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Mobile Communications

HTC: Why the Asian Tiger Stopped Roaring

In August, news emerged that Beijing-based start-up Xiaomi had surpassed Samsung to lead the Chinese smartphone market – the world’s largest. Commentators queued up to marvel at the speed with which it has burst into the global top five, but many, yours truly included, also raised a word of caution that in the mobile space things move pretty fast, and success is never guaranteed. Once dominant Taiwanese manufacturer HTC is proof personified. Its shares have lost around 90% of their value since 2011, when the firm was second only to Apple in the US and the world’s top Android handset maker.

So what exactly went wrong, and is there any hope of a revival at the under-fire Taipei-headquartered firm?

It’s hard to exaggerate just how far HTC has fallen since those days. At an annual shareholders’ meeting in June this year incensed investors even demanded free handsets to assuage their anger at a share price which continues to lie in the doldrums. But to put in context its current predicament it makes sense to take a look back at the company’s past.

Back to the beginning

The High-Tech Computer Corporation, as it was first named, began life in 1997 as the brainchild of founders Cher Wang, Peter Chou and HT Chou. After an ill-advised dalliance with laptops, the firm soon made its name as an innovative contract manufacturer in the mobile space, producing phones and PDAs for the likes of Palm and HP. Its successes came at the height of the Taiwanese ODM/OEM boom, with mobile operators including O2 and Orange soon striking relationships with the manufacturer to build co-branded handsets.

The firm produced its first own-branded device in 2006 and renamed itself HTC two years later - a year that was to mark another defining moment for Wang and co. HTC had mainly built Windows Phone and Brew MP devices up until then, but 2008 saw the launch of the HTC Dream – the first ever Android smartphone, a slider design which sold over one million units in US in its first six months.  Next came the HTC Magic and then the Hero a year later, featuring for the first time HTC’s Sense UI.

Already on a roll, HTC’s momentum grew even further when it was chosen to produce Google’s first Nexus smartphone. It followed this with a string of well received handsets including the Legend, the Desire and the Droid Incredible. In 2010 Fast Company ranked HTC as the 31st most innovative company in the world and the following year it was named “device manufacturer of the year” at Mobile World Congress. In April 2011 it leapfrogged Nokia to become the third largest smartphone maker in the world by market value behind Samsung and Apple. In the third quarter of that year its post-tax profits exceeded $620m.

Let the bad times roll

It never got that good again. With Samsung competing strongly with HTC in virtually all markets and budget Chinese rivals springing up all over the place its revenues began to plummet – from over $4.5bn in Q3 2011 to $1.1bn in Q1 2014. Its performance has not been helped by some dubious business decisions, including a $300m investment in Beats Electronics for a 51% stake (although Apple’s purchase of Beats perhaps vindicated the move) and the $35m it threw at enterprise app business Magnet Systems.

It’s been unlucky in the courtroom too. Despite spending $300m on S3 Graphics and $75m on ADC Telecoms patents as part of a defensive IP grab, it was forced to sign licensing agreements with both Microsoft and Apple which see a slice of each Android handset sale heading to Redmond and Cupertino.

It’s also been blamed for a messy, at times bemusing marketing strategy which saw the release of a huge number of similar sounding devices. It’s a mistake that cost the firm dear and it only got back on track marketing and specs wise with the HTC One X in 2012.

Forrester’s Thomas Husson told me HTC’s fall was a combination of tactical missteps, increased competition and a smartphone market growing in maturity.

“They know how to design quality products but their products are overshadowed by the fierce competition in the high-end smartphone market due to lack of marketing budget. In addition, they mostly have a mobile-only play and moved too lately in the low to middle-market segment,” he said.

“Several years ago they benefited from great products and innovative teams … At that time, competition was not that fierce and the smartphone market was still growing quickly. In mature markets this is no longer the case.”

Any way back?

So is HTC set to become a cautionary tale for all smartphone makers – one to study in 10 years’ time to prove that despite great channel partnerships, innovative technology and lots of momentum, things can turn inside-out in less than 12 months?

Well, the board has certainly been doing its best to get things back on track. HTC has now begun outsourcing production of some smartphones in a bid to keep costs down, and hired former Samsung US marketing boss Paul Golden as a consultant to help reinvent the brand. The figures are slowly looking up too. Chou expects a “noticeable improvement” in the next two to three quarters and the firm’s Q2 financials showed a return to form of sorts, with net profits jumping 80% year-on-year and doubling of revenue quarter-on-quarter to roughly NT$2.26bn ($76m), thanks to strong sales of its One M8 device.

But it’s not going to be easy, according to Gartner analyst CK Lu.

“HTC has missed the window of opportunity to rise with smartphone growth in China in the past few years,” he told me.

“In the next wave of smartphones in emerging markets, we believe Chinese and local brands will take the major share due to their excellence at providing value-for-money smartphones. HTC has to be cost competitive and build its brand in those markets at haste.”

 

Phil Muncaster has been writing about technology since joining IT Week as a reporter in 2005. After leaving his post as news editor of online site V3 in 2012, Phil spent over two years covering the Asian tech scene from his base in Hong Kong, writing for The Register, MIT Technology Review and others. Now back in London, he always has one eye on what's happening out East.

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Phil Muncaster

Phil Muncaster has been writing about technology since joining IT Week as a reporter in 2005. After leaving his post as news editor of online site V3 in 2012, Phil spent over two years covering the Asian tech scene from his base in Hong Kong. Now back in London, he always has one eye on what's happening out East.

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