Impact of VAT on mobile phone market

Research firm IDC has said that the introduction of value-added tax in January 2018 will exacerbate the outlook for the mobile phone market in the GCC region. With VAT of 5% becoming effective across the UAE and Saudi Arabia on January 1st, and the rest of the GCC following suit later in 2018, questions are being asked about what this means for the region’s mobile phone market. 

“Given that mobile phones are included in the list of VAT-able items, the entire industry – vendors and distributors alike –are wondering what they can expect from consumers in a post-VAT economy and how they can prepare for it,” says Nabila Popal, a senior research manager at IDC. “Many are looking at global case studies where there was a huge buildup of stock in the channel pre-VAT followed by a major slump in sales post-VAT, and they are understandably wondering whether we might see a repeat in the GCC.”

“The GCC mobile phone market is already going through many significant challenges outside of VAT, due to various ongoing social, political, and economic developments, and VAT will only compound this dire situation,” continues Popal. “Indeed, many industry experts feel this is the worst possible time that VAT could have been introduced, with demand already faltering due to consumers no longer being enticed by the ‘amazing’ new features advertised by vendors as they try to push they latest devices.

“There is already a large amount of stock left over in the channel from previous quarters, so distributors are not looking to increase their shipments in the pre-VAT weeks, with many even looking to vendors to reduce their targets for Q4. As such, we do not expect to see any major increase in stock levels in the lead up to the implementation of VAT beyond the regular seasonal increase in Q4, which we are forecasting to be lower than in previous years.”

IDC’s recently published Quarterly Mobile Phone Tracker supports this assumption, predicting a quarter-on-quarter increase in smartphone shipments to the UAE and Saudi Arabia of just 5.0% in Q4 2017, which can be attributed to the traditional seasonal increase rather than to any pre-VAT stock buildup. Looking further ahead, IDC expects the introduction of VAT to have a negative impact on smartphone shipments to the UAE and Saudi Arabia during the first half of 2018, with these two markets set to experience a combined -10.1% decline when compared with the same period of 2017.

“There are various reasons for the lack of pre-VAT stockpiling in Q4 2017,” says Isaac Ngatia, a senior research analyst at IDC. “VAT is not a one-product – or even one-sector – issue, so prudent distributors will most likely adopt a cautious approach rather than stockpiling devices ahead of its implementation. VAT will also have a significant negative impact on cashflow, at least in the early stages while confusion reigns over VAT recovery. And as there’s already limited credit in the sector, distributors won’t want to be taking any risks that will further constrain their cashflow at a time of such uncertainty.

“As for the anticipated slump in post-VAT shipments in H1 2018, the additional 5% for VAT purposes will obviously have an impact on end-user prices, and as margins are already extremely narrow in the mobile phone space there will be little room to maneuver with regards to these increases. However, the effect is likely to vary across different price bands, with target consumers for lower-priced models being much more sensitive to changes in price.”