HTC of Taiwan Slides in Global Smartphone Market

Struck by shrinking sales and global market share, HTC Corp., a Taiwan-based developer and vendor of branded smartphones that may be regarded as the island's upstart against Apple and Sansung, erstwhile the industry leader who launched the world's first Android phone two years ago to ignite short-lived, enviable business growth, has seen its share price in Taiwan plummet to less than half its peak that led the tech sector on the island.

Normally stock prices vary according to corporate performance. Just a week after HTC reported second-quarter financial statement for this year to disappoint investors, its shares closed at a two-year nadir of less than NT$300 (US$10) on July 13, 2012 in Taiwan, compared to its all-time high of over NT$1,300 (US$43) in May 2011.

The company's second-quarter sales totaled NT$91 billion, over NT$30 billion less than NT$124.39 billion of a year ago, with net operating income of NT$8.2 billion, plunging nearly 58% YoY, with EPS (earnings per share) of NT$8.9, sharply dropping from NT$20.63, with the company forecasting sales revenue likely to continue waning in the third quarter.

Poor sales along with persistently declining stock prices have HTC investors on edge, especially when the company's flagship model, One X, launched this April to revive brand sales, fails to successfully take on Apple's iPhone 4S and Samsung's Galaxy S3 in the global market.

While HTC remains profitable for the time being and keeps striving to develop new smartphones as its first model installed with Windows Phone 8, many are leery about the future of this once-flashy company. While global demand for smartphones keeps growing stoutly to sustain the market for handsets, observers and investors will have to knit eyebrows for now to figure out why HTC lags behind.

Less Resources

Some experts believe that developing branded tech gadgets for long-term success is for the big leaguers, hence HTC's weaker resources, compared to Apple and Samsung, always had the writing on the wall.

Pierre Ferragu, analyst at Sanford Bernstein, a Wall Street's premier sell-side research firm, noted that Samsung and Apple reportedly spend six and four times more, respectively, on promotions than HTC, exposing the Galaxy series and iPhone 4S to more global consumers. The bottom-line seems to be bigger advertising dollar begets greater global exposure to generate better sales.

T. Michael Walkley, market analyst at Canaccord Genuity, a global investment bank with operations in 12 countries, also points to HTC's disadvantaged marketing resources, stating that the brand's One series smartphones are retailed by major American telecom companies, including Verizon, AT&T, Sprint Nextel and T-Mobile, but not as aggressively promoted as Samsung and Apple models, with AT&T promoting nationwide the One series while emphasizing HTC as a key smartphone partner.

Drowning amid rivals' promotions, HTC sold only 9.2 million smartphones in the second quarter, nearly 3 million units less than a year ago, compared to Samsung and Apple's 50-plus million and 26 million units, respectively, hence hammering the Taiwanese brand's global market share to 2.2% in the quarter from 10.7% a year earlier.

Ineffective Strategies

To reverse flagging sales, HTC has tried many aggressive business strategies over the past year, some of which, however, have proven ineffective to strengthen competitive advantages but have been criticized as waste of financial resources.

HTC, as done by increasingly more Taiwan-based firms who lack in-house expertise and creativity, also adopted cross-industry acquisition as the major strategy. For instance, HTC completed two acquisitions in August 2011, both of which looked rational, reasonable and farsighted. One was the US$300 million majority-stake buy of Beats Electronics, a well-known brand vendor of headphones in the U.S., to build so-called street cred of HTC smartphones by tapping the fame of its founder the legendary music producer Jimmy Iovine and hip-hop music producer Dr. Dre.

Buying literally into such popular marketing wisdom clearly didn't work. Failing to achieve bigger market share in North America, HTC had to sell half of the acquired shares back to the U.S. firm this July.

And acquiring S3 Graphics and Dashwire to enhance patent asset and cloud computing application, and reinvesting in Catchplay to develop on-demand media entertainment enabled for its smartphones also failed to generate higher profit for HTC as expected, decisions of which not only did not help the brand to narrow the gap with Apple or Samsung, but also led market observers to question the brand's decision making.

HTC's Overseas Acquisitions in 2011
Company	Beats Electronics	Dashwire	S3 Graphics	OnLive	Saffron Digital
Date Announced	Aug. 11	Aug. 5	Jul. 6	Mar. 15	Feb. 7
Investment Value	US$300 M.	US$18.5 M.	US$300 M.	US$40 M.	US$50 M.
Stake Acquired	51%	100%	100%	In the form of preferred stocks	100%

Additionally, HTC's emerging market strategy contradicts CEO Peter Chou, who repeatedly said the brand would never develop and promote low-end smartphones for image sake.

Market observers say that HTC, despite emphasizing the Chinese market, hasn't gained significantly bigger shares there, partly due to not offering budget-priced models to consumers whose main concern remains price; while competitors Huawei and ZTE promote wide-ranging smartphones that undersell HTC to grab market shares.

Samsung versus HTC

Initially HTC showed greater growth potential than Samsung, especially when it outdid the Korean rival by launching the world's first Android and 4G smartphones to underscore its technological prowess. But Samsung now leads the global smartphone market by sales, with the Taiwanese brand trailing in envy.

Market observers say that Samsung's success is partly due to its highly integrated, secure supply chain composed of affiliates supplying processors, AMOLED (active matrix organic light emitting diode) panels and memory, as well as its own global-caliber semiconductor foundry.

In contrast, HTC relies on outsourcing for most key parts, even from Samsung Display which supplies AMOLED panels. Such operation is sometimes dogged by supply shortage that can compromise brand image. For example, HTC had to adopt lower-performance S3 processors in its One series smartphones for a while due to shortage of the newest S4 models, which irritated and may have lost consumers in some markets.

The two competing brands deal with software development and optimization differently, which to some degrees determines who will win the market. Compared to HTC, which is mainly focused on optimizing user interface, Samsung is ambitiously dedicated to researching the kernel of operating systems to work out its platform, bada, and actively partners with Linaro, a non-profit engineering organization that works on consolidating and optimizing open source for the ARM architecture. These efforts enrich Samsung's know-how of software, and pay off to enhance interoperability of hardware and software in its smartphones.