Kenya Autos Report Q3 2012

New vehicle dealers in Kenya sold 1,525 units in January-February 2012, compared with 1,775 vehicles sold during the same period of 2011, according to data released by the Kenya Motor Industry Association (KMI). The slump has been attributed to several factors, including the forthcoming general elections and strict measures by the government to reduce new car orders, according to CMC Motors CEO Bill Lay. In addition, sales dropped due to high interest rates, owing to the Central Bank of Kenya's measures to tighten liquidity. High interest rates had a direct affect on showroom prices of vehicles, since new vehicle sales are primarily funded by bank credit.

Although data from the KMI shows that the total new vehicle market grew 10% year-on-year (y-o-y) in 2011, not all local distributors are capitalising on the trend. The growth in demand for pick-up trucks is leading to a shift in the competitive landscape. Total vehicle sales in 2012 are expected to increase by 9.42% y-o-y to 12,769 units, reaching 17,828 units in 2016.

KMI data show that while the total new vehicle market grew 10% y-o-y in 2011, the Japanese earthquake and tsunami had the biggest impact on the country's larger dealers. As a result, those that the association groups as smaller dealers saw their market share increase from 6.5% in 2010 to 10%, while their sales rose 69% compared with 6.1% growth for the combined larger dealers. General Motors East Africa (GMEA) offset some of the negative impact of restricted supplies for its Isuzu truck brand, however, through its domestic production, which underlines the advantages to be gained in an increasingly competitive vehicle segment.

According to data from the KMI, growth in the agriculture, manufacturing and trade sectors is driving demand for pick-up trucks, which accounted for 35% of total vehicle sales in the nine-month period.

Sales of heavy commercial vehicles still account for 26.8% of the market, behind pick-ups. We also believe that construction projects in the region will fuel sales in the heavier segments over our forecast period. Further growth in Kenya's construction sector is forecast over the next two years by BMI's Infrastructure team, supporting the favourable conditions for the commercial vehicle segment.

The government has development plans with a total cost of US$22bn that include significant improvements to roads, railways, seaports, airports, water, sanitation and telecommunications. According to the government, Kenya is focusing on these in the hope of attracting, accelerating and retaining investors who often complain its dilapidated facilities increase the cost of doing business, rendering Kenya's products uncompetitive in the global market.

BMI believes the infrastructure spending plans announced by the governments of Kenya represents an encouraging sign that the political commitment to long-term infrastructure investment is strengthening.

BMI has previously commented on the effects of a weakening Kenyan shilling on the country's used car segment and new data show the extent of the problem, with figures not expected to improve in the short term. Data from the Kenya National Bureau of Statistics show that used car sales for the eight months to August 2011 were down 20% y-o-y to 33,073 units, from 39,790 in the same period of 2010 previous year.

Dealers reported a 30% increase since the start of 2011 in the charges associated with importing used cars, including the exchange rate against the yen and US dollar and higher freight costs. The shilling reached a record low of below KES100.0/US$ on September 26 2011, and the Central Bank of Kenya expects sustained currency volatility over the next six months. Inflation has exacerbated the situation and, according to Kwame Owino, chief executive of the Institute of Economic Affairs, this has particularly hit the middle class, which is the biggest customer base for used cars.

Domestic production is one solution to such issues and Kenya is attracting investment, particularly from Chinese companies. Commercial vehicle manufacturer Beiqi Foton Motor launched its first domestically produced trucks in June 2011, after establishing a local subsidiary in the country in late 2010. The Foton Slip Double Cab pick-up truck was assembled at the Kenya Vehicle Manufacturers facility, where it will be assembled until Foton's own plant comes onstream. As part of a growing focus on Africa by Chinese auto companies, the company is building its own vehicle assembly plant, which is scheduled to begin operations in May 2012. Chery Automobile will be the next Chinese carmaker to invest in Kenya.

According to Justus Nguu, director of Chery's local franchise holder Stantech Motors, Chery is now in negotiations with the Chinese government to secure financing of US$50mn for the Kenyan plant, which the carmaker plans to open in 2013.