Samsung – Lucky’s draw

Samsung was in talks for its smartphone contract manufacturing with Tecno, Airlink, Nishat, Arif Habib and Ibrahim Fibers but Lucky came out the victor. After partnering with Kia for car assembling in the country, another Korean company Samsung got Lucky (in partnership) to assemble smart phones in Pakistan. The capital investment of the project is $12-15 million which is not even 10 percent of what Lucky invested in automobiles ($150-200 mn). But it is a number’s game, and if played right, Pakistan can well become a cellphone exporter.

The smartphone policy under which this investment has come to fruition was prepared by Engineering Development Board (EDB) and approved by the federal cabinet last year – for details read “ Smartphone – smart policy”. The policy is certainly yielding results. There are over a dozen factories ready to assemble phones. Some of these are fully or partially operational. With higher regulatory duty (in addition to policy incentive last year) on completely built units (CBUs) in FY22 Budget, the shift from imported CBUs to semi-knock down (SKD) is accelerating.

Apart from Apple (and small-time players of high-end phones like OnePlus), all the brands selling phones in Pakistan will assemble in Pakistan. The game changer could be in three years when completely knock-down (CKD) would come in play and localization would be enhanced in Pakistan. If that happens, Pakistan can potentially export phones by importing CKD and exporting CBUs after adding value at home.

In FY21, according to industry data, Pakistan imported $1,849 million worth of 16.4 million smartphones. Average price of the phone at imported stage comes at $113. Around 80 percent of that market may shift to local assembling. After the smart phone policy in 2020, many players came in and started setting up factories here. Many are installed. Most are manufacturing at the pilot stage. The government has incentivized manufacturers to accelerate the process by further increasing the delta between the cost of CBU and CKD/SKD in this budget.

In FY21, the highest market share was for VIVO that imported 3.9 million phones (24% of market share) of $393 million (21% market share) – average price at $101. That was followed by Infinix – imported 3.8 million phones (23% share) worth $324 million (18% share) at an average price of $85. In terms of value, third biggest player was Samsung – imported 1.6 million units (10% share) of value $281 million (15% share). The average price of Samsung is $176 – and the company has a variety of phones in all price ranges. Then there are a few other brands like Apple (10% share in value but not even 1 percent in volume), Oppo (11% value share), Tecno (9% value share), Xiaomi (7% value share) and a few others.

The current cell phone market in Pakistan is around 1.5 million phones a month. Majority of these are imported as CBUs. Some are already assembled in Pakistan. Oldest player in smart phone is Transsion Tecno. The company has history of automobile parts manufacturing, and it is the first mover in smartphones. The company is making around 300 k units a month and soon may cross 400k units. In an interview to BR in March 2020, its CEO said that mobile phone exports from Pakistan can cross textile. Hammad Azhar shared similar sentiments when the policy was conceived at the time. Others like CEO Lucky Group, and EDB Chairman have shared the same optimism.

Mobile phone assembly is not capital intensive. Enhancing assembling lines is not an issue. The initial investment is low. It is a labor-intensive industry, and the key is operational control and following of SOPs. Working capital requirement is high and here Lucky group would have an advantage over others being a big business. For Samsung, working capital requirement could be around $25-35 million for Lucky.

Since installing the factory is not capital intensive, many players already have the capacity to produce more than their market share. Transsion Tecno was the first one in Karachi. Airlink – biggest phone importer in Pakistan has its facility in Lahore which is currently manufacturing around 70K units a month. Then VIVO has its factory in FIEDMC. Oppo/Realme and Inovi have also installed their manufacturing facilities too.

The market is up for grabs. Within a few quarters, mobile phone imports will largely shift to local assembling. These factories may on average be employing 600 workers – mostly young boys and girls. Lucky’s plan is to start manufacturing Samsung by Dec 2021. In early days, it may start from cheaper phones (A and M series) and may move up the ladder with time to make relatively high-end Samsung phones.

The question is how quickly these companies can localize. The policy envisages a move from SKD to CKD in three years (by assembling motherboards in Pakistan). In between, there will be localization of packaging, chargers, handsfree, plastic parts and battery. Once that happens, the value addition could be as high as 45-50 percent and barring imports of raw material (for parts manufacturing), the value addition could reach 25-30 percent.

Once that bridge is crossed, the export market will open. China’s exports of smartphones is around $125-130 billion a year – half the world share. But the labour cost of China is increasing and many of these phones being assembled in the country will move towards other countries. It cannot be Vietnam either as the labour cost is increasing in all Far-Eastern economies. Mobile phone companies have the option to shift to countries like Pakistan, India, and Bangladesh.

There is a good share that Pakistan can get. In this budget, export rebate incentive has increased from 3 percent to 6 percent. Some players say it is not enough and demand more. Interestingly, when Samsung was negotiating with the government and its potential partner, the company was arguing that localization timeline in the policy was too stiff and needed to be relaxed. But authorities argued that it is a small investment ($15 mn) and did not justify a change in policy. Authorities argued that it was better to bring technology and localize, and when companies reach a point where they could generate exports, the government could show generosity.