Will backward integration boost telecom sector near-term?

The Central Bank of Nigeria has been commended for its efforts in stabilizing the foreign exchange market and boosting investor confidence. The governor of the Apex Bank has called on telecom firms to embrace backward integration by producing essential components locally to reduce dollar demand and create jobs. The move aims to strengthen Denara's competitiveness and further stabilize the FX market. In a recent interview with Samuel Alagdegbaye, Investment Research Analyst at Zcrest Wealth, the discussion centered around the need for localization within Nigeria's telecom sector. The Nigerian Communications Commission (NCC) commissioned a report that revealed only 16 percent of components are localized, while 84 percent are imported, especially critical equipment like software development. This stark contrast highlights the need for significant improvements in local production capabilities. However, there have been positive strides in the industry, with SIM cards already being produced locally. Despite this progress, there is still a large gap to close, which calls for strategic investments and reforms in the sector. The year 2025 is expected to bring targeted reforms to the telecom industry, aiming to enhance local production capacities. The recent increase in telecom tariff hikes by 50 percent is a step towards improving the sector's profitability and attracting investments. The production of SIM cards locally has already shown potential, with an estimated market size of around 55 billion. Industry players are urged to consider backward integration by producing cables and setting up towers to further strengthen the sector's fundamentals. The potential risks associated with relying heavily on imported critical components, especially related to national security, necessitate a shift towards localization. To fund these initiatives, companies can create ownership stakes in supporting firms to facilitate production. Collaboration between industry players and financial stakeholders can foster a robust ecosystem that enhances the sector's growth. Amid ongoing tariff disputes between the NCC and labor unions, finding a balance that supports the industry's sustainability is crucial. The recommendation of a 50 percent tariff hike has been met with mixed reactions, with suggestions for phased increases to alleviate the impact on consumers. The deliberations between the government and labor unions are expected to yield a resolution that balances the sector's profitability and consumer affordability. The need for a comprehensive approach that considers the industry's growth, profitability, and consumer interests remains paramount in navigating the challenges facing Nigeria's telecom sector.