Fair Price Law Will Reduce Investment
BMI View: Increasing restrictions on imported devices will maintain downward pressure on Venezuela's consumer electronics growth potential and further reduce incentives to invest. Vendors face a fixed range of prices at which they can sell their products including smartphones, TV sets and computers. Companies operating in Venezuela face a profit margin cap of 30% as part of the fair price decree-law. The decision to restrict more companies serves to keep Venezuela at the bottom of our Risk/Reward Ratings.
|Upward Trajectory To Slow|
|Consumer Electronics Demand (USDmn)|
Asian electricals and electronics vendors LG and Sony are the latest to see prices fixed through government intervention, joining a number of international companies across industries such as apparel, automotives and food. BMI already ranks Venezuela below its regional peers for opportunities in the Consumer Electronics market with weak industry risks holding the market back, compounded by the high inflation rate that significantly weakens private consumption. When the law was passed, BMI noted that there are inherent difficulties in deciding what are legitimate business costs, which allows immense potential for further consolidation of business in the hands of the government ( see ''Law Of Fair Prices' To Deal Another Major Blow To Private Businesses', February 4, 2014).
The law further reduces incentive to launch new products in Venezuela or invest in the country. There is little to recommend Venezuela's consumer electronics market, which has weak growth potential and very limited upside risks to the outlook. BMI expects the main outcomes of the restrictions placed on consumer electronics manufacturers will be an increase in grey market sales, particularly for mobile handsets, and a sharp reduction in the number of new devices launched by the leading global devices manufacturers. Wealthier Venezuelans will go abroad to obtain the latest products; the majority of the market will have fewer options.
While a number of different products are affected by the law, BMI expects that smaller devices will generate the greatest increase in the grey market. Not only do the restrictions affect device vendors but also the mobile operators in the country that have invested in expensive network upgrades to offer 3G and 4G services. A restriction on the number of data-enabled devices will have a notable impact on their ability to generate higher revenues from 3G and 4G services, slowing the rate of growth and restricting the market further.