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HTC Struggles through a Bottleneck

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HTC Struggles through a Bottleneck

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Hurt by patent defeats and errant strategies, HTC has suffered through two gloomy quarters. CEO Peter Chou reveals four changes his company is making to right the ship.

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HTC Struggles through a Bottleneck

By Benjamin Chiang
From CommonWealth Magazine (vol. 494 )

No company in Taiwan's corporate history has ever gone through as many highs and lows as leading smartphone maker HTC Corp. The company's revenues more than tripled over the course of five years – rising from NT$118.6 billion in 2007 to NT$455.1 billion in 2011. Its share price has been the highest on the Taiwan stock exchange on three separate occasions, and has also plummeted three times.

To HTC and its chief executive Peter Chou, 2011 was a year of both soaring morale and unprecedented challenges.

The company's market capitalization catapulted to US$38.8 billion, surpassing that of global handset stalwart Nokia Corp., and HTC stunningly emerged as the leading smartphone vendor in North America in the third quarter by overtaking Apple. It also became the first Taiwanese company to crack the world's top 100 brands.

No sooner had HTC risen to the top, however, than it was unceremoniously left in the dust by Apple and Samsung. Successive patent infringement cases only deepened the company's sudden malaise, and HTC was forced in February to lower its financial targets for the first time in its history, sparking an uproar in the market.

HTC posted a record high EPS (earnings per share) of NT$72.73 in 2011, once again establishing itself as the "king of profitability" on the Taiwan bourse. But after peaking at NT$1,300, its share price has plunged by nearly 50 percent over the past 52 weeks (from April 8, 2011 to April 5, 2012), while Apple shares have risen 89 percent and Samsung shares 48 percent over the same period. (Table 1)

Its 2012 first quarter financial results, reported on April 6, only highlighted the company's difficulties. Net income was down 70 percent year-on-year to NT$4.46 billion and earnings per share hit a seven-year low at NT$5.35.

But the numbers may not be as bad as they seem at first glance.

"HTC has not gotten worse. It just hasn't been as ‘powerful' as in the past," said Topology Research Institute analyst Ho Tai-ching, who suggested that HTC needed to rethink how to make its brand value stand out.

Two Difficult Quarters

Many Taiwanese have a strong emotional bond with and high expectations for the HTC brand. The Topology Research Institute ranks HTC as the world's fifth largest mobile phone vendor and expects it to break into the top four this year, because its market share is on the rise and that of fourth-place RIM, maker of BlackBerry phones, is on the decline. (Table 2)

But the challenges remain formidable, and HTC cannot get too far ahead of itself.

"Ever since its inception, HTC has been fighting an asymmetrical battle. Our opponents have been industry giants like Nokia and Motorola," stresses HTC's chief marketing officer John Wang. Because of the small scale of Taiwan's market, HTC does not have a "home field" edge, forcing it to fight at a disadvantage in the home markets of rivals.

Yi-chia Chiu, an associate professor in National Chengchi University's Graduate Institute of Intellectual Property, believes the company has only one way out.

"HTC must carve out a path for itself in the area of strategic innovation," Chiu says, noting that HTC's edge in hardware development and its strong relationships with telecom operators are slowly being eroded by its competitors.

Over the past two years, South Korea-based Samsung Electronics Co. has vertically integrated its display and semiconductor operations to support the mobile phone business, keeping costs extremely low. HTC, on the other hand, procures nearly all of its most important components from outside vendors, putting it at a clear disadvantage against its Korean rival.

But Eddie Chang, vice president of sales at Qualcomm CDMA Technologies Taiwan, does not think the cost issue is decisive.

"Although HTC lost last year's fourth quarter battle, it still has its base, and as long as it makes the right decisions, it will be extremely competitive," Chang contends.

His company having suffered through two difficult quarters, how does HTC CEO Peter Chou expect to turn the situation around? In a recent interview with CommonWealth Magazine – his first with a domestic media outlet in three years – Chou pointed to four key strategic adjustments intended to improve HTC's fortunes.

Change No. 1: Simplifying the Product Line

As HTC was competing with Samsung across the globe in 2011, it introduced 14 new mobile phone models in Taiwan alone.

"The model names were all over the place. Consumers were unclear about how each product was positioned," says the general manager of one mobile phone contractor.

The executive recalls seeing an HTC ad on a Taipei bus, promoting four or five phone models. "You couldn't remember which model the company was actually selling," he said.

In using one wave of new devices after another to wage a global battle, the biggest hurdles HTC has faced are branding and gross margin. "HTC does not have a volume advantage in procuring parts. Compared with similarly positioned handsets in the market, its purchasing costs are at least 10 percent higher than Samsung's," the Topology Research Institute's Ho says.

Having perceived the problem, HTC has quickly adjusted its operating strategy and decided to streamline and simplify its product line.

"We began making the adjustment in the middle of last year and have now clearly positioned our products and brand. This is the first time we have integrated our global marketing resources," Chou admits.

Going for an Upscale Brand

In adjusting its brand strategy, HTC has repositioned itself as a high-end brand. "The HTC One represents the current most upscale model and lets every consumer clearly know that it is the best mobile phone," HTC's Wang says.

At the global launch of the HTC One in Barcelona on Feb. 26 in front of more than 600 media figures, Chou enthusiastically introduced the three models in the series. "We are going to have to apologize to camera makers for setting off a camera revolution," Chou said of the HTC One's innovative camera functions that some bloggers described as amazing.    

The day after the product launch, a group of Samsung employees rushed to HTC's booth at the Mobile World Congress exhibition to play with the new HTC devices and try out their camera functions.

"Within a day, a complete intelligence report on the phones was being analyzed in the company's Korea headquarters," said the general manager of a foreign telecom operator, who felt Samsung had underestimated HTC's innovative capabilities. "They didn't expect that Peter would highlight the camera and audio functions."

HTC's simplification of its product line will not only strengthen brand recognition among consumers but, even more importantly, help dramatically lower the company's component purchasing costs.

Another major undertaking for HTC has been the expansion of its brand distribution in China and other emerging markets. In China alone, HTC has gained a presence in 2,000 retail outlets. 

"An open channel is the true manifestation of a brand experience and will help HTC communicate directly with consumers," observes Richard Ko, an analyst at KGI Securities Co.

Change No. 2: Buying into a ‘Business Ecosystem'

In 2011, HTC invested more than NT$23 billion to either purchase outright or acquire stakes in nine companies, making an acquisition on an average of once every month and a half.

The motivation for the move was the growing lack of brand differentiation in mobile phone hardware amid fierce competition in the global smartphone market.

"For HTC to maximize the company's value, it will have to rely on building a mobile applications platform to differentiate itself from others," Ko said, pointing to the new competitive trend of attempting to create "business ecosystems."

Though HTC's strategy was not evident to outsiders, a careful analysis of the mergers reveals that Chou's strategic map not only includes strengthening the company's audio (music), entertainment (games) and cloud computing applications, but also involves reinforcing HTC's ability to defend its mobile phone-related patents.

"HTC clearly realizes that we cannot match Samsung in terms of advanced technology and hardware purchasing costs. We can only make our mobile phone functions more innovative," an HTC executive said bluntly, arguing that only by buying vendors of services, such as music and digital content, can HTC enhance its competitive edge.

"To be honest, we are still learning. Through this process, we have learned how to create value," explains Chou, pointing to the HTC One's highly praised audio effects resulting from the company's acquisition of high-end headphone maker Beats Electronics LLC.

Some in the industry are still questioning the strategy, however. As the general manager of a mobile phone contractor worried, "Having bought this many companies, is HTC truly capable of integrating them all?"

Aside from concerns about its ability to consolidate its acquisitions, a management bottleneck is also believed to be standing in HTC's way. When managing a global brand, operational and management capabilities are paramount. Without them, a company can easily see its hard-earned income evaporate for no reason. In HTC's case, its after-tax net margin fell sharply from 24.4 percent in 2007 to 14.2 percent in 2010, and its operating margin in the first quarter of 2012 was 7.52 percent, the lowest for a first quarter in the company's history. This rapid decline has set off alarms over the efficiency of the company's operations.

"HTC's global logistics capabilities need to improve. The company's purchasing projections are really inaccurate and can be off sometimes by a factor of 5 or 6," says one HTC supplier who suspects that the company has grown too quickly, leaving its organization and operations unable to catch up.

"When a company is still growing rapidly, organizational and operations issues can be hidden. But in the fourth quarter of last year, the company's operating scale grew larger while its growth slowed, and all of the management problems became magnified," the supplier observes. To deal with the problem, hiring foreign executives could be an option, but at the most basic level, improving management decision-making is also critical, the supplier believes.

Change No. 3: Creating a Complete User Experience

HTC has made a name for itself over the past 15 years with its PDAs and smartphones. Its single product line has allowed the company to stay focused, but has also made it more vulnerable to competition.

Shipments of smartphones are expected to explode to over 600 million units in 2012, an indication that smartphones are evolving from fun and convenient gadgets into devices that are essential parts of people's daily lives.

At this year's Mobile World Congress in Barcelona, HTC exhibited its ambition to broaden its product line by introducing home entertainment and car stereo accessories.

"We don't want HTC to be just a mobile phone or hardware company; we want to bring together the experiences of your whole life," Chou says, implicitly acknowledging that the user experience will soon become the key battleground for smartphones.

To create a more comprehensive user experience, HTC has increasingly paid attention to all aspects of their products seen or touched by consumers, no matter how small a detail. Even the protective film on HTC phone screens has the message "I'm the ONE you've been waiting for" printed on it, one of many added touches to build consumer loyalty.

"This is the first time since it was founded that HTC has put forth an integrated user experience for consumers. We created, not a product, but a complete experience," Chou explains.

HTC handsets stress audio quality. Consumers are not going to wear Beats headphones in their cars, so "HTC wants to fill in that big gap in the user experience," HTC's Wang says. Similarly, users should be able to share the high-quality photos they take with HTC phones on their television sets.

HTC's product value creation strategy has moved toward better integrating its phones into people's daily lives, including creating new functions that link it with television sets and automobiles.

HTC and Luxgen, the Yulon Motor Co.'s high-end car brand, have begun a technological cooperation program that will help the company better understand the user experience provided by automotive electronics.

"HTC's innovations have a good chance of satisfying first-time buyers of smartphones," the Topology Research Institute's Ho says.

Change No. 4: Deepening Supply Chain Partnerships

"HTC is a typical Taiwanese company. There's no way we can be super big and strong, so we have to be small and attractive," Chou says with conviction.

Jack Tong, president of HTC North America, takes the idea a step further. "By concentrating on high-end products, HTC hopes to satisfy consumers' every experience and compete on differentiation rather than blindly pushing for quantity," he says.

The success or failure of the company's differentiation strategy will be determined by whether it can accelerate the speed at which it integrates hardware and software elements and deepen its partnerships with members of its supply chain.

The HTC One, for example, showcases camera functions. The camera boasts super fast autofocus and continuous capture, as well as an innovative "Concurrent Video/Still Capture" function. These features meet heretofore unsatisfied consumer demands.

As for its supply chain structure, because HTC ships nearly 50 million smartphones a year, "it has the chance to play the role of leader of Taiwan's smartphone supply chain, just as Japan's Toyota has developed a ‘co-prosperity sphere' of relations with vendors in its supply chain," says one HTC executive. To date, HTC and its suppliers have concentrated their collaboration on the design of screen displays and attractive casings.

"Strengthening cooperation with supply chain vendors has become an important strategy in HTC's pursuit of a breakthrough," says a senior executive at panel supplier AU Optronics Corp., which has gradually developed a close partnership with HTC in developing AMOLED (active-matrix organic light-emitting diode) displays.

There are still hurdles, however. HTC faces the same development bottlenecks most Taiwanese corporations inevitably face: transitioning from contract manufacturing to managing its own brand, and battling to keep its single product line and specialized commercial model from being elbowed out by global rivals.

Though many analysts are skeptical about HTC's future prospects, it cannot be denied that the humble engineers of Taiwan such as Peter Chou are undaunted by the idea of going up against mighty corporations like Samsung. Lacking a home field edge that a huge domestic market would provide, they are nonetheless waging a series of mighty battles around the world.

For companies to become legends, they usually must go through years of meeting difficult challenges. HTC is coming off two troublesome quarters but hopes it has embraced the right changes that will help it overcome those challenges and rise from the depths once again.

Translated from the Chinese by Luke Sabatier

Keywords:

好友人數