Service sector: key engine of economic growth
If we classify the economy into key economic sectors, we can have manufacturing/industry, agriculture and service. Industry can also include the extractive sector dealing with mining of oil, minerals and gas. For many years, the Kenyan economy relied on agriculture which directly and indirectly accounted for about 50% of the GDP.
A recently released report by the World Bank shows that the traditionally important sectors of the Kenyan economy namely manufacturing and agriculture have stagnated. The country’s economy is being propped up by the resilient and fast evolving service sector.
Policy makers need to understand the power of the service sector. Even China, a country which is serving as the world’s factory in terms of manufacturing is re-engineering its sector plays a greater role. With increased automation of manufacturing, the fucture looks bleak for countries depending on it to create jobs.
Technologies such as 3D printing and robotics have levelled the ground and obliterated the competitiveness of manufacturing giants. You no longer need masses of workers on the factory floor to manufacture tones of goods. Thus, having affordable and readily available labour is no longer an unassailable competitive edge. Machines have taken over and manufacturing is trickling back to countries it deserted due to labour issues. Machines work tirelessly, their costs are largely uniform and they do not go on strike.
The service sector is not insulated from automation but it is more resilient than manufacturing. Services require a human touch and full automation will never be realized. People should however prepare for any eventuality. I saw some local taxi drivers fighting Uber forgetting that in future, even drivers will not be required as vehicles will be self-driven or autonomous.
In view of the above, I would like to discuss some issues that make the service sector attractive as an economic focal point or pillar. I will also highlight on the need to focus on the service sector not just as the next frontier, but indeed the final basis for economic growth and progress.
Manufacturing has many limitations
While many economic analysts have argued on the need to focus on strengthening the manufacturing sector I have always insisted on us putting more effort on the service sector. I believe the question many need to ask themselves is what would happen if every country focused on manufacturing. Who would buy their manufactured good?
Manufacturing and agriculture depend on competitiveness and the country with a competitive advantage will rule the markets. Today, due to improved logistics you can import almost anything from one part of the world to the other. This ease of movement of goods has resulted in many trade disputes among countries e.g. the dumping allegations against China with regard to tyres in the US and steel in the UK.
While services also are hinged on competitiveness the difference is that manufacturing and agriculture rely largely on naturally occurring factors such as say presence of natural resources, favourable climate, affordable labour etc. on the other hand the competitiveness required by services is largely man made. It comes from creativity. It is not inherited.
Many service products are not easy to export because their consumption is location specific. For instance, you can’t just travel to London for a haircut no matter how good the barber there might be. You can only experience Maasai Mara Game Reserve in Kenya. Well you can have a virtual tour of the place from an online location but there is nothing that can be comparable to a physical visit.
Services are also very ubiquitous. Some of them can be exported at virtually no cost. Think of works of art such as movies, music, e-books and cloud storage. These can be exported and enjoyed around the world at no time and at little distribution cost. Unlike manufactured goods whicjh must move long distances to be consumed, some service products present the entire world as an instantly accessible market.
It is this flexibility that make services stand tall. Where service consumption is location specific, it insulates it to global competition. Where service consumption is universal, you have access to such a wide market that it blows the mind away. What can be more beautiful than that?
Service sectors is less capital intensive
The service sector has low entry and exit barriers. There are many service businesses you can start with hardly any capital. For instance, in a business such as management consultancy, it is possible to start with zero capital. The greatest assets here are skills, talents, experiences and abilities. These once properly packaged become a product with high returns and which is hard to replicate.
In this country, you will find youths moving around with brown envelopes and long faces looking for employment. Many will tell you they have no capital to start a business. They forget that the training which they have received is sufficient capital to start a business. They forget that the training which they have received is sufficient capital to start a business. In this era of the internet, you can start a business headquartered in your residence. Indeed, any place can be your office and you can make money on 24/7 basis. Many opportunities abound but some are still slaves to brick and mortar mentality.
If for instance you are a trained accountant, you may require nothing to offer bookkeeping services to small enterprises. You will provide them with much needed services without burdening them with employment obligations. Some of those employers who will quickly chase a jobseeker may be more approachable if you confront them as a service provider.
In marketing, the concept of branding is key to the success of a business but it is even more important to the individual. If you brand yourself as a solution people willcrown you; if you brand yourself as a problem people will frown at you.
Even at large scale, some services can be delivered at little cost. Think about Uber now the world’s largest taxi service firm. It has no cars of its own and employs no drivers. Just a mobile phone App and we are ready for business. For the year ended December 2015, Facebook made revenues amounting to kshs 1.8 trillion with each 1.04 billion active daily users providing kshs 1,758 in the year 2015.
These are mindboggling numbers but if you dig deeper into Facebook’s accounts you will find out that in their balance sheet the net book value of property and equipment is kshs 580 billion. This is about the same kind of money we have invested in the Standard Gauge Railway yet one would be insane to expect the SGR to deliver stellar results like these.
Here at home, the mobile money revolution continues to confound the world. The value of funds transacted through mobile phones in Kenya stood at kshs. 2.8 trillion in 2015 according to recent statistics. Yet this is a service that was non-existent ten years ago. All this while we are still figuring out how to commercialize the oil discovered five years ago. This demonstrates the power of services in transforming the economy in a short time and with little investment.
Service pricing has endless possibilities
Some may find it hard to believe that you can almost charge anything for a service. You can charge zero shillings and you can charge millions for the same service. It all depends on how you package it and accurately target the market.
Many Kenyans were startled to hear of a 50 hour valentine day package at the luxurious Villa Rosa Kempinski hotel which was being sold at kshs 5.4 million. The hotel was not selling goods, it was selling an experience. The value of the experience cannot be expressed through a standard price because only the buyer can evaluate their experience which shifts from one consumer to the next. This is the power we need to harness.
The take home lesson here is that policy makers need urgent training and awareness about the service sector. Now that the term low hanging fruits is a cliché, the service sector presents many opportunities. A small investment in the service sector has a much larger multiplier effect.
Believe it or not, if properly marketed, the tourism sub-sector can provide this country with all the money we require to progress economically. My heart is pained when I reaed in the news that treasury has cut tourism marketing funds by kshs. 3.4 billion. We should be expanding and not cutting the tourism promotion budget. This sector can employ millions of Kenyans if we invest in supporting infrastructure and support services such as security.
This country can be a financial services hub and a health services go to destination. It can be an ICT hub for the region. It can be a logistical hub for the world. Our leaders need to think big about services. Let us not be blinded by all the rosy talk about manufacturing. This is the golden age for the service sector. It is up to us seize the moment or remain forever seized by poverty.