A few years ago, there were more than two dozen local mobile phone assemblers in Ethiopia. With the steady growth in demand, many of them reaped huge amounts of profit while increasing their productivity. But over the past 12 months, majority of them stopped operations because of the increased rise of the smuggled mobile phone market. This, coupled with the shortage of raw materials, pushed the local assemblers to compete with the contraband phones suppliers. EBR’s Ashenafi Endale explores.
Roughly three years ago, mobile shops in Addis Ababa were swiftly taken over by locally assembled mobile phones. Many mobile brands like Smadl, G-tide, Tecno, Hidase and Tana, among others, had become familiar brands. Although Chinese companies, particularly Tecno, were the pioneers in the mobile assembly industry, many indigenous enterprises followed their lead, given the growing number of mobile subscribers and the rise of demand for affordable mobile phones.
But now, this has become a thing of the past as demonstrated by the experiences of local assemblers such as Umer Shekur, who was a mobile phones seller before he invested ETB10 million to establish an assembly plant two years ago. When he built his factory around Lafto in Nefas Silk District, the plan was to produce 240,000 feature phones and 60,000 smart phones a year. Nonetheless, after a year of being active, Umer’s company was forced to terminate operations and incur a huge loss. “We have produced only 110,000 mobile phones, but sold only 10,000 of it,” Umer tells EBR.
According to the information obtained from the Metal Industry Development Institute (MIDI), five local assemblers left the sector within the last year. Currently, only nine local and five foreign companies are active with a combined capacity of assembling 20 million mobile phones annually. However, most of the operational factories are utilizing below 30Pct of their installed capacity.
Of course, local assemblers have been operating in the presence of many challenges such as recurrent foreign currency shortage and broker intrusion. But they have now reached a point where they are not able to continue with their operations. This is largely because of the influx of mobile phones smuggled into the country illegally.
Contrary to the trend observed in the past, it is now a norm to see outlets selling branded mobile phones, the majority of which are smuggled. While this shrunk the market share of the local mobile assemblers, it paved the way for the expansion of the smuggled mobile phone market.
According to Ethio telecom, there are 40.4 million active mobile phones as of November 2018. Out of the total active mobile devices, 19.9 million are basic phones while 7.6 million are feature phones and 12.4 million are smartphones. The annual demand for mobile phones in Ethiopia is estimated to grow by 10 million annually. This is based on the estimation of the current mobile phone penetration rate. Out of the total annual demand, close to 98Pct are satisfied by illegally smuggled mobile phones. This figure stood at 65Pct two years ago, according to the Association that represents the local assemblers.
To cut the size of the growing illegally smuggled mobile phone market, the government introduced the national Equipment Identity Registration System (EIRS) in September 2017. The system pin pointed phones with an unidentifiable IMEI number and made them obsolete, a strategy to mainly encourage the local assemblers and the few legal importers. As a result, 2.7 million cloned phones with fake IMEI numbers were found. But the government reconsidered its decision of introducing the EIRS shortly after its introduction began endangering the local assemblers once again.
The real reason behind the government’s decision to revert from the system remains unclear, in turn, suspension of the EIRS jeopardized the future of the local assemblers while bringing a gloomy hope for mobile phone smugglers.
“Illegal smugglers and assemblers started to formalize with the implementation of the EIRS. But after suspension of the system, formal importers and assemblers joined in the trade and became smugglers,” says Amare Tefera (PhD), president of Ethiopian Mobile Assemblers Association. He is also the general manager of VG Electronics Assembly, a factory which was installed with ETB10 million three years ago, but stopped production as of last year chiefly because of the rise of the smuggled mobile phone market.
Information obtained from the Ethiopian Custom Commission reveals that smuggled mobile phones worth ETB145 million were seized in the past fiscal year. However, this represents only 10Pct of the mobile phones that enter the country illegally, according to a study commissioned by the Commission last year. Some local assemblers of feature and basic phones were also found engaging in the smuggling of the same brands of mobile phones they produced locally, according to Amare.
“The assemblers themselves sell smuggled products because they could not survive by just assembling mobile phones in Ethiopia. Most of the Chinese assemblers in Ethiopia have similar brands produced in bulk in China where they can access hard currency via supply credit,” says Umer. “Using this as an opportunity, many are engaged in smuggling of their own products.”
The major entrance route for smuggled mobile phones is through the Kenya border, even though contraband trade through Somalia, Sudan and Eritrea is also on the rise. Smugglers choose Kenya mainly because the tax levied on mobile phones in Kenya is much lower than Ethiopia.
Due to the influx of smuggled mobile phones, Tecno mobile, which exported phones worth USD42 million last year (accounting for 90Pct of Ethiopia’s total export from the electronic sector), significantly cut its output. This is verified by the assessment conducted by EBR in different mobile shops around Addis Ababa. Unlike the past, the presence of Tecno mobile in the local market has declined drastically.
Unfortunately, the growth of the illegally smuggled mobile phone market is not the only threat local assemblers are facing. In fact, for many years assemblers complained about problems such as scarcity of foreign currency.
Fitsum Teshome is among those who passed through such challenges before setting up her assembly company in which she has invested ETB10 million to build a plant that can assemble 165,000 mobile phones. “We have been processing for over two years. However, it has been difficult to start production due to the lack of hard currency to import raw materials, adding to the existing problems in the market chain,” says Fitsum.
Local assemblers, including Umer, also complain about the extended supply chain their products have to pass through in order to reach consumers. “Currently, assemblers cannot supply directly to shop owners as it is difficult to avoid intermediaries. These people are given the power to determine the supply and demand of a certain product, while this should have been determined by the market itself,” says Umer.
“The intermediaries buy products from factories and supply it to shop owners after taking a lucrative profit margin for themselves. If you refuse to offer such profit margins for the brokers, your product will never reach the market.”
Intermediaries exist in the market because of the law of the land, which does not allow mobile assemblers from owning an outlet. This means local assemblers are expected to setup another company that will distribute mobile phones to wholesalers.
But these problems are only the tip of the iceberg. Value addition requirements set by the government is also one of the bones of contention. The directive introduced by the Ministry of Finance seven years ago allows mobile assemblers that fulfill a 30Pct value addition requirement the right to import raw materials. The value addition formula divides profit to overhead cost, rather than depending on the number of components produced locally. According to this computation, as assemblers produce more, their value addition decreases because the rate of defects rises.
In fact, the license of Tecno mobile was almost revoked a few years ago because its value addition fell below the 30Pct minimum requirement. Although the government reduced the threshold drastically to 0.5Pct two years ago, the rate was again raised to five percent last year. “This requirement failed to appreciate the dynamism of the sector according to local assemblers,” argues Umer.
In addition to fulfilling the threshold, assemblers are expected to export in order to get priority in accessing forex to import raw materials, or even stay in the business. “Most of the assemblers have opened factories in Ethiopia mainly targeting the fast-growing mobile market in the country. But the government pushes them to export in order to generate hard currency. This is perplexing as the assemblers are not able to generate enough foreign currency to even finance their raw materials need,” says Amare.
These challenges are pushing assemblers to descend themselves into the smuggling business although they seem to run their own factory from the onset. The new entrants usually start smuggling after producing for three years just to trick the custom officials.
The Metal Industry Development Institute, tasked to follow-up mobile assemblers and local producers, is also aware of this. “Many owners of shops in Merkato are claiming that they are assemblers,” says Tilahun Abay, director of planning at the Institute. “Such claims arose from the tendency of many assemblers abusing the different incentive schemes allowed by the government.” Bearing this in mind, the Ministry of Finance, as of August 2019, suspended such incentive schemes given under the second schedule. This would however worsen the existing situation in the mobile assembly industry which is on the verge of extinction.
8th Year • Sep.16 – Oct.15 2019 • No. 78