BMI believes that proposed changes to regulations in Kenya's construction industry would not only shake up the sector's competitive landscape, but could have a similar knock-on effect for the truck market. Chinese truck manufacturers have been prolific investors in domestic truck production in Kenya, partly owing to contracts from Chinese engineering and construction firms with projects in the country. Implementing the new regulations could drastically reduce the number of such contracts and leave manufacturers with excess capacity.
Although only in the proposal stages right now, BMI's Infrastructure team already sees the potential for the new regulations, aimed at increasing domestic involvement in the construction sector, to erode the dominant market share of Chinese construction firms ( see 'Regulations Will Loosen China's Dominance', April 11 2014). Chinese firms account for 47% of the international contractors operating in East Africa, according to data from industry journal Engineering News Record, and this has attracted major Chinese truck makers to fulfil the resulting vehicle demand.
|Enough Growth To Go Round|
|Kenyan New CV Registrations (CBUs)|
First Mover Advantage Erased?
In 2012, Beiqi Foton's USD50mn truck plant marked one of the biggest ever foreign direct investment projects by a Chinese company in Kenya. With an annual production capacity of 10,000 units a year, the plant produces a full range of commercial vehicles (CVs) from light trucks and buses to heavy industrial vehicles such as tippers. The investment reportedly came on the back of a deal to supply Chinese engineering firm Shengli, which had won a contract for a major road building project.
It is these kinds of existing business relationships which make us believe that a slowdown in the number of construction projects awarded to Chinese firms could also impact the competitive landscape of a CV segment forecast by BMI to grow an annual average of 8.4% over the five years to 2018. Indeed, where firms such as Foton were among the first movers in local assembly, the competition has rapidly ramped up as manufacturers see the benefit of producing locally to avoid higher tax rates.
This means that should the regulations be implemented and more domestic construction firms or international firms from outside of China win more projects, there will be no shortage of CV manufacturers to supply them. Indeed, despite the influx of Chinese investment, Toyota Motor and General Motors East Africa still vie for control of the country's light truck market. At the heavier end, Sweden's Scania claims to hold around 50% of the truck and bus market and has recently invested in more local exposure, although not assembly. We believe its strong brand presence could provide the edge without more competitive pricing through domestic production ( see 'Infrastructure Growth Catches Scania's Attention', March 18).
The most positive outcome for Chinese truck makers would be if the proposed regulations were not adopted. Given the level of anti-Chinese sentiment surrounding the construction sector this seems unlikely. However, the regulations would only apply to state-funded projects, which would limit the impact. It is also likely to be some time before all existing truck supply contracts are fulfilled and reduced demand would kick in.
Further upside comes from the fact that these Chinese truck brands have been in the market for a few years now and have had time to start building their brand among local consumers and not just with their compatriot construction firms. Their lower cost models are well suited to emerging markets such as the Sub-Saharan Africa region and some companies such as Foton claim to have invested in market research to adapt models to local requirements.
Another option is increasing exports if domestic sales wane. Kenya has been developing its role as a production and export hub for the wider East Africa Community (EAC) with many of the vehicle plants built recently including some export element. BMI's Infrastructure team notes that the East Africa region requires USD20bn in investment for its transport infrastructure, according to the EAC's Corridor Diagnostic Study, just to connect the community and develop export capabilities.
This makes the CV segment attractive on a regional level, which is supported by the number of production projects intended to serve regional sales. As stated earlier, almost half of the international contractors in East Africa are Chinese, which means there are still plenty of opportunities for building on relationships outside of Kenya and redirecting potential excess capacity.