Handset Distribution Co.
6. Case Examples
Handset Distribution Co.: Mastering the Art of Importing and Distributing Mobile Phone Handsets in Complex, Ever-shifting Latin American and African Markets
Latin America and Africa are home to some of the world’s fastest-growing markets for mobile telephony, but the rules governing tariffs, local content and supply-chain logistics also make them the world’s hardest to navigate for mobile handset importers and distributors. Managing these complexities and the costs they impose requires sophistication and nimbleness. Handset Distribution Co., a leading wireless handset distribution company, managed to find its way in these hard-to-serve markets by mastering trade barriers.
A leading mobile handset distributor, Handset Distribution Co. has built a local presence on six continents serving some 43,000 customers that include manufacturers, operators and retailers with specialized wireless distribution and services. With annual revenues exceeding US$ 5.7 billion in 2012,the company has been able to use its sophisticated supply chain to provide value-added sales in both advanced and hard-to-serve developing countries. Handset Distribution Co.’s activities in Latin America and Africa, both fast-growing regions for mobile telephony, demonstrate the company’s management of complex trade issues and the logistics challenges they present.
A tangle of taxes, tariffs and trade frictions in Latin America
Latin America’s largest market, Brazil is also one of the continent’s most complex for importers of low-margin, fast-changing mobile handsets. Facing a stiff 16% tariff on imported goods, the already high price of entry is compounded and significantly increased by Brazil’s complicated, multi-tiered federal and state tax scheme.
Including value-added taxes and a supplemental social integration tax, the combined tariff and tax complexity has led most companies – including mobile handset distributors – to assemble goods domestically. Not only do locally assembled mobile handsets escape the tariff itself, they are free of the taxes that are layered on top of the tariff. The difference is striking. A handset imported into Brazil will incur tax liabilities that drive up its cost by 83%, while a handset assembled in the country will incur over the same value only 32% tax.74 As is usually the case, the end-consumer bears the additional cost burden. The costs of producing locally would of course be higher and are estimated at 10%-15%.75
Beyond tariffs and taxes, delays resulting from customs clearance bottlenecks, international freight handoffs and frequent labour disputes complicate the movement of handsets through Handset Distribution Co.’s supply chain and drive up distribution costs. The duration and source of delay can vary widely among Latin American countries. For example, shipments going to Argentina may take over 3 weeks to clear customs because all importing companies must fill out an application with details of the business transaction and then wait for a special government permit to import the products. By contrast, products shipping to Colombia reach the market in just 11 days.
The costs of delay are steep and can add up fast, but they also vary widely by market. The total cost for goods crossing the border into Brazil exceed US$ 20 per handset. In nearby Colombia, by contrast, the cost of delay adds less than 50 cents. Direct costs include warehousing and brokerage costs, of course, but delays also stretch out the cash conversion cycle for a distributor like Handset Distribution Co., which sometimes pays the original equipment manufacturers when it picks up the goods but can only collect payment from its customers upon delivery. In extreme cases, like the unstable Venezuela market, where Handset Distribution Co. remains one of the few distributors serving the country, the cash conversion cycle can last up to 180 days before the company is paid, adding foreign exchange hedging costs to the final tally. For fast-changing products like mobile handsets, delays can even impact depreciation costs, which can amount to as much as 2% per month.
Other indirect costs arising from frequent, unpredictable and sometimes prolonged strikes in Brazil also drive up transit costs. All of the complexities surrounding product shipments, short product lifecycles and mismatched supply and demand contribute to a grey market for handsets (see sidebar).
The grey market “safety valve”
The existence of unofficial, unauthorized (although not necessarily illegal) grey markets are certainly not sanctioned by manufacturers, but they are sometimes a necessary evil – particularly for products like mobile handsets. The grey market is a safety valve that lets producers release excess capacity.
The markets are the results of price and supply/demand differences in the world. Flashing price differences, of as much as 150%, present significant opportunities for arbitrage. But as even the best forecasting methods only work about three-quarters of the time, supply chain barriers and the resulting supply/demand mismatches add to this opportunity. Unexpected delays can derail forecasting and even render orders obsolete, further feeding goods into the grey market.
Latin American trade-related barriers and delays – and the opportunities they present for improvement – virtually ensure that supply chains will not remain static. One major set of changes will likely occur for Handset Distribution Co. if Colombia joins the now five-nation Mercosur common market of Argentina, Brazil, Paraguay, Uruguay and Venezuela. Handset Distribution Co. Colombia currently imports some products from Mexico and pays a 5% duty. With Mercosur, the tariff for imports from Brazil will fall to zero, likely shifting Handset Distribution Co.’s supply chain accordingly. As tariffs and barriers evolve in Latin America’s changing political climate, supply chains will be in constant flux.
Steep tariffs and patchy infrastructure in Africa
Handset Distribution Co. delivers handsets to more than 20 African countries, but nearly all of its distribution to the continent is staged out of Dubai as, according to the vice-president of operations, “the barriers listed in the Global Enabling Trade Report are exactly the reason to have a distribution centre in Dubai and not in Africa.” Approximately 40% of the product it ships goes to operators, delivered to the port in country; the balance goes to merchants, dealers and local distributors, often handed over to them in Dubai.
Tariffs are but one of many factors that discourage firms from directly basing operations in Africa – and in fact are causing many to leave. In Nigeria, for example, steep fees total 13.5%, including a 5% duty, 7% port charge and a 1% import charge. The fees are likely intended to entice foreign companies to assemble products locally, and they also are a source of government revenue. But they also provide an incentive for local markets and channels to find ways to circumvent the barriers by developing better connections, but also to engage in bribes and smuggling.
African import rules are not particularly difficult to follow, but companies that pay the duties and comply with regulations put themselves at a severe disadvantage. That is one reason why Handset Distribution Co. chooses not to deliver in Nigeria or the Democratic Republic of the Congo. Prices of products imported to Nigeria by operators are far more expensive than goods in the market.
Even in African markets like Kenya, which impose no import duties, shipping from Dubai offers benefits that make it a better location to base operations, even when doing so adds about 4% to 5% to the cost of products it ships. Among the biggest barriers would-be importers face in Africa is inadequate infrastructure – not just poor roads, prohibitively expensive real estate, and poor port facilities, but also insufficient telephone networks, the lack of Internet availability, and even a reliable affordable power supply. Another obstacle is the small size of many African markets, which makes it uneconomical to serve them by direct air routes or even to support sufficient warehousing.
With its low barriers and strong direct connections to other markets, by contrast, Dubai enjoys sufficient scale that makes it a more suitable location for companies like Handset Distribution Co.
Note: Delays from Mexico to Brazil are mostly related to scrutiny of the certificate of origin; Dubai does not include logistics to African countries; “other costs” are an estimate.
Source: Company data; Bain analysis.