If iPhones are produced locally in Pakistan for assembly, could it potentially lower the price consumers will pay?
Pakistan’s government has proposed creating a Mobile and Electronics Manufacturing Framework designed to provide incentives for foreign companies to either establish a presence in Pakistan or to shift existing operations from another country to Pakistan.
Apple has also agreed (in principle) to refurbish existing used iPhones in Pakistan and then export them (“refurbished units”). Officials project that, in the first twelve months of this program, they will generate approximately $ 100 million in export revenues.
This is a very positive development; however, there is no guarantee that consumer pricing will be lower.
Why Are IPhones Expensive in Pakistan?
There Are Several Reasons Why iPhones Are Expensive to acquire in Pakistan:
When iPhones are imported into Pakistan, they are subject to:
- Custom duties.
- Regulatory duties.
- Sales tax.
- PTA approval charges
These multiple tax layers result in the retail price being substantially more than in countries where the final assembly of mobile phones is done locally.
iPhones tend to be more competitively priced in countries such as India where Apple assembles iPhones using a local contractor, Foxconn, allowing them to avoid the import duty on fully assembled mobile phones.
How Will Creating Local Manufacturing Impact Pricing?
There are two potential changes:
If Pakistan Assembles Rather Than Fully Manufactures
If Pakistan assembles mobile phones rather than manufacturing all parts locally. In this situation, even though final assembly will occur in Pakistan, most of the component parts will still be imported to Pakistan from other countries.
If that occurs, then:
- Import duty on fully built units may be avoided
- However, duties on imported components could still apply
- Sales tax and PTA taxes would likely remain
Consequently, it may lower consumer pricing somewhat, but not significantly.
2. If the Government Offers Major Tax Relief
- Reduced Customs Tariff on Components
- Reduced Sales Tax for Local Assembly of Devices
- Consumer Benefits
Then prices could see a significant decrease. However, this is only possible if the policy is implemented properly. Incentives to manufacturers do not always result in lower prices for the end consumer.
What Will Happen with Refurbished iPhones?
The agreement to refurbish iPhones locally is primarily aimed at exporting refurbished iPhones, not selling them at lower prices domestically. Therefore, refurbished iPhones are likely to be sold internationally rather than locally.
However, if the government allows for the local sale of certified refurbished iPhones, then a completely new segment would be established that could offer affordable pricing for customers. If not, the $100m export goal is more beneficial to our foreign reserves than to local customers.
Will Duty Still Apply on Locally Assembled iPhones?
Most Likely Yes! Even if the assembly is to take place in Pakistan:
- We can expect that PTA taxes will still be in place
- We can expect that sales tax will also continue to be in place
- We may also expect that the existing regulatory structure will remain intact
Unless the Govt creates a separate tax structure to reflect that smartphones were manufactured in Pakistan, we do not foresee the elimination of duties altogether for locally manufactured iPhones.
Conclusion:
Beyond pricing, a successful launch of local smart phone manufacturing will both:
- Create jobs
- Transfer technology
- Strengthen Pakistan’s electronics supply chain
- Alleviate some of the burden from our dollar reserves
However, in light of the above, consumer expectations need to be realistic. An additional small reduction in pricing appears reasonable; however, a large decrease in pricing is not likely unless tax policy changes along with production.
Ultimately, the questions surrounding Apple’s assembly of iPhones in Pakistan stem from the fiscal policies that create a fundamentally fair playing field for the home market and the export market.
