Developing economies are almost always more attractive as digital growth markets than advanced markets, yet emerging countries are also more vulnerable to economic and political shocks. Despite much early hype, three markets have suddenly become less attractive in 2015 for the consumption of digital goods and services: Russia, Brazil and Venezuela. Hit by various socioeconomic problems, local consumers in these markets are downgrading their purchases of smartphones and online services, while financing for digital start-ups has largely dried up. However, this could be an opportune time for cost-conscious products.
GDP Growth and Total Telecom Revenues in Russia, Brazil and Venezuela: 2015
Source: Euromonitor International from International Telecommunications Union (ITU)/national statistics/Eurostat/OECD/UN/International Monetary Fund (IMF),World Economic Outlook (WEO)
Note: All figures are forecast
1. Russia: Ukraine crisis and falling oil prices inflate costs of foreign electronics
Up to 2014, Russia was the standout emerging market in Europe for digital products. Local consumers are IT-savvy and place a premium on communications, with upmarket brands such as Apple in particular demand. However, the outbreak of the Ukraine crisis in early 2014, a prolonged and simultaneous collapse in oil prices (to which the hydrocarbon-driven economy is especially vulnerable), and a sudden devaluation of the rouble have taken a heavy toll on the information and communications technology (ICT) market.
- Capital investments in telecoms will decline by 11.8% in real annual terms in 2015, as government revenues have been hit by falling oil prices and major telecom projects are placed on hold;
- With consumers focusing on necessities, purchases of telecom goods and services have taken a backseat. In particular, the rouble devaluation has meant that foreign brands, such as iPhones for example, have double in price. As a result, total telecom revenues will contract by 9.6% in annual real terms in 2015, the biggest decline since the 1990s;
- In this unsure climate, companies are cutting their advertising budgets. All advertising segments are set to take a hit as total adspend in Russia will decline by 22.0% in real annual terms in 2015;
- However, the one bright spot on the market is e-commerce, which still continue to grow as income-squeezed consumers come online to find bargains. Internet retailing value is set to expand by 14.6% in real annual terms in 2015.
2. Brazil: Worst year for communications expenditure on record
Once the shining beacon of emerging market growth, Brazil. With corruption scandals plaguing a stricken government, consumer confidence has plummeted. The country continues to demonstrate strong growth in indicators such as Internet usage and mobile subscriptions, but consumers have slowdown down spending on tablets, smartphones and other telecom devices.
- Consumer expenditure on telecom equipment is to decline by 3.7% in annual real terms in 2015, the biggest annual decline on record. The volume of smartphones sold will slow down considerably, though stills represent a growth of 23.9% annually;
- Meanwhile, consumer expenditure on telecom services will see its first annual decline in history (of 0.7% in real terms), meaning growth in markets such as pay-TV and fixed broadband plans will be impacted;
- However, unlike a Russian market that has been abandoned by foreign investors, Brazil continues to attract sizable investments in its tech industry. Start-ups are thriving and venture capitalists believe the market will rebound yet.
3. Venezuela: Digital services collapsing amidst crisis
Following several years of stable economic growth, Venezuela has been engulfed by a huge recession. A forecast real GDP contraction of 7.0% in 2015 is set to be one of the world’s heaviest economic declines. The collapse is far reaching and has paralysed numerous government services that have supplied much of the country’s telecom sector. Venezuelans are even struggling to call abroad since local telephone carriers have fallen behind on payments to their international partners. The country’s heavily subsidised broadband Internet programme in rural areas is also on the verge of closure.
- Venezuela will see one of the largest declines in telecom revenues globally in 2015 at almost 50.0% in real annual terms, which will surely bring most telecom companies close to bankruptcy;
- The retail volume of smartphones in the country will almost halve in 2015 from their 2014 total, while mobile telephone subscriptions will largely stagnate;
- Surging inflation means few foreign digital goods are affordable to Venezuelans, which will spawn an industry of ultra-affordable mobile phone and tablet models coming in from China or India.