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How VAT will impact GCC mobile phone sales

Dubai - Additional tax will obviously have an impact on end-user prices

The five per cent value added tax (VAT) is expected to impact GCC mobile phone market, which is already facing slowing demand and stockpiling, a global technology research and consulting firm said.
"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 fourth quarter," said Nabila Popal, a senior research manager at the International Data Corporation (IDC).
As for the anticipated slump in post-VAT shipments in first half 2018, the additional five per cent 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, said Isaac Ngatia, a senior research analyst at the IDC.
"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," said Ngatia.
"There are various reasons for the lack of pre-VAT stockpiling in fourth quarter 2017," said Ngatia. "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."
Ngatia said VAT would 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 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 fourth quarter, which we are forecasting to be lower than in previous years," said Popal.
"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."
Many analysts 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 there might be a repeat in the GCC.
Such concerns come at a time when the region's mobile phone market is already in a state of flux, with the IDC's latest Quarterly Mobile Phone Tracker showing that overall shipments increased just 0.1 per cent quarter-on-quarter in third quarter 2017 to total 6.4 million units. Smartphone shipments declined -4.9 per cent over the same period, so the scenario could have been even more perilous had this decline not been offset by a 13 per cent increase in feature phone shipments across 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," said Popal.
IDC's Quarterly Mobile Phone Tracker supports this assumption, predicting a quarter-on-quarter increase in smartphone shipments to the UAE and Saudi Arabia of just five per cent in fourth quarter 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 per cent decline when compared with the same period of 2017.
Whatever happens next, the lessons learned over the coming months in the UAE and Saudi Arabia are sure to heavily influence the rollout of VAT in other GCC markets towards the end of 2018, the IDC said.
- issacjohn@khaleejtimes.com