shoe industries were those which had either adopted relatively modern technology or been able to establish special niche markets. A textile firm, for instance, which specialized in creative designs for women's cultural garments had been able to establish a stable export market. Another firm's impressive exports were due to a contract with an international firm to supply high-quality balls. The firm's competitiveness also depended on locally available leather and low labour costs. A recent shift to synthetic materials and inflexible labour contracts had adversely affected its competitiveness in the last few years.
In the cement industry, one of the two firms was able to export because it had adopted a more modern and fuel-efficient technological process which reduced costs and produced high-quality cement. Liberalization of prices and imports also helped the firm to increase its profitability and lower costs to international market levels.
The case studies show that private firms with foreign ownership and expatriate management tended to have higher efficiency, technical competence and managerial capabilities. Foreign ownership provided the necessary link to the outside world. This was vital for firms' ability to keep up with changing technological processes. The expatriate management played a key role in the adoption of new technologies, training labour and servicing the new equipment.
Specialization and economies of scale emerged as rather insignificant considerations. Most firms relied on specified varying orders from some traditional customers. This was, for instance, shown in the shoe and ball manufacturing firms and two textile firms. These firms' ability to cope with a range of quality requirements and changing customer needs was important.
The study also shows that those firms that had developed a competent and disciplined indigenous workforce, backed by close supervision' were able to maintain their competitiveness in both local and export markets. Continuous training of the workforce was found to be vital in view of the rapidly changing technologies and increasing quality control requirements. The ability of some pharmaceutical firms to enter the highly competitive export market was due to modern equipment, the adoption of more efficient production processes, the use of experienced expatriate pharmacists, and government incentives.
It was also evident that some Kenyan firms which established production facilities between the 1950s and 1970s have continued to export to neighbouring countries in part because these countries have not been able to establish similar facilities, due either to the small size of their markets or the high costs of installing such facilities. In such cases, the market share of the Kenyan firms in these countries was not necessarily based on modern technology or superior quality but rather because they happened to have some manufacturing capacity which was absent in some neighbouring countries. This was, however, a temporary situation which was rapidly becoming quite rare.
1 Manufactured items include those classified under SITC 5-8. They exclude food, beverages and tobacco.
2 This excludes unofficial exports, which account for an estimated 20 per cent.
Coughlin, Peter, The Gradual Maturation of an Import Substitution Industry: The Textile Industry in Kenya. University of Nairobi' mimeo, 1986.
Republic of Kenya, Economic Survey, 1992, Nairobi, Government Printer, 1992.
World Bank. Productivity, Technology Choice and Project Design: With an Application to the Cotton Textile Sector, World Bank, No. 671-77, Washington D.C., 1986.
11. The Ivory Coast
The cooking fats industry
Preserved and processed foods
The textiles industry
Oussou Kouassy and Bouabre Bohoun
Context of the study
Ivorian industry was very dynamic until the end of the 1970s. In 1960 there were fewer than one hundred firms with a combined turnover of 13 billion f.CFA.1 By 1978 this had grown to more than 500 firms with a total turnover of 600 billion. By 1984 the number of firms had again increased, to some 750, with a turnover of 1 250 billion. Average annual industrial growth was 13 per cent until 1973, and 85 per cent between 1974 and 1981. Manufacturing value added (MVA) grew by 3.7 per cent between 1975 and 1985. In 1960 the industrial sector represented only 14 per cent of the gross national product: this increased to an average of 23 per cent between 1971 and 1981.
But this growth in Ivorian industry began to reverse at the beginning of the 1980s. The financial and economic crisis the country experienced then hit industrial activity and exposed its structural weaknesses. There was in fact a sharp drop in industrial growth (minus 8 per cent between 1981 and 1983), a collapse in investments and accelerated obsolescence of productive capacity. Annual gross investment decreased by 50 per cent between 1981 and 1987. The crisis also meant slower growth in sales (+18 per cent a year between 1978 and 1984, +14 per cent between 1984 and 1986) and serious degeneration in the financial situation of industrial firms. Between 1981 and 1983 the debt level of industrial firms increased from 1.3 billion to 1.8 billion.
From 1981 onward, the effects of the adjustment measures adopted by the government were added to the difficulties linked to the crisis. MVA fell by 1.6 per cent per year between 1985 and 1990. The main measures affecting industry related to changes in the protection system (removal of non-tariff barriers and the reduction of tariff protection) and efforts to lower taxation and factor prices as well as the introduction of an export subsidy scheme. All these measures were intended to revitalize the industrial sector, so as to correct its weaknesses, increase its competitiveness and promote exports.
In this general context of crisis and major changes, often unfavourable to industrial activities, some firms achieved noteworthy performances on the domestic market and sometimes on export markets. We have studied the reasons for these success stories in the hope of finding measures which would consolidate their present performances and encourage the vitalization of other industrial firms.
This analysis is based on a study of a sample of manufacturing firms selected for their capacity to illustrate these themes.
The methodology used here has two elements:
1 a quantitative approach based on a combination of financial analysis, accounting analysis and incentive and comparative advantage calculations. The necessary accounting and financial data for the quantitative analysis was collected either directly from the firms, or from the Banque des Données Financières' (BDF) of the Ministry of Finance and Planning.
2 a qualitative analysis of the characteristics of some industries and industrial firms. This included a study of their history, human resources management and acquisition and development of technologies, in which information collected during interviews with the main actors was of considerable importance.
Choice of sectors and firms
The choice of firms in the sample is based on the relative importance of the industrial sectors, sub-sectors and the firms themselves in Ivorian industry. The three sectors from which we have selected firms are, according to the Ivorian classification of economic activities:
1 Sector 07: industries preserving and processing food (Capral-Nestlé and Saco).
2 Sector 09: the cooking fats industry (Cosmivoire and Trituraf).
3 Sector 11: the textile industry (Uniwax and Cotivo).
These three industries represent a significant proportion of Ivorian industry, in terms of production, export capacity (especially Sector 07) and the value added they generate. On the basis of the 1985 data, the three industries contribute about 26 per cent of the manufacturing output and 16.1 per cent of total exports. The industries of Sector 07 are the major exporters, with 10.2 per cent of total exports.
Two firms were selected from each of these sectors. Capral and Saco together account for 31.7 per cent of production in their industry but generate just 24.3 per cent of the value added. As for the firms producing cooking fats, they have a very high value added: 18 per cent of the industry's value added against only 16.5 per cent of its total output. The textile firms account for just 1.6 per cent of the value added in textiles.
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