Cellphone makers suffer in Kenya as grey market traders take up channels

NAIROBI, KENYA: Mobile phone makers with a presence in Kenya are losing their market share to unauthorised device vendors after a review of the Value Added Tax law pushed up prices of cellphones and computers.

Treasury re-introduced VAT on mobile phones in September, but a new report shows the move may have had unintended consequences. It distorted the market by opening it up to traders who source for products away from official manufacturers’ channels, which means they can bring them in cheaper.

While this may be good news for consumers, these traders have made it increasingly difficult for handset makers to sell their products locally through official channels.

The unauthorised traders — referred to as grey market dealers — have overrun the channels set up by original equipment manufacturers, and now control more than 60 per cent of the local mobile handset retail market, according to a report by the International Data Corporation (IDC).

This growth has been attributed to the imposition of taxes on mobile phones.

Though not illegal, grey market products deny the Government revenue it would get from manufacturers’ local authorised partners.

MAIN BENEFICIARIES

The IDC report shows that Kenya’s mobile handset market grew 21.5 per cent in the first quarter of this year.

“While various economic and social factors continued to help push this growth, the positive quarterly performance was primarily driven by a vibrant grey market that was boosted by the September 2013 re-introduction of VAT on handsets and other electronic devices,” said Mr James Mutua, a research analyst with IDC East Africa.

“Grey market dealers have been the main beneficiaries of the Government’s decision to re-introduce VAT in late 2013, while official channel partners have been badly hit. Grey market dealers are known to source their handsets from unofficial or unauthorised channels, which makes their gadgets cheaper than the same products sourced through official partners.”

The Government had exempted mobile handsets from VAT in June 2009. This led to an increase in the volume of shipments to the country, but Mr Mutua said this changed with the return of the levy.

“An unfair playing field has emerged since these new taxes were implemented, and as a result, grey market dealers now account for more than two-thirds of the mobile handset market’s volume,” he said.

“These are conservative estimates; the numbers may be significantly higher as some official channel partners are claiming to have lost more than half of their normal monthly run rate business.”

He added that in addition to the losses being experienced by mobile handset manufacturers, the Government could also be losing out on taxes as experience locally and globally has shown that traders in the grey market are not necessarily tax compliant.

“The Government needs to be alert to the challenges that lie ahead in terms of the market’s composition, particularly when genuine tax-compliant businesses lose out to grey market dealers that may not fully adhere to the relevant taxation requirements,” said Mutua.

Mr Bruce Howe, the general manager for Nokia East Africa, noted that there is need for more controls for both the Government and handset makers to benefit, especially with VAT in place.

KEY DRIVER

“We should ask ourselves whether VAT is the right thing to do when mobile is a key driver of growth for the economy. I don’t think the Government intended to grow the grey market when they re-introduced VAT, but rather to grow revenues, and so if the VAT has stay, we need to have stronger controls in place,” he said.

The local mobile handset market is dominated by Samsung, Tecno and Nokia. These, according to IDC, account for 75 per cent of the phones sold locally.

And though the less complex 2G and 2.5G phones still dominate the handset market, there is a slow but steady shift to smartphones.

“Third generation [3G] and 4G-enabled devices continued to record healthy year-on-year volume growth in the first quarter of 2014, growing 67 per cent and 207.4 per cent, respectively. This is an indication that the Kenyan market’s user base is increasingly ready to join the rest of the world in shifting to LTE [4G],” said IDC.

emacharia@standardmedia.co.ke