The Ups and Downs of HTC

The smartphone maker is diversifying its product lineup in an effort to reverse its fortunes.

By Tim Ferry with Philip Liu

Taiwan’s leading smartphone brand HTC last November launched its first own-brand, non-smartphone or tablet product: the Re, a mini still and video camera. Resembling a periscope, the L-shaped camera with one-button activation is aimed at the booming market for “lifestyle cameras” pioneered by GoPro – and with sales booming, the company has already announced an updated version to be released later this year.

The Re is not the only new venture for HTC, and the Re launch coincides with a tie-up between HTC and U.S. sports clothing and accessories maker Under Armor to create fitness-related wearable devices, as well as a collaboration with Google to manufacture its Nexus 9 line of tablets. All three moves signal HTC’s push to diversify away from a singular focus on the already saturated smartphone market and towards more burgeoning tech sectors such as wearable devices.

“In a mature market like smartphones, it’s reasonable for branded phone makers to deliver products which can clearly present diversification and creativity,” says Avril Wu, sector analyst and vice president for Taiwan technology analytics firm Trendforce, citing the Re camera as one such example. She views such diversification as benefiting the company by allowing HTC to “expand the application of mobile technology” into new product lines such as wearables, and equally important to help the maker build up its ecosystem in the rising Internet of Things (IoT) sector of connected devices and appliances.

Vicky Yeh, smartphone market analyst with the Industrial Economics and Knowledge Center (IEK) at Taiwan’s Industrial Technology Research Institute (ITRI), says that HTC is trying to “transform from a smartphone brand name to a personal computer and electronics brand name.”

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The HTC Re Camera

HTC hasn’t given up on its core smartphone business, but here too the company has also diversified its product lines away from top-tier models aimed at rich markets towards lower-priced models offered in emerging markets.

Will these new ventures be enough to restore HTC to its once lofty perch at the top of the global smartphone industry?

Diversification into wearables and IoT-related tech should offer attractive potential opportunities. Market forecasts predict annual sales in IoT-related devices and components ranging from 30-50 billion units valued at some US$300 billion by 2020. HTC has earned a reputation for offering bold new products to the market, including the world’s first Android and Android 4G LTE phones, and has been recognized as an innovation leader by Boston Consulting Group, Fast Company magazine, and Bloomberg, all signs that the company is well-positioned to take advantage of these new sectors. But HTC is also known for getting too far ahead of the market, only to have consumers shift direction behind them, as previously seen in HTC’s costly investments in 3D cameras and sophisticated audio that contributed little to revenue and profits.

A push into emerging markets also offers great potential, as global smartphone sales are skyrocketing, propelled by strong demand in developing countries such as China and India. But in these markets, Chinese smartphone vendors such as Huawei and ZTE already dominate, offering surprisingly good phones for less money, and these vendors now collectively own some 38% of the world market, according to Trendforce.

Perhaps the most significant obstacle standing in HTC’s way back towards its previous heights, though, is that the chasm separating its current status from its 2011 glory days may be simply too wide to bridge.

HTC’s rise and subsequent decline are the stuff of legend in Taiwan. The company rose from ODM obscurity to heights of consumer branding and sales rarely attained by Taiwanese firms, but then plummeted from lists of top 10 smartphone vendors following years of patent litigation, shifting market trends, and ever-stiffening competition. HTC’s market cap shrank from 2011’s US$33.8 billion to the current US$4.06 billion, relegating the erstwhile market leader to the “Other” column in market share charts of smartphone vendors.

HTC Chair Cher Wang shows the motherboard of the new Desire Eye smartphone model during a presentation at this 2015's World Economic Forum in Davos, Switzerland
HTC Chair Cher Wang shows the motherboard of the new Desire Eye smartphone model during a presentation at this 2015’s World Economic Forum in Davos, Switzerland

What went wrong?

HTC was founded in the late 1990s by a partnership consisting of chairperson Cher Wang – scion of the Wang family of international conglomerate Formosa Plastics Group – and CEO Peter Chou. The firm started out as a contract ODM/OEM manufacturer of touchscreens, smartphones, and notebook PCs, including one of the earliest mobile devices, Compaq’s Pocket PC. HTC’s collaboration with Compaq led to ventures with Microsoft, Google, and even with telecoms such as T-Mobile, O2, and Vodafone, all of which also wanted to produce their own-spec phones.

According to presentation materials provided by IEK, HTC began to develop its own-brand smartphones in 2006, and from 2008 to 2011 the company enjoyed great success in developed world markets. It produced the world’s first Android-based smartphone, the HTC Dream, launched in October 2008, followed by its well-received User Interface (UI) software, Sense, in 2009, and the first Android 4G LTE-enabled phone offered in the United States, the HTC Evo, in 2010. By 2011, HTC’s market valuation exceeded former leader Nokia and the company held over 10% of the global market for smartphones. However, this early success also led the company directly into the middle of the smartphone patent wars that would eventually engulf all of the top players.

In March 2010, Apple filed suit against HTC in both the U.S. District Court of Delaware and the International Trade Commission (ITC) for patent infringement, citing at least 20 patents that allegedly copied Apple’s iPhone. Although many suspected that the real target of Apple was Google, instead of going head to head in battle against the search giant, Apple instead waged war on Android developers. Further, while Samsung was also in Apple’s crosshairs, smaller and less experienced HTC represented an easier target.

The litigation in U.S. and foreign courts distracted HTC and cost the firm billions of US dollars. Even more importantly, it stopped nearly half of HTC’s shipments into the United States at the border in 2012, including flagship models One X and Evo 4G LTE. The impact on HTC’s market share and income was devastating. The patent wars “ruined HTC’s constitution,” says IEK’s Yeh.

Moreover, while HTC was tied up in litigation that was eventually settled in November 2012, China’s smartphone industry was just ramping up. ZTE and Huawei began by offering cheaper smartphones for emerging markets that were quickly supplanting the developed world as areas of growth for the smartphone industry.

According to TrendForce, China’s smartphone industry has been expanding at an annual clip of 50% since its inception in 2011, with its global market share reaching 38.6% in 2014. That year, the three leading Chinese brands – Lenovo, Huawei, and Xiaomi – each delivered over 60 million units, joining Samsung, Apple, and LG on Trendforce’s list of top smartphone brands. Their shipments are expected to rise to over 530 million units in 2015.

By 2012, heightened competition in the top-tier segment from Apple and Samsung led HTC to shift focus towards emerging markets. But here they faced another challenge; as latecomers in entering China, India, and other markets, they had to play catch up. And China’s rising sophistication in branded electronics eroded HTC’s quality advantage, while production located in higher cost Taiwan put the company at a price disadvantage.

The old strategy of offering better quality at a lower price – the strategy employed by Taiwan’s electronics industry across many segments – was no longer working. “In the mid-to-high-end markets, HTC was squeezed by Apple and Samsung, and in the middle to low-end, it was squeezed by the Chinese vendors and manufacturers,” observes IEK’s Yeh.

The impact on HTC’s finances has been dramatic. In 2013, the company suffered a net loss of NT$1.329 billion (US$44.3 million), on sales of NT$203.4 billion (US$7.7 billion), and its share price began its inexorable slide from 2011 high of NT$1,238 to its closing price of NT$147 on February 11. By 2013, HTC had dropped to 11th place in terms of market share, trailing far behind market leaders Samsung and Apple, at 31.6% and 15.5% respectively.

The numbers improved in 2014, with fourth-quarter results showing revenues up 12% year-on-year to reach NT$47.9 billion (US$1.5 billion), with slim profits of NT$500 million (US$15.9 million). It marked HTC’s third consecutive quarter of profitability. The company is estimated to have earned after-tax net profits of NT$1.81 per share in 2014, much better than the NT$1.6 per share in the red in 2013.

 

Diversification

As HTC’s business stabilizes, diversifying its product lines will hopefully expand its range and increase sales. At the product release of the Re in New York City last November, Peter Chou noted that the camera is an outcome of an R&D effort that has focused on audio and image in recent years. Cher Wang noted in media interviews that Re is a natural extension of HTC’s innovation from mobile phones into the budding sector of mobile devices, adding that the company will offer even more such devices in the future.

On other occasions, Chou has stressed HTC’s intention to create new value by rolling out cloud-based products and other non-smartphone products.

Another example of the company’s diversification strategy is its contract production of Google’s latest tablet-PC model Nexus 9, marking the resumption of tablet production following the disappointing performance of its two own-brand models two years ago. As HTC’s shipments are down across its product lines, the return to contract manufacturing is apparently meant to bolster its output volume for the sake of economies of scale. HTC has more involvement in Nexus 9 than a pure contract producer, though, since the device is furnished with HTC’s proprietary BoomSound stereo speaker. In addition, HTC can sell the tablet under its own brand in markets approved by Google. Market reception to Nexus 9, notably in Japan and the U.K., has been satisfactory, as shown by initial supply shortages.

The earlier-mentioned partnership with Under Armor is aimed at promoting the U.S. company’s UA Record brand of fitness apps, including popular fitness tracking app MapMyRide. While neither Under Armor nor HTC has disclosed exactly what devices HTC will produce, tech blogs predict it will likely be a line of wristwatch-type devices. According to the HTC website, Robin Thurston, Under Armour’s senior vice president in charge of its Connected Fitness brand, cited HTC’s “fearless commitment to innovation” and its “attention to detail and premium design” as reasons the company chose HTC as its partner.

To back up its innovation, HTC last April set up a Creative Lab in its R&D center in Seattle, boasting a workforce of 250, dedicated to software development. In addition, Cher Wang signed an agreement with China’s Guizhou provincial government in October for establishing a big-data online precision marketing and interactive center in a hi-tech industrial park.

While HTC is trying to bolster its bottom line with new product lines, it is also strengthening its smartphone offerings. The company launched two new smartphone models at the end of 2014, the Desire Eye and Desire 820, both targeting the medium-price sector. The two models supplement Butterfly 2, the company’s high-end flagship model, and the mid-level model HTC One M8. HTC is vigorously pushing the models worldwide, especially in the emerging markets of China, India, and Southeast Asia. Media reports say that HTC will launch new models at the Mobile World Congress in Barcelona Spain this month, as well as a smartwatch. The number of new models underscores the company’s resolve to revitalize its presence on the global smartphone market.

Among HTC’s biggest shortcomings has been what experts see as mediocre marketing. HTC has strived to project a distinct brand image and retain loyal followers by employing international celebrities as spokespeople, such as actor Robert Downey Jr., in the second half of 2013, at a cost of NT$360 million (US$12 million), and baseball star Robinson Cano, at an undisclosed cost. But the results were roundly criticized as being confusing and did little to stimulate sales.

Aware of the weakness in marketing, Cher Wang took over the task herself during a top-management reshuffle in the fourth quarter of 2013, leaving Peter Chou to concentrate on product design and development. The effort so far has produced only limited success at best, according to market observers.

Most securities analysts are still harboring a conservative outlook for HTC, predicting a low share price range of NT$90-100 in the coming 12 months. Kao Hsin-shan, tech-industry analyst at Barclays Securities Taiwan, for instance, notes that despite changes in the product lineup, HTC’s gross margin will remain low, as acute competition, notably in China and India, will continue to dampen the profit level.

Market observers hesitate to predict that HTC’s new moves can propel the company back to the top of the consumer tech game. But noting that Cher Wang still has the “brand name dream,” and based on the firm’s improved performance over the past half year and renewed emphasis on product diversification and emerging markets, neither are they are dismissing the possibility out of hand.

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