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HTC Fights Back

Rise of the Butterfly?


Rise of the Butterfly?


Squeezed by giants Apple and Samsung, HTC is fighting back with its new Butterfly, hoping to establish itself as the "third force" in the global smartphone market.



Rise of the Butterfly?

By Hsiao-wen Wang
From CommonWealth Magazine (vol. 514 )

A cold wind was blowing outside HTC's Taipei headquarters, and the mood was nearly as cool indoors.

"Today is Dec. 31, 2012. Will you still be HTC's CEO at this time next year?" a reporter asked of the company's CEO Peter Chou.

"Nobody knows what the future holds. I'm trying hard to live for the moment, working hard to do my best today," Chou answered, showing little emotion.

For the 56-year-old executive, 2013 represents a pivotal moment in his life. For HTC, it will determine whether the company can emerge from the depths after an extremely trying 2012.

The Chill

HTC is facing a frigid winter, coming off a year when revenues fell an estimated 37 percent and its global market share fell from 10.7 percent to 4.8 percent. The company's share price plummeted to a 7 1/2-year low, and its earnings per share of NT$20.14 were barely a quarter of the NT$73 in EPS posted by HTC in 2011.

"In Europe or the United States, with these results the CEO would have already been fired," said an analyst at a foreign brokerage focused solely on the pursuit of profit, reflecting the views of many of his peers.

"If it weren't for Peter Chou, HTC would have already gone under," counters an Asustek Group design executive who specializes in mobile phone products.

HTC has refused to succumb to the gloom, fighting ahead with abandon and rolling out a series of new phones. The company's "Butterfly" model and the flagship Jelly Bean-powered M7, expected to be unveiled at the Mobile World Congress in February, represent the first weapons in the company's arsenal to revive its fortunes.

"I don't have time to be discouraged. I am readjusting my wings to take to the air again," reads HTC's latest corporate image advertisement, reflecting the mood of the company's 20,000 employees.

A sunny 6 degree Celsius day in Nagoya, Japan.

Entering an orange and white "au" phone store (run by KDDI, one of Japan's largest telecom operators), one is immediately drawn to the shiny red and glistening white HTC J Butterfly HTL 21 series smartphones, positioned to appear as though they have grown wings. They are selling for 72,870 yen.

Nobody could have imagined that in the first week the butterfly series went on sale in Japan, it conquered the hearts of Japanese consumers and beat out the iPhone5.

The depth of its popularity was then reflected in a survey of 10 writers and media workers invited by Japan's ITmedia Mobile and weekly magazine Ascii to select the "2012 Smartphone of the Year." The HTC J Butterfly HTL21 took top honors, because "right now it carries the best functions and specs, making it the ultimate Android smartphone."

Although it is not the first smartphone with a 5-inch screen on the Japanese market, the Butterfly phone is beautifully designed, and its marketing campaign has resonated perfectly with the young crowd. For consumers who are not fans of the iPhone and Samsung's Galaxy series, a viable third option has suddenly emerged.

CommonWealth Magazine's correspondent in Japan, Sun Hsiaoping, decided to head to Nagoya to find out why the Japanese like the Butterfly so much.

A 20-something consumer surnamed Yamada had just left the store with a new HTC smartphone, the first he had ever purchased, and could not wait to touch the screen with his fingers. Having never heard of HTC, he was amazed to discover that "the image was extremely sharp, and even small characters can be seen clearly," he said with satisfaction. "It works just as well as my desktop computer at home."

A consumer who had previously used an iPhone, surnamed Arakawa, praised the sleek lines of HTC's smartphone body. "It's beautiful!" said Arakawa, who enjoys watching anime online and felt the 5-inch screen was perfectly suited for the pastime.

The Butterfly J has enabled HTC to climb out of a dark valley and finally see blue sky. The company's shares plummeted below NT$200 per share in early November from a high of NT$1,300 in late April 2011, but the new model's success in Japan helped push the stock back above NT$300 at the beginning of January and provided a much needed boost to HTC morale.

Gravity Check

In fact, HTC had already initiated a thorough internal review of its product and marketing strategies and overall execution.

For more than a year, HTC products lost their focus, marketing campaigns rarely hit home, and the company's supply chain management went backwards, setting HTC up for a massive fall.

The HTC Sensation released in May 2011 fell short of expectations, while the Sensation XL reverted back to single-core technology. At the beginning of last year, the 4G-LTE model it custom-designed for Verizon – the HTC Thunderbolt – ended in disaster despite being offered for free with a two-year subscription contract. Then the One X, introduced with such high expectations, had quality problems because it was rushed to market and drew countless complaints from users.

These four successive setbacks cost HTC considerable market share in the United States, and with rival Samsung emerging as an unstoppable force, most observers figured HTC would have a hard time turning things around.

"In an industry that turns over so quickly, having three straight smartphones that were poorly made, the company was heading toward bankruptcy," says a former HTC executive bluntly.

The company's marketing efforts, which were consistently off target and lacking in rhythm, were also closely scrutinized internally.

The HTC One X's advertising campaign, which centered on a free fall photo shoot, highlighted the phone falling out of a plane, lacked a clear message and appeal, and the product's advertising budget was used up shortly after the campaign started, making it hard to sustain the brand. Chou reluctantly let go one of his closest associates, chief marketing officer John Wang, and hired Benjamin Ho, who was previously vice president of business strategy and marketing at Far EasTone Telecommunications, to replace Wang and take responsibility for the company's worldwide branding and marketing.

"Our competitors were too strong and very resourceful, pouring lots of money into marketing. We haven't done enough on the marketing front," Chou told the Wall Street Journal in an interview published on Jan. 4.

Conquering Fate

According to numbers bandied about within the industry, Samsung spent US$2 billion to market the Galaxy S3 alone, and it nearly won the sponsorship rights to put on the annual New Year's Eve fireworks at one of Taiwan's most iconic landmarks, the Taipei 101 skyscraper.

As for Apple, it is sitting on US$120 billion in cash, more than 40 times the US$3 billion HTC has at its disposal.

"Actually, HTC is still a profitable company. It's just that it has run into the world's two strongest adversaries," says Victor Tsan, the vice president and general director of the Market Intelligence & Consulting Institute (MIC). In fairness, Tsan says, high-tech companies based on the small island of Taiwan are inherently fated to be "hardware companies," because "hardware is the only product that does not have cultural barriers and can be sold globally."

Although Samsung similarly arose from a base on the Korean Peninsula, it produces its own CPUs, AMOLED displays, and other key components. The vertical integration of the smartphone's production has given the giant electronics company a major market advantage.

Apple, with its roots planted in the soil of inclusive and diverse Silicon Valley, has achieved greatness by pursuing its dreams. HTC also believes in the power of dreams, but to break free from the shackles of Taiwan's "hardware company" destiny and create a global brand, it has to first conquer fate and become a globalized company.

The setbacks over the past year have forced Chou to learn how to adjust his steps as he continues to move forward.

"One thing I'd learned from last year is to act fast and be responsive to market changes," Chou told the Wall Street Journal. "We are being more flexible now. We are constantly fine-tuning our sales plans and position in various markets."

The Butterfly – Sign of a New Spring?

HTC employees clearly understand that they are fighting a defensive battle to protect the company's turf that will surely incur painful costs.

The Butterfly's success alone will not be enough to win the war.

Analysts estimate that about 300,000 Butterfly smartphones have been sold, less than 1 percent of the 40 million Galaxy S3s sold by Samsung. One of the big reasons for the massive difference is the re-emergence of HTC's Achilles heel: supply chain management.

Just when it has created some positive buzz in the market, procuring key components has become problematic. Quad-core processors from Qualcomm have already been snapped up by Asustek, and Apple and Samsung have cornered the market for ITO film, which is used in touch panels.

It is not the first time HTC has suffered from a shortage of components.

HTC's One X smartphone actually had a three-month lead on Samsung's Galaxy, but it was hurt by a huge shortage of Qualcomm's Snapdragon quad-core chips produced with 28-nanometer technology. Even worse for HTC, it was left off Qualcomm's high-priority list because its volume requirements fell far short of the Korean giant's needs.

"It was really too bad. If TSMC could have jacked up its capacity a little faster, HTC would not necessarily have lost," says Eddie Chang, the vice president of sales for Qualcomm CDMA Technologies Taiwan, distraught over HTC's misfortune.

Another problem facing HTC is that its success in Japan cannot be easily replicated elsewhere.

"Japan is an extremely closed market controlled by the major telecom vendors. Even Nokia and the iPhone have been unable to break into Japan," says Lee Ji-ren, who teaches business strategy and management at National Taiwan University. In Japan, he explains, Japanese-brand smartphones hold a 70-percent share of the market, meaning that HTC does not have to directly butt heads with Apple and Samsung.

The Challenge: Rekindling the Fight

Outside of Japan, the changing face of the smartphone business poses an enormous challenge to HTC. The business has evolved into a battle of "platforms" and "ecosystems" that requires large economic scales and deep resources to survive.

Samsung currently spends 15 times more on R&D than HTC. Apple's market capitalization is 60 times that of the Taiwanese smartphone maker, and in the decisive area of software services, Apple remains dominant.

Distimo, a mobile app store market research firm, estimates that Apple's App Store has daily revenues of US$15 million, four times that of Google Play.

HTC, which has yet to build its own ecosystem, will have to find its own niche to conquer the Goliaths and break through its inherent limitations.

One opportunity for a breakthrough may be China's middle- and low-end smartphone market, ignored by Apple and underserved by Samsung.

In the third quarter of 2012, HTC sold 2.8 million smartphones in China, giving it a 5.8-percent market share that surpassed Apple's.

"HTC still has opportunities," Qualcomm's Chang asserts.

Unfortunately for HTC, of the two main trends currently guiding the smartphone market, neither favors the company.

The first is the trend toward an "M-shaped" smartphone world, where mid-market offerings are gradually disappearing and retail prices are plummeting. HTC is caught in the middle, pressured from the higher end by Apple and Samsung and undercut at the lower end by Chinese producers Huawei, ZTE and Lenovo.

"The iPhone's average selling price is US$600, and that won't come down. HTC already has strong product development and time-to-market capabilities, and now it has to learn how to segment the market at price points below US$600 and take advantage of a market Apple ignores," NTU's Lee suggests.

The other disconcerting trend for HTC is the growing maturity of the smartphone market, which could reduce smartphones to commodities, as has happened with computers.

Most non-Apple phone vendors now use Google's Android operating system and Qualcomm and MediaTek chipsets, making the heart and mind of every smartphone identical and leaving little room for differentiation. HTC once thrived by getting telecom operators to appreciate its smartphones' technological leadership and advantages, but that edge will be hard to sustain.

"When an industry starts to become mature is when the real battle begins," MIC's Tsan says, ready to watch how the market will sort itself out.

Translated from the Chinese by Luke Sabatier