IDC: Kenyan handset VAT supports gray goods market

Kenya's mobile handset market recorded year-on-year volume growth of 21.5% in Q1 2014, according to preliminary figures announced today by International Data Corporation (IDC). While various economic and social factors continued to help push this growth, the positive quarterly performance was primarily driven by a vibrant gray market that was boosted by the September 2013 re-introduction of VAT on handsets and other electronic devices.

"Gray 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," says James Mutua, a research analyst with IDC East Africa. "Gray market dealers are known to source their handsets from unofficial/unauthorised channels, which makes their gadgets cheaper than the same products sourced through official partners."

The Kenyan government had exempted mobile handsets from VAT in June 2009. This generated significant benefits for many Kenyans and led to an increase in the volume of shipments to the country, but this all changed with the return of the levy. "An unfair playing field has emerged since these new taxes were implemented, and as a result gray market dealers now account for more than two-thirds of the mobile handset market's volume," continues Mutua. "Moreover, these estimates are conservative; 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.

IDC's latest figures show that smartphone shipments were up 104.6% year on year in Q1 2014, against a paltry rise of just 3.6% for feature phones over the same period. The smartphone category increased its unit share of the overall handset market to 29.8% for the period under review as more consumers invested in the various new gadgets launched since the start of Q4 2013. Some of the models recently introduced to the Kenyan market include, but are not limited to, the LG L1, LG L4, Nokia X, Nokia Lumia 1320, Nokia Lumia 1520, Samsung S3 Lite, Samsung Galaxy Grand 2, Samsung S5, Sony Xperia M2, Apple iPhone 5, Tecno M3, Tecno R7, and various devices from Infinix.

The overall handset market in Kenya is dominated by three vendors, namely Nokia, Tecno, and Samsung. Combined, these vendors control around 75% of the market's total volume. Devices with 2G and 2.5G interfaces still dominate the Kenya handset market. However, 3G and 4G-enabled devices continued to record healthy year-on-year volume growth in Q1 2014 of 67.0% and 207.4% 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.

However, Kenya's case for 4G (LTE) infrastructure remains in limbo as operators are yet to identify the best network deployment model. IDC expects Kenya to move faster toward 4G deployment once key market stakeholders have agreed on the best approach to take.

With prices declining and increasing numbers of Kenyans now accessing the Internet via mobile phones, IDC expects the smartphone segment to continue recording healthy growth over the coming quarters. However, 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 gray market dealers that may not fully adhere to the relevant taxation requirements.

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