Struggling HTC gets ready to ring in changes in 2013

After tough two years, Taiwanese phone maker hopes it can rebound after sorting out legal battles and revamping designs and marketing

PUBLISHED : Thursday, 14 February, 2013, 12:00am
UPDATED : Thursday, 14 February, 2013, 4:53am

HTC, the smartphone maker that surged into the global market share rankings two years ago, is seeking to repair itself this year after a slide due to marketing shortfalls, competition from Samsung and old legal battles with Apple.

The Taiwanese company, known for its mid-priced Android-based smartphones, posted operating income of just 1 per cent of sales in the fourth quarter, capping a tough year.

HTC's attention to a range of difficulties, from buying parts to selling finished phones, puts it in position to consolidate this year, especially as the company and archrival Apple dropped 20 patent lawsuits in November and signed a 10-year licence deal for future patents.

But it's deep enough into those difficulties to hold any comeback well below the growth momentum of 2010, when revenues grew 93 per cent to NT$278.8 billion (HK$74.4 billion), industry analysts warn.

They say HTC, which reported revenue of NT$60 billion in the fourth quarter, should expect a levelling off this year if it can compete with the Galaxy smartphone series made by its chief Android operating system rival Samsung, as well as cheaper brands in the massive mainland market.

"We look neutrally at its growth this year," said Peter Liao, an analyst with Nomura Securities. "The end of the Apple lawsuits definitely has a positive impact on the US market, but there's no change in emerging markets such as China."

HTC will ship 37 million smartphones this year, up from 33 million last year, Nomura estimates, a 4.7 per cent market share.

The company said last week it expected revenue of NT$50-60 billion this quarter with an operating margin at or below 1 per cent. But chief executive officer Peter Chou said product design, technology and marketing looked promising for the year.

"Outstanding products, paired with improvements in our marketing execution and overall readiness give us reason to feel optimistic about the progress we will make in 2013," Chou said.

HTC has secured a share of the US market through deals with major carriers such as AT&T and Verizon. Research in software and hardware has earned positive reviews for smartphone models such as the Butterfly, with its two cameras, and the One, built for web-browsing speed and picture quality. "I thought about an iPhone4 or 4S, but HTC costs less, the specs are better and it's got a larger screen, a better processor and a better camera," said Mark McVicar, 39, a paralegal in Taipei who bought an HTC handset in April. "People ask me where I got these photos. They are amazed when I tell them."

The Boston Consulting Group ranked HTC No24 in its Most Innovative Companies 2012 survey.

But the smartphone maker, which got its start in contract manufacturing for bigger-name foreign firms, has been losing money as it gets squeezed between the high and low ends of the market.

Apple and Samsung control the high end, while cheaper, though lesser-known, brands attract thriftier smartphone buyers in emerging markets.

Samsung, despite similar products, leads HTC in part because it relies on its own memory and screen technology, instead of extending production time by outsourcing, says John Brebeck, senior adviser at Quantum International in Taipei. Apple also does much of its work in-house.

"HTC is a great company, it really is, with a great design team, but Apple and Samsung are better," Brebeck said.

On mainland China, HTC arrived early and built a reputation for affordable quality, said Mark Natkin, managing director with the hi-tech advisory firm Marbridge Consulting. It had formed "strong relationships with all three of China's mobile operators, bolstering its own sales and marketing efforts", he said.

But now local rivals such as Huawei and ZTE are hurting it with even cheaper models.

Some HTC models also overheat, develop yellow spots on the screen or start out being "undersensitive" to touch, says Jeff Pu, equity analyst at Fubon Securities Investment Services in Taipei. Its own software often slowed down the underlying Android system, he said.

Taiwanese user Vicky Chen, a college student, said she would buy an iPhone next time because the HTC she bought a year ago freezes up, turning the screen white. She bought the Sensation XE because the latest iPhone had not reached the market.

Thin marketing and advertising have added to HTC's setbacks, analysts say. Much of its marketing now is done on the back of service providers like Verizon.

"Samsung spends four times what HTC spends on marketing," Pu said. "HTC fails to deliver its messages."

HTC started the year by cutting prices of its Droid DNA model smartphones from US$199 to US$120 as Apple and Samsung prepared for new releases in the first half of the year. That cut can hardly shore up margins.

"HTC's fourth-quarter operating income was a 1 per cent margin, capping a year in which it was squeezed out of the high end by Samsung and Apple," financial analyst Richard Kramer said in a research note for Arete Research in London. "They are barely making money."

The company knows its shortcomings, especially in marketing, analysts say. It is expected to release a landmark model handset at the Mobile World Congress in Spain this month and acquire power-efficient chipsets from Qualcomm in May. Advertising for its Butterfly models has caught eyes in Asia.

"Consensus expects operating margins in fiscal year 2013 to come back to 6-7 per cent and sales to be flat," Kramer's research note states. But it says, "guidance could disappoint, in our view".