If you want to know what obfuscation means, try the global motor market

 This is all about the “degree of breakdown”, the extent to which a vehicle is either not fully built by a source manufacturer, or which is fully built up (FBU) but then partially dismantled before shipping.

Originally (between 50 and 120 years ago) both systems were used primarily to cut shipping costs, to reduce the cubic dimensions (volume) on which cargo prices were based.

If you put 50 complete trucks each in their own crate, the cube will be much higher than if you pack the cabs together, the load-beds together, and the axles together. That was the first idea of SKD – built but then semi knocked-down to make them more packable and stackable.

Separating “manufacture” and “assembly”

Equally, if you do not build the vehicle, but pack its components in the most efficient manner, the cube for 50 trucks is a fraction of the FBU alternative. That was the first principle of CKD (completely knocked-down), which led Henry Ford, the pioneer of mass production, to the principle that car components should be “manufactured” as close as possible to the source of raw materials and “assembled” as near as possible to the customer (showrooms).

The principle still holds true, but has been partly superseded by the invention of ro-ro ships (giant trans-ocean ferries where the vehicles can drive themselves on and off the vessel). Such fully-built vehicles are not cube efficient, but there are major compensatory savings in time, no need for packaging or crane-work of loading and unloading, and simpler inland distribution thereafter.

CKD, not so much SKD, retained a major cube advantage but could also exploit another trend – a global trend towards import substitution and progressive local assembly/manufacture in economies which wished to earn and keep a share of the investment, technology transfer and jobs that vehicle production offered. It can be very big business in any country. Hundreds of billions a year globally.

What drives the choice?

Today, the choice of FBU, SKD or CKD are driven by practicality, policy and profit margins. The principles are simple, but the application is riddled with that wonderful word ‘obfuscation’, which means the very opposite of ‘clarity’.

FBU has only one version. It means Fully Built Up. The vehicle leaves the factory complete in every detail, ready to go to a showroom anywhere in the world. On a ro-ro ship. All the production benefits go to the source manufacturer.

KD means Knocked Down (either dismantled or not fully built) which has a very, very, wide range of degrees. To illustrate how extreme the obfuscation can be, if you remove just a wing mirror from an FBU, strictly speaking, it is Semi KD. Putting that mirror back on could be called “assembly”. At the other extreme, Completely KD can mean every single item part, (thousands of them), has been made but not joined to any other part. Joining all those together could also be called “assembly”, though at that degree quite a lot of the joining together could also fit definitions of “manufacture”.

Degree of breakdown

The first question is at what exact degree of breakdown does FBU become SKD and does SKD become CKD. Effective policy must have that definition – which is not simple to establish or equitably enforce.

It must be compatible with each individual source manufacturer’s processes and with each local assembler’s technical ability (capacity, skill and equipment) and with availability of local component diversity – things that can be readily left out of the imported source kit. That varies from country to country depending on local support industries. Batteries, exhaust pipes, radiators, rubber pipes and bushes, shock absorbers, window and windscreen glasses, filters, tyres and tubes, adhesives, nut-and-bolts-and-washers, wiring harnesses, clips, sump guards, bush bars and roof racks, seats and trim…

Those and many other things might be locally available for some models but not others. Then, what discount will be given on the kit price when these things are left out, and what price will be charged for the local substitute? What had to be imported to make the local component?

Overall, what will be the difference between the FBU and KD price (and shipping cost) from source, and what will be the cost of substitutions and assembly locally, set against the other value-added elements of local modification/tropicalisation, technology transfer and industrial investment and job creation and skills development in the local economy. Then aspects like the different tax differentials and impacts on consumer prices, and what will be the competitive status and margins for regional re-export. Also, the strategic value of greater economic diversity or logistical self-sufficiency.

Production scales and model rationalisation are fundamental to the answers, with protection and incentives and even type approvals essential to enable scale-growth from zero to viable to maximally beneficial. Clearly, the level of support for CKD needs to be much higher than for SKD, so a very clear distinction between the two is vital. Bear in mind that source manufacturers to not want to delete anything, so deletion allowances for components left out of kits are mean - based on the “cost” price at a source factory with huge economies of scale, so the discount is less than even the most enterprising local manufacturer can possibly match as a supply price.

The battles for value-added

Even in a policy and political vacuum, all those factors are not simple calculations. The reality is they must be made in a context of competitive vested interests with a lot more conflict than teamwork in evidence. Source manufacturers do not want to give away a chunk of their value own added. Vehicle importers want variety and flexibility. Local component manufacturers want market opportunities and need model rationalisation if possible. The tax man wants one thing, business wants another, and the consumer has the final vote.

Remember, too, that all the components to build a car come from more than one place. Engines from one country, leather seats from another…up to a dozen different sources is normal. And they can all be collated anywhere, depending on which trade agreements are most beneficial. Local assemblers would have a lot more bargaining leverage if they could import different parts of a complete kit from different sources.

And with so many wrinkles and variations at play, there are inevitable loopholes which the Kenya market is not slow to exploit, sometimes with strategies that warrant more blunt descriptors than obfuscation.

In sum, SKD cannot be allowed to share the same support status as CKD. The definitions must be crystal clear. The incentives must be starkly different.    BY DAILY NATION