What you need to know
Once a leading light of the global smartphone market, Taiwan's HTC has been hemorrhaging for the past nine quarters. Having bet on sales of its Vive virtual reality (VR) headset to drive future revenues, it will need VR to become a mass market technology sooner rather than later to survive long-term.
In early 2013, Gerald Fu decided to buy his first smartphone. He went with Taiwan’s HTC “because I thought it was better than a mainland Chinese brand and cheaper than an iPhone,” says the Shanghai-based communications consultant. Fu was initially impressed with the phone’s performance. The hardware was good and its Android operating system (OS) seemed limber.
But within a year, the phone had become sluggish. The more apps Fu installed, the worse the phone performed. “Most of the problem is from Android,” he says. “It can’t use hardware resources efficiently.”
Fu has not purchased a second HTC handset. “I can afford the iPhone now,” he says. “Why would I buy an HTC?”
On the other hand, John Yeh, a long-time HTC user, says that he finds the company’s phones to be a good value. “I prefer HTC to Apple, Korean, or Chinese brands,” he says. “But the brand positioning is fuzzy, so it’s not easy for people to define what HTC is.”
Therein lies the problem for the Xindian-based company: It fails to capture the imaginations of consumers. Indeed, besides Apple, HTC’s competitors all use some variation of the buggy Android OS. But Chinese brands like Huawei, Oppo, and Xiaomi are consistently among the top five global smartphone vendors by shipments. So, of course, is South Korea’s Samsung.
“HTC makes a good product but in order to compete in the smartphone market, a good product is not enough — channels and marketing are equally important, and HTC has been weak in both areas,” says CK Lu, a research director at Gartner in Taiwan.
As a result, HTC is struggling. Its share of the global smartphone market stands at just 2 percent. In the past five years, it has lost three-fourths of its market capitalization.
For the past nine quarters, HTC has been in the red. In the quarter ended June 2017, the company posted a net loss of US$64.23 million, about 4 percent better than its US$66.87 million loss in the January-March period. HTC’s total losses in the first half of the year are 30 percent less than the same period a year ago.
HTC’s chronic hemorrhaging of cash couldn’t go on forever. And so in September HTC sold part of its smartphone business to Google for US$1.1 billion, providing HTC with some much-needed liquidity. Google will receive a 10-year non-exclusive license for HTC intellectual property and take over some 2,000 employees from HTC’s Powered team. HTC has previously manufactured several devices for Google, including its first Android phone, its Nexus 9 tablet, and its Pixel handset.
In a statement, HTC chairwoman and chief executive officer Cher Wang called the agreement “a brilliant next step in our longstanding partnership [with Google], enabling Google to supercharge their hardware business while ensuring continued innovation within our HTC smartphone and VIVE virtual reality businesses.”
To be sure, the deal offers Google the chance to get a stronger foothold in the hardware business. It’s reasonable for Google to acquire hardware assets from HTC, given that the two companies have “a pleasant collaborative relationship,” says Aaron Lin, a senior analyst at the Marketing & Consulting Institute (MIC), a semi-governmental research house. Acquiring those assets will help drive Google’s efforts to integrate hardware and software, he adds.
Analysts say that the deal could signify a move away from smartphones for HTC. “I think this is about how HTC can quickly downsize its organization as its smartphone business is shrinking,” says Gartner’s Lu. “It needs a much slimmer structure to stay alive.”
Fall from grace
HTC’s rapid rise and fall in the smartphone segment has become a familiar story. The company arrived on the scene just as Nokia and Motorola were fading and before China had strong brands of its own. As an early adopter of the Android operating system (well before Samsung), HTC filled a void for consumers who didn’t want to splurge on an iPhone. With a “well-rounded” product strategy, HTC managed to sell over 40 million smartphones in 2011, notes MIC’s Lin.
HTC now sells just over one-fourth that number of handsets annually. “HTC lost its momentum because it failed to clearly identify its product and brand positioning,” Lin says. In contrast, Chinese competitors moved quickly to seize the lower and middle segments of the smartphone market, while Apple and Samsung dominated the premium tier.
It is understandable that HTC wouldn’t be able to match the resources of a global electronics maker like Apple or Samsung. Yet even once-obscure Chinese brands have run circles around the Taiwanese firm, industry observers say. Guangdong-based Oppo, which began in the mid-2000s as a manufacturer of DVD players, is currently the world’s fourth-largest smartphone maker by shipments. Oppo has built on its reputation for high-quality electronics by calling itself “a camera phone brand.” And the company has raised its profile throughout Greater China with clever celebrity endorsements.
Then there’s Xiaomi, the world’s second most valuable startup. From the beginning, the Beijing-based smartphone maker has focused on branding – and has retained a loyal following despite a dip in smartphone sales. Not all of Xiaomi’s branding has been original; the company has sometimes borrowed heavily from Apple. But its founder, Lei Jun, understood that comparing Xiaomi with Apple would inevitably create a buzz around his company’s products.
“Now that consumers have so many choices, brand image has become prominent in sales strategies,” says MIC’s Lin.
HTC has tried to shift gears, launching a new series of “U” handsets in a bid to recapture lost market share. But the company is struggling to maintain a stable supply chain as it increasingly lacks economies of scale, Lin observes.
Betting on VR
A return by HTC to its roots as a contract electronics manufacturer isn’t seen as a likely option. Lin says that returning to ODM work would only provide short-term benefits to the company: a boost in utilization capacity and a reduction in losses. In the long term, focusing on contract electronics manufacturing would be unwise since HTC cannot match the production scale of dominant ODMs, he says.
Nor is a continued focus on smartphones the way forward, says Mark Stocker, managing director of Taipei-based branding consultancy DDG, which has worked with many Taiwanese technology brands over the years. For HTC, “the future is in virtual reality, but only if that future arrives sooner rather than later.”
While a hardware maker at heart, HTC has shown a readiness to lead on the software side of the VR business, Stocker observes. If HTC can manage to carve out a commanding position in software, then the profits spun off will be a boon to brand-building efforts. “This would be a big win for not only HTC, but also for the Taiwan technology industry,” he says.
In August, HTC cut the retail price of its Vive VR system from US$799 to US$599 in a bid to boost shipments. The price cut followed a sales promotion by Facebook-owned rival Occulus. Some consumers had previously complained that HTC’s VR system was too expensive.
Brian Blau, a research vice president at Gartner, says that HTC’s Vive VR headset is one of the top choices for the current generation of VR technologies, “but that may not be good enough for a long-term sustainable business.” He notes that HTC faces juggernauts like Facebook and Microsoft in the VR segment.
Then there’s the risk of betting on VR as the way to take HTC forward. The technology could still flop. Phil Iwaniuk, an editor at PCGamesN.com, is skeptical VR will ever appeal to a large swath of consumers. “The difference, you feel, between previous failed technologies and this wave of VR is that there’s such a sense of hope, such a collective desire for VR to deliver on our fantasies,” he wrote in an April post. “But the user experience doesn’t justify the outlay, and you don’t know that until you buy one.”
Even if VR proves the skeptics wrong, HTC still will need to spend heavily to make Vive a success. That’s because VR depends on fixed-asset investment to grow — just like smartphones, observes Di Jin, a research manager at International Data Corp. (IDC) in Beijing. If it were to dedicate itself to the VR business, HTC would need to sell enough Vive headsets to justify expanding production capacity. The problem is that VR adoption remains limited, constraining Vive’s growth prospects. “Without sufficient commercial returns, it would be hard to survive in such a competitive market for long,” Jin says.
(Taiwan Business TOPICS is published monthly by the American Chamber of Commerce in Taipei.)