Safaricom (NSE:SCOM) has revealed that it is setting up a factory in Kenya, which will assemble between 1.2 million and 1.4 million smartphones a year, making it one the biggest players lining up to implement President William Ruto's plan of producing Africa's cheapest gadgets.
Appearing before the National Assembly’s Finance and Planning committee on Tuesday, the telco put up a spirited fight against new taxes on mobile phones as contained in the Finance Bill, 2023, arguing that it will be impossible to achieve the target price of a $ 50-smartphone (Sh6,850) since the proposed taxes will raise the cost of locally assembled smartphones to Sh11,500.
“If we were to work with the President's vision of a 50-dollar phone, we need to address the question of import, excise and output VAT (Value Added Tax) for me to save Sh4,000 and bring down the cost from Sh11, 500 to Sh7,500,” Mr Karanja Gichiri, Safaricom Head of Venture, told MPs during public hearings on the Finance Bill.
He said the telco, which imports four million phones every year, is working on an assembly line, but the taxes would make the project unviable.
“Today we have one local assembly line that recently started. The most expensive part of the phone is the microchip that runs the 4G network within the phone. We have sourced and the appropriate base for a good phone is $40 driven by the chip and components.”
“After that, the assembly of the phone will cost Sh300 including factory profit margins. We want to pass the cost-benefit to the consumer,” he said.
The Safaricom executive said on top of these costs, after the assembly, the firm will have to deal with last-mile connectivity, where it will be required to part with another Sh1,400 while the output VAT for the device is Sh1,500.
“This brings the final price to Sh11,500 with the manufacturer taking only Sh300,” said Mr Gachiri.
He said other drivers of cost are taxes on transporting the phones to the port of Mombasa. He said Safaricom spends an additional Sh2,300 for a Sh5,000 phone largely driven by import duty and excise duty.
He said when Dr Ruto announced the production of the Sh5,000 locally assembled smartphones, the exchange rate was about Sh118 to the dollar but this is now at Sh135.
“We estimate 120 million new subscribers in Africa will need phones and taking advantage of Africa Continental Free Trade Agreement (AfCFTA), we will be leaders in Africa and the world in mobile telephony,” said Mr Gachiri.
President Ruto last December announced that Kenya will manufacture the cheapest smartphone in Africa this year whose cost will be less than Sh5,000.
Dr Ruto promised to deliver the cheap smartphone within eight to 12 months of this year to ensure all Kenyans can access digital platforms for business and access to government services.
He told a forum of micro, small, and medium enterprises (MSMEs) representatives that the cheapest smartphone goes for between Sh10,000 and Sh15,000.
“We can scale the taxes down to Sh3,000 where it will give the final price of the locally assembled smartphone to between Sh6,500 to Sh7,000.”
Safaricom in its presentations to the committee said the reduction of taxes will see it assemble the most affordable phone in Africa.
Safaricom was accompanied by a consortium of telecommunications operators and device makers who are also pushing the Finance Committee to scrap VAT on locally assembled or manufactured mobile phones at zero percent.
The consortium told the committee chaired by Molo MP Kuria Kimani to amend the law to have excise duty exempted from the supply of locally assembled or manufactured phones.
“There has been a decline in imports by 13.5 percent due to shortage and inflation in the fourth quarter of 2022,” Job Kabochi, a partner at PricewaterhouseCoopers (PwC) told MPs on behalf of the consortium.
“We propose that the VAT Act and the Excise Duty Act be amended to introduce a new paragraph within Part A of the Second Schedule of the VAT Act to include the supply of locally assembled and manufactured mobile phones and introduce a new paragraph to Part A of the Second Schedule of the Excise Duty Act to include disassembled/unassembled kits for local assembly or manufacture of mobile phones.”