Samsung was in talks for its smartphone manufacturing contract with Tecno, Airlink, Nishat, Arif Habib and Ibrahim Fibers, but Lucky came out on top. After partnering with Kia for car assembly in the country, another Korean company Samsung asked Lucky (in partnership) to assemble smart phones in Pakistan. The project’s capital investment is $ 12-15 million, which is not even 10% of what Lucky has invested in automobiles ($ 150-200 million). But it’s a numbers game, and if played well, Pakistan may very well become a cell phone exporter.
The smartphone policy under which this investment resulted was prepared by the Engineering Development Board (EDB) and approved by the Federal Cabinet last year – for more details read ” Smartphone – smart policy”. Politics certainly works. There are more than a dozen factories ready to assemble phones. Some of them are fully or partially operational. With higher regulatory fees (on top of last year’s political incentive) on fully-built units (CBUs) in the FY22 budget, the shift from imported CBUs to semi-collapsible (SKDs) is accelerating.
Apart from Apple (and small high-end phone players like OnePlus), all brands selling phones in Pakistan will assemble in Pakistan. The game change could happen in three years, when full knockdown (CKD) kicks in and localization improves in Pakistan. If this happens, Pakistan can potentially export phones by importing CKDs and exporting CBUs after adding value back home.
In FY21, according to industry data, Pakistan imported $ 1,849 million of 16.4 million smartphones. The average price of the imported stage phone is $ 113. About 80 percent of this market could shift to local assembly. After the smart phone policy in 2020, many players came in and started to set up factories here. Many are installed. Most of them manufacture at the pilot stage. The government has urged manufacturers to speed up the process by further increasing the delta between the cost of CBU and CKD / SKD in this budget.
In FY 21, the highest market share was for VIVO which imported 3.9 million phones (24% market share) of $ 393 million (21% market share) – price average at $ 101. This 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, the third biggest player was Samsung – imported 1.6 million units (10% share) worth $ 281 million (15% share). Samsung’s average price is $ 176 – and the company has a variety of phones in all price ranges. Then there are a few other brands like Apple (10% value share but not even 1% volume), Oppo (11% value share), Tecno (9% value share), Xiaomi (7% share of value) and a few others.
The current cell phone market in Pakistan is around 1.5 million phones per month. The majority of them are imported as CBUs. Some are already assembled in Pakistan. The oldest smart phone player is Transsion Tecno. The company has a history of manufacturing auto parts, and it is the leading player in smartphones. The company manufactures around 300,000 units per month and could soon exceed 400,000. an interview with BR in March 2020, its CEO said that Pakistan’s cellphone exports can cross textile. Hammad Azhar shared similar sentiments when the policy was conceived at the time. Others, like CEO Lucky Group and chairman of EDB, shared the same optimism.
Cell phone assembly is not capital intensive Improving assembly lines is not a problem. The initial investment is low. It is a labor intensive industry, and the key is operational control and monitoring of SOPs. The working capital requirement is high and here Lucky Group would have an advantage over the others being a large company. For Samsung, the working capital requirement could be around $ 25-35 million for Lucky.
As the plant’s installation is not capital intensive, many players already have the capacity to produce more than their market share. Transsion Tecno was the first in Karachi. Airlink – Pakistan’s largest importer of phones has its factory in Lahore which currently manufactures around 70,000 units per month. Then, VIVO has its factory in FIEDMC. Oppo / Realme and Inovi have also set up their manufacturing facilities.
The market is up for grabs. Within a few quarters, imports of mobile phones will shift largely to local assembly. These factories can employ an average of 600 workers – mostly young boys and girls. Lucky’s plan is to start manufacturing Samsung by December 2021. At first, he can start from cheaper phones (A and M series) and can climb the ranks over time to make relatively high-end Samsung phones. range.
The question is how quickly these companies can locate themselves. The policy envisions a move from SKD to CKD in three years (by assembling motherboards in Pakistan). In between, there will be the location of packaging, chargers, hands-free, plastic parts and the battery. Once this happens, the added value could reach 45 to 50 percent and, unless you import raw materials (for making parts), the added value could reach 25 to 30 percent.
Once this bridge is crossed, the export market will open up. Chinese smartphone exports are around $ 125 to $ 130 billion per year, or half of the global share. But the cost of labor from China is increasing, and many of these phones assembled in the country will move to other countries. It cannot be Vietnam either as the cost of labor is increasing in all the economies of the Far East. Mobile phone companies have the option of moving to countries like Pakistan, India and Bangladesh.
There is a good chunk Pakistan can get. In this budget, the export rebate incentive has been reduced from 3% to 6%. Some players say it’s not enough and ask for more. Interestingly, when Samsung was negotiating with the government and its potential partner, the company argued that the localization timeline in politics was too rigid and needed to be relaxed. But authorities argued that it was a small investment ($ 15 million) and did not warrant a change in policy. Authorities have argued that it is better to bring in the technology and locate, and when companies reach a point where they can generate exports, the government can be generous.