Pakistan’s telecommunications industry holds tremendous potential for growth, investment and development. Currently, Pakistan is one of the fastest growing telecommunications market. In terms of cellular subscriptions, we have witnessed a phenomenal annual growth of 119% during the period of 2000 and 2007. It is also encouraging to observe that between fiscal year 2006-07 and 2007-08, mobile phone penetration also increased by 15.5%. Mobile phone penetration in Pakistan in year 2007-08 was 55.6% which is 34.9% higher than India’s for the same period. Whether Pakistan’s telecommunications industry would be able to maintain this growth trend in the future as well is a question that remains to be answered. To understand the issues at hand, we need to analyse the current economic situation and its direct impact on telecommunications industry.
A decade ago, the cost of a mobile device was so high that only a handful of people could afford to indulge in the luxury of using a mobile device. However, over time, rapid technological advancements and increasing demand for mobile devices made it possible for mobile phone manufacturers to produce low-cost mobile devices. Intense competition between mobile service providers also led to cheaper call rates, both locally and internationally. As a result, mobile phone usage has proliferated among masses to the extent that even the low-tier workers such as electricians, plumbers and shopkeepers own a mobile phone now. Many wage workers use their mobile phone as a means of conducting business more efficiently and providing better and faster services to customers. This shows that a mobile phone has become an essential part of people’s lives. A direct, positive correlation exists between mobile phone penetration and GDP. According to PTA, Pakistan’s telecom sector is contributing 2% to the GDP directly, while indirect contribution to the economy is 5%. In effect, as more people opt to use mobile phones, greater business opportunities are created to produce goods and services in the economy.
The Government recently imposed a flat rate of Rs. 750 on all mobile devices being imported in the country, regardless of their price. This regulation came into effect after the Government categorised all mobile phones as luxury items. The increased taxation has added to the retail price of mobile devices and has eventually resulted in lower sales of all mobile phone manufacturers such as Nokia, Samsung, Sony Ericsson and LG. Decline in profitability has even forced certain mobile phone makers to close their operations in Pakistan. In consequence of declining sales, import of mobile devices has gone down by approximately 33.5%, from $670.17 million (2006-07) to $445.8 million (2007-08).
The mobile phone consumption patterns reveal that 67% of Pakistani market uses entry-level phones. Entry-level phones are the ones that are priced below $50. They are used by almost all income groups but most predominantly by the low-income group. The urban population has almost 100% mobile penetration, so the new growth market for the mobile phone manufacturers operating in Pakistan is the rural population. Most of the people in rural areas are wage earners who save money over a period of time to buy a mobile phone. As the price of mobile phones increases, the total cost of ownership has risen for the low-end segment of the market, making it difficult for the mobile device makers to grow in this segment. Expressing his views on the import duties, Mr. Imran Khalid Mahmood, Country General Manager of Nokia Pakistan states, “Not every car is a luxury car. For example, the BMW 5 series is a luxury car but Alto, Cultus and Cuore are not luxury cars. The same policy should apply to us. Above a certain price tag, all mobile phone devices should be declared as luxury items but below a certain price level are those mobile phone devices that serve the bare minimum purpose of communication. In today’s age of information, it is difficult to live without such a convenient tool of communication if not impossible.”
While the mobile phone manufacturers are bearing the brunt of the situation, alternative channels are flourishing. Mobile phones are available through alternative channels/ black market at lower prices because no duty is paid on the import of these mobile phones. This means that the Government is earning lower revenues than it can by preventing these channels from growing. Consumers who buy mobile phones available via grey channels also suffer because no warranty or after-sales service is available for these mobile devices. These devices don’t come with the reliability of a high-quality product that is promised by the leading mobile device makers.
Sales through grey channels are the key obstacle that the mobile phone industry is facing at the moment. Mobile phone sales can regain positive growth only if the total cost of ownership of a mobile phone can be reduced for the lower social strata. If the timely support cannot be ascertained for the mobile phone industry, it may lead to the stunted growth of a sector that has a lot of potential otherwise.
