July 26, 2011 / 1:27 PM / 7 years ago

HTC faces test as investors fret over slowing growth

TAIPEI/HELSINKI (Reuters) - Taiwan’s HTC, which rose from obscure origins making phones for others to become one of the world’s top smartphone companies, is facing a test of its mettle as investor faith in its rapid growth wanes in an increasingly competitive market.

A new HTC Android-based smartphone Sensation is displayed during a news conference for the launch of the product in Taipei in this May 27, 2011 file photo. REUTERS/Pichi Chuang

The world No.5 has had a fairytale ride, with its shares more than tripling in the 14 months to April 2011 and sales surging 300 percent over the past 18 months, as consumers snapped up its innovative phones with their distinctive large clock numerals.

But worries over faltering demand and stiff competition from Apple Inc and South Korea’s Samsung Electronics and legal challenges over patents have since pushed its shares to as much as 30 percent below their peak.

Analysts say HTC needs new markets to sustain growth and will have to call on the speed and innovation that turned it to a global brand in five years and propelled its market value beyond Nokia this year.

“In the near-term, HTC’s biggest challenge is to combat the growing competitive threats from Samsung and Apple in the profitable U.S. market,” said Neil Mawston at research consultancy Strategy Analytics.

“In the mid-term, its biggest challenge is to increase its low market share across the high-growth regions of China, India and Asia.”

In the first quarter, Asia-Pacific was the largest and fastest growing smartphone market with 37 million units sold, followed by Europe, Middle East and Africa with 33 million and North America with 25 million, research firm Canalys said.

China and India are home to 1.7 billion mobile phone subscribers, but last year only 10percent of HTC’s revenues came from Asia, compared with 85 percent from North America and Europe.


Nokia has traditionally dominated the developing markets, but HTC is facing new rivals in the likes of Chinese companies ZTE and Huawei Technologies, which are aggressively muscling in on mobile devices.

“But in terms of quality, HTC is still much better than the Chinese brands; the Chinese brands are not as competitive,” said Michael On, a managing director of Beyond Asset Management in Taipei.

And then there’s Apple. It reported a near-doubling of revenue in the third quarter thanks to a surge in iPhone sales, and said it was “just scratching the surface” in China. Its Asia-Pacific revenue more than tripled in the quarter.

Apple is also studying a cheaper version of its iPhone for emerging markets, according to sources, touching on an issue — pricing — that could be a hurdle for HTC in low income markets.

“We expect HTC to remain at the forefront of smartphone development,” said Geoff Blaber, London-based director of devices, software and platforms at mobile technology research firm CCS Insight.

“But its biggest challenge will be managing expansion into an increasingly price-sensitive, low-cost smartphone segment.”

Nokia’s average selling price was $85 per handset in the first quarter this year, compared with HTC’s $360, Strategy Analytics says. The price of phones in Asian stores can go as low as $20.

One reason HTC sells more phones in the U.S. and Europe is its close relations with local operators who provide heavy subsidies — a sale structure not as popular in Asia.

As a result, the cheapest phone that HTC has launched this year, the Wildfire, with a retail price of around $300, is more expensive to get from stores in Asia than its most expensive phone in the U.S., the Thunderbolt, running on Verizon’s 4G LTE network with a bundle price of $249, $50 more than the iPhone.


Investors have been worried by signs of tougher times with HTC’s gross margin falling to 29.3 percent in the first quarter, down 1.3 percentage points from the same quarter last year.

On top of that, the company is embroiled in an acrimonious patent war with Apple that has the potential to hurt.

This month, a U.S. trade panel initially ruled that HTC infringed two of Apple’s patents.

“The market is expecting the companies to settle outside the court; if they don’t, the consequences will be very severe for HTC,” said Beyond Asset Management’s On. “HTC then wouldn’t be able to sell in the U.S., which contributes 50 percent of its sales.”

HTC is rolling out phones at a furious pace, a new model every month on average, as it tries to maximize its customer reach and differentiate itself from Apple, whose iPhones are icons but stay the same until the next model.

“Whatever customers prefer, we make sure we have a product for them,” CEO Peter Chou told Reuters in a recent interview.

HTC has benefitted by being one of the first to roll out a smartphone backed by Google’s Android operating system. That turned out to be a good bet as Android phones have been gobbling up market share.

Research firm Gartner says Android will account for 49.2 percent of the market in 2012, dominating the 18.9 percent share of biggest rival Apple’s iOS and jumping from an estimated 38.5 percent this year and 22.7 percent last year.

HTC has its history of innovation, which saw it change from a contract manufacturer for brands such as Siemens and Vodafone in the first 10 years from its founding in 1997, to call on.

Its latest corporate slogan, “quietly brilliant,” reflects a culture of avoiding the limelight — even down to its head office hidden at the end of a long driveway in an old industrial suburb of Taipei — yet fostering innovation and speed.

When the sudden ringing of a mobile phone distracted an internal company meeting in 2010, the embarrassed owner fumbled quickly to switch off the sound. The result: HTC phones can be turned silent by turning them around.

“I ask a very simple question usually: can my mom figure out how to use it? My mom is very smart, she is smarter than me, I definitely know that, but she is not technology savvy, did not grow up with technology. Until she can figure it out I think it’s still experimental,” said Horace Luke, HTC’s former innovation chief, who left the company in April for unspecified personal reasons.

HTC is also capable of speedy change and innovation. On the eve of the 2009 launch of the Magic model it was able to make a change to the model and fly it to the other side of the globe in two days in time for a news conference.

HTC can also draw on the determination that kicked off its transformation.

CEO Chou recalled that the 2006 decision to go for a brand was “the hardest.” “We took full responsibility to go to war,” he said.

“I think talent, innovation, brand, customer relations are the long term intangible values ...without a brand it is very difficult to tap strong talent and strong customer relationships,” Chou said.

Additional reporting by Jakob Vesterager in COPENHAGEN and Georgina Prodhan in London; Editing by Jonathan Standing and Anshuman Daga

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