BMI View: after the negative impact of exchange rate reforms enacted in February 2015 became clearer in H115 we made a downward revision to the forecast for Venezuela's consumer electronics market. The reforms are effectively a devaluation and will have a negative impact on IT market growth in 2015 by dramatically increasing the cost of imported products, solutions and components. Additional economic challenges in 2015 include inflation forecast at almost 75% and GDP to contract by 3.6% in real terms. Meanwhile, t he push by the government to implement the 'fair price' law in H114, which restrict ed vendor margins to 30%, means vendors face continued political as well as economic risk factors. The law adds to a hostile business environment and exacerbates existing challenges for vendors including currency weakness and economic, political and security risks that are weighing on purchasing power and consumer confidence.
Headline Expenditure Projections
Computer Hardware Sales: USD917mn in 2014 to USD360mn in 2015. Sharp contraction forecast in value and volume terms in the PC market in 2015 due to the impact of currency reforms, which raised the cost of imported PCs and components. AV Sales: USD934mn in 2014 to USD532mn in 2015, -43% in US dollar terms. Demand for flat-panel TV sets hit by currency weakness and we expect the market will continue to contract beyond 2015 as digital camera volumes decline due to the proliferation of smartphone ownership.
Handset Sales: USD1.21bn in 2014 to USD1.25bn in 2015. The relative strength of local handset manufacturing and operator subsidies will help to absorb some of the impact of devaluation, resulting in stronger performance compared with the other consumer electronics segments.
Key Trends & Developments
The impact of the government's February 2015 currency reforms has become clearer through H115, with the early evidence that it has been a major disruption to the local consumer electronics devices market. The shift from the Sicad to Simadi exchange rates effectively quadrupled the cost of imported devices and components for local assembly - hitting the supply of devices from global and regional vendors, as well as disrupting the operations of Venezuela's large local assembly industry. There were reports in H115 that price rises for PCs far exceeded the rate of wage inflation in Venezuela - even for devices from socially oriented local vendors such as VIT and Siragon. Meanwhile, there were also reports that shops were not able to offer PCs due to shortages of goods, a development BMI believes likely to be derived from the negative shock of component price increases. In recent less severe periods of challenging economic conditions, the local Venezuelan PC and handset markets were insulated from the worst effects of crisis, but in 2015 devaluation has been too severe and as a result we forecast a sharp decline in both market value and volumes.
The government response to economic crisis does offer some cause for optimism, with increases in local PC assembly and component manufacturing targeted through a range of measures. In April 2015 some details of Venezuela's introduction of Special Economic Zones (SEZ) were released, with electronics one of the sectors targeted by the government hoping to attract investment and technical expertise. The most prominent partners are Chinese IT vendors. In addition to the SEZ development, there are also initiatives underway to modernise existing assembly operations. For instance, in May 2015 a Chinese delegation began working with the Canaima (notebooks for education) production facility in La Carlota, Caracas, to automate the production process and enable increased output. Meanwhile, ZTE, agreed in January 2015 to a target of 6mn handsets to be produced annually through its Vtelca joint venture and Samsung Electronics (the first signatory to the fair price law earlier in 2014) invested in local production back in November 2013 as part of a conciliatory approach to dealing with the government. BMI believes the economic and political environment in Venezuela will present unique challenges, but there is medium-term potential for the industry to expand to meet a greater portion of local demand and possibly increase regional exports by pairing local labour with international expertise and capital.