Is 2025 the year of manufacturing?

As we settle into 2025, the global manufacturing landscape continues to evolve, with economic giants such as China and India reinforcing their dominance. 

China’s manufacturing sector is adapting to a shifting global trade environment, leveraging automation and high-tech industries to maintain its edge. India, on the other hand, is positioning itself as a global manufacturing hub, drawing significant investments and reducing reliance on imports.

Kenya’s manufacturing is walking a tightrope, balancing on the edge of uncertainty while seeking growth. The sector is navigating the new year with caution, as revealed in the latest Manufacturing Sector Barometer Report for the fourth quarter of 2024 by the Kenya Association of Manufacturers (KAM).

The report paints a picture of subdued confidence among industry players, with many expressing concerns over excessive taxation, high operational costs and regulatory unpredictability. With nearly half of the manufacturers surveyed taking a wait-and-see approach and over a quarter feeling pessimistic about the economic climate, the outlook remains uncertain. Then, there is the Finance Bill 2025 that could further escalate the cost of doing business.

Manufacturers are bracing for cost escalations. The anticipated rise is attributed to higher raw material costs, increased labour expenses, excise duties, energy price hikes and forex volatility. Global commodity price fluctuations continue to affect input costs, while taxation policies, particularly excise duties on locally manufactured products, further strain businesses. The high cost of fuel and electricity, and government pending bills are affecting cash flow and overall industry stability.

Remain stable

Meanwhile, a significant number of manufacturers expect prices to remain stable, as firms absorb costs to remain competitive in a market where the buyer has limited purchasing power. However, if inflationary pressures persist, price reviews may be inevitable later in the year.

Investment appetite among manufacturers remains divided, with nearly half planning new investments while the rest adopt a cautious approach. Areas of planned investment include product innovation and diversification, facility expansion and business acquisitions. However, concerns about capital constraints, taxation and regulatory unpredictability continue to deter significant investment commitments.

When you scroll through social media platforms such as X, Kenyans have found a dark sense of humour in their frustration, comparing their payslips to shopping lists, having become long due to increased deductions that leave little to take home. With multiple new tax measures eating into salaries, disposable incomes are shrinking at an alarming rate. This erosion of purchasing power is not just a household concern; it is rippling through the economy, weakening sales volumes and slowing overall economic growth.

Frequent shifts in taxation and policy create an unstable climate, discouraging long-term investments and making it difficult for manufacturers to plan. At the same time, the influx of cheaper imports from neighbouring countries continues to put local manufacturers at a disadvantage, making it difficult to compete.

However, some opportunities exist, particularly in import substitution within industries such as footwear and textiles. Political stability in 2025 and early signs of economic recovery offer a glimmer of hope, hinting at the possibility of a more predictable business environment. The question is whether this hope will translate into tangible growth or fade into a mirage of what could have been.

Further, some recent legislative changes could offer a much-needed boost to the sector. The merger of 42 parastatals into 20 could enhance efficiency, reduce bureaucracy and ease duplication of regulatory roles while streamlining interactions between businesses and regulatory bodies. Additionally, the inclusion of Social Health Insurance Fund and Affordable Housing under allowable deductions provides financial relief for employees.

Reduced investment

Investors stand to benefit from the reduced investment deduction threshold from Sh2 billion to Sh1 billion, making it easier for businesses to scale up. Furthermore, the reduction of Capital Gains Tax from 15 per cent to 5 per cent is expected to encourage investments, driving new momentum into industrial expansion.

Technology is another force reshaping Kenya’s industrial space. But while this shift improves productivity, it also raises concerns about job security for workers. Striking a balance will be one of the defining challenges of 2025.

The economic outlook for Kenya’s manufacturing sector in 2025 tells a narrative of two realities—one of caution and uncertainty, yet with glimpses of potential growth. For Kenya to unlock the full potential of its manufacturing sector, bold steps are needed. Tax incentives for local manufacturers, investment in infrastructure and affordable energy solutions, and stronger policy support will be critical.

How the government and private sector choose to collaborate in addressing challenges will determine whether 2025 marks a turning point or a missed opportunity.

The writer is the Chief Executive of KAM. [email protected].