The Kenyan economic environment

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Business Studies

Economic Environment

The Kenyan economic environment will affect the start-up cost and the Modern Solar Systems Company’s market potential. The World Bank Kenya provides information about Kenya’s economic performance of 2019 and prediction for 2020 and 2021. The information from the organization reveals that the GDP grew by 0.1% in 2018. The GDP for 2018 increased from 4.9% in 2017 to 5.8% in 2018. Appendix 1 shows the performance of Kenya’s economy, in terms of the GDP, from 2015 to 2021 (World Bank Kenya). The information reveals major changes and improvement in the country’s GDP, especially since 2017. The figure shows that the country’s economy has grown of the years and is anticipated to grow further, which is beneficial for businesses operating in the country. In 2019, the country experienced a real pick-up in economic activity. One of the factors behind the change was the growth in consumer spending and a positive view among investors. Investing in the country will provide a financial advantage for the company due to the positive economic growth and development.

The country’s infrastructure, including roads, is well developed to support access to the target areas. Per Kenya Economic Outlook, the inflation rate in 2019 was 5.8, from 5.7, while the currency exchange rate was 101.4 in 2019, down from 101.9 in the previous year. The interest rate was 8.50 in 2019, from 9.00, while the unemployment rate is relatively high, at 5.70 in the past 12 months, and is expected to rise to 7.00 in 2021 and 8.00 in 2022, respectively (Kenya Economic Outlook). The inflation rate in the country has remained relatively unstable between 2018 and 2019, with periods of major decline. On monthly bases, the inflation has been affected by consumer prices, which increased 0.11%, after declining 0.90% in last two months of 2019. Prices declined for varioisj consumer goods, such as food & non-alcoholic beverages (-0.40% vs -1.895). Besides, the country experienced a cost rebound for housing & utilities (0.07% vs. -0.10%) and transport (0.48% vs. -0.03%). Appendix 2 shows the rate of inflation from October 2018 to the end of 2019, according to the Kenya Bureau of Statistics. Although most Kenyans are middle-income earners, the country has a massive number of low-income families; hence, such factors will affect the performance of Modern Solar Systems Company, especially considering the COVID-19 pandemic’s impact on the economy.

Start-up Costs

The cost of building equipment to convert light energy into electricity has been decreasing over the years over the last two decades. The affordability of solar is one of the reasons for the reducing cost of setting up businesses. The cost includes the cost of the physical solar cell hardware, which is the main equipment necessary to begin the business. However, the business requires other soft costs, such as labor and the cost of obtaining government permits. Appendix 3 shows the breakdown of costs necessary to start the business. The cost of starting up the business will require finances for equipment, building, vehicles, infrastructure improvement, training costs, consultations, legal fees, and licenses in the target market. The management should consider the cost to determine the product’s potential in the target market, such as whether it will be profitable. The cost of beginning the business is analyzed in appendix 4.

Financing Sources

Modern Solar Systems Company’s management should consider various sources of finances to fund the business. Besides using capital generated internanally by the entrepreneur, companies might consider external sources of funding, such as :”equity capital, preferred stock, debentures, term loans, venture capital, leasing, hire purchase, trade credit, bank overdraft, factoring etc.” (External Source of Finance / Capital) (see appendix 5). The external sources are the capital obtained from outside the business instead of being contributed by the owner or generated from business operations. Modern Solar Systems Company should consider sources, such as selling stocks, issuing bonds, or loans from major financial institutions, considering that it is a global company. The company can sell stocks to major investors to generate enough funds to establish the business or issue bonds to access the desired capital. However, the most viable option for Modern Solar Systems Company is to access a loan from a bank or any other financial institution to finance its operations. Overall, the company will take a $10M loan from the financier to begin operations and fund the rest from the owner’s contribution.

The Economic Environment

Modern Solar Systems Company should consider various economic factors when making pricing decisions for its solar panels. Kenyan’s income level has grown over the years from 2004 to 2019, averaging at 4197.76 KES Billion, and reaching an all-time high of 8591.30 KES Billion in 2019 (see appendix 6) (“Kenya National Disposable Income 2004-2019”). The improvement in disposable income is a benefit for the company because it wil have adequate number of customers with the ability to purchase the product. Besides, the ability to purchase will continue growing over time as the level of the income continues to increase. The country’s inflation rate has remained relatively stable over the past decade, with minimal changes. Kenya’s taxation system is relatively flexible and lower than in other countries, making it an impressive market for foreign investors. Hence, such factors will determine the product’s prices, considering that the target market is rural, with a relatively lower personal income rate than the national average. Overall, the company will enjoy relatively low taxes, allowing them to market the product at a lower price. The low tax will help the company to operate at a relatively low cost to secure its profitability. Kenya is receptive to investors and will support Modern Solar Systems Company to invest and build a strong business.

Cost Analysis

Various other factors will affect the pricing and market potential of the new product in the Kenyan market. The production cost will be relatively high, amounting to more than $500,000, considering the direct cost of production. Besides, the company will cater to the cost of marketing and transportation of the products to the market, considering that it will not have local production capacity during the earlier years of business. Administrative and overhead expenses are expected to go beyond $200,000. Therefore, when pricing the product, the management will consider the high cost of producing and delivering the product to the market and consider the competitor’s pricing strategy. When pricing the product, the company will compare the pricing of other companies in the same market. Appendix 7 shows some of the leading companies and their prices for solar panels that the company can learn from when pricing its products. However, the pricing will depend on the cost. .

Demand Analysis

The solar panel demand will be higher in rural Kenya since the electric grid does not serve the entire region. Current evidence indicate an increase in the demand for solar energy for various uses in the country (see appendix 8 and appendix 9). Solar business will continue growing because many users in the currently are currently open to the renewable source of energy. Besides, the government has put considerable effort to solar energy production. From current research, solar business has grown by 30-32% in 2017 and will continue in the upward trend in the future (2018 solar forecast). The increasing demand for solar energy in Kenya follows the global trends (see appendix 10) (In 2019 the solar PV market). Notably, the current demand will be high, although it will depend on the level of marketing. With effective marketing, the company will reach more target customers who need solar panels for their domestic and commercial use. As the country’s rural parts require energy to develop, the company will have a considerable market for its solar panels. Besides, Shahsavari and Akbari indicate that solar energy in the urban areas of developing countries is cheaper compared to electricity, especially during dry seasons when the levels of water decline (275). Besides, the solar panel’s demand in the country will grow, as rural residents require more energy to meet their energy needs.

Competitor Analysis                                                     

Modern Solar Systems Company’s pricing plan will consider competitors’ strategies, such as Go Solar Systems Ltd and the Kenya Power and Lighting Company (KPLC), the leading suppliers of the country’s electric grid. For solar companies, pricing depends on the cost of providing power through KPLC. For instance, solar companies ensure that their prices are always lower than the electricity to attract more customers. Hence, Modern Solar Systems Company will use a similar strategy but consider the solar panels’ power to add value and sell the product at a reasonable price and recover production costs. Manufacturing panels with higher watts will allow the firm to market at a higher price through the promise of value-added customer benefit.

Works Cited

2018 solar forecast. Demand for solar applications is here! Are you ready for market?, 2018. Available at https://metsolar.eu/blog/2018-solar-forecast-demand-solar-applications-ready-market/

External Source of Finance / Capital, 2020. Available at: https://efinancemanagement.com/sources-of-finance/external-source-of-finance-capital

In 2019 the solar PV market increased an estimated 12% to around 115 GW, 2020. Available at: https://www.evwind.es/2020/07/05/in-2019-the-solar-pv-market-increased-an-estimated-12-to-around-115-gw/75561

Kenya Economic Outlook, 2020. www.focus-economics.com/countries/kenya. Accessed October 10, 2020.

Kenya National Disposable Income2004-2019 Data, 2020. tradingeconomics.com/kenya/disposable-personal-income#:~:text=Disposable%20Personal%20Income%20in%20Kenya%20averaged%204197.76%20KES%20Billion%20from,1357.30%20KES%20Billion%20in%202004. Accessed October 10, 2020.

Shahsavari, Amir, and Morteza Akbari. “Potential of Solar Energy in Developing Countries for Reducing Energy-related Emissions.” Renewable and Sustainable Energy Reviews, vol. 90, 2018, pp. 275-291

World Bank Releases Kenya Economic Update 2019 – GDP to Expand 5.7%, 2020. Available at https://bitcoinke.io/2019/04/world-bank-releases-kenya-economic-update-2019/

Appendix 4: Budget

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