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HTC Takes on Apple

From High-Tech Force to Fashion Brand


From High-Tech Force to Fashion Brand


Geek engineers meet hip hop stars – the unlikely pairing is helping Taiwanese smartphone maker HTC transform into a lifestyle brand, in a bid to counter U.S. high-tech giant Apple's dominance of mobile software applications.



From High-Tech Force to Fashion Brand

By Hsiao-wen Wang
From CommonWealth Magazine (vol. 479 )

When Peter Chou, the CEO of HTC, recently held a press conference, two Americans were at his side, one white, one black.

You may not recognize the white man wearing a bright red shiny leather jacket and a black baseball cap, but you have definitely heard the names of the records he has produced and the pop stars he has discovered: John Lennon, U2 and Lady Gaga, among others. He is top music producer Jimmy Iovine.

The other person, clad in a black T-shirt and black jeans and sporting a cool smile, is the father of American hip hop, Dr. Dre, who discovered and cultivated such hip hop stars as Eminem and 50 Cent.

The diligent, overworking, nerdy engineers of HTC and the good-timing, grooving stars of hip hop seem to come from two worlds that don't mix. But HTC has struck a deal that brings both worlds together.

On Aug. 11, HTC bought a US$300 million stake in Beats Electronics, a top-end head- and earphone maker jointly founded by Iovine and Dr. Dre. The partnership aims to pave the road for the launch of HTC's mobile music service HTC Listen this fall. By creating an attractive, fashionable brand image, HTC hopes to woo youngsters round the world.

But this is only the first step in HTC's long-term campaign to take a bite out of Apple.

"They need to make efforts to transform from a high-tech brand into a lifestyle brand," notes RBS Securities senior analyst for the Asia-Pacific Wang Wanli. Consumers still buy Samsung and HTC smartphones for their technical features, whereas they buy Apple iPhones because they are must-haves for the hip and trendy. It's for that reason that Apple's profit margin is far higher than HTC's.

HTC is aware that it can no longer rely on the competitive strengths it built over the past decade if it wants to fence off with Apple.

Google Buys Motorola, Short-term Benefit for HTC

The news about Google's acquisition of Motorola Mobility again demonstrates how volatile the telecommunications industry is.

For HTC's long-term prospects the Google-Motorola merger amounts to a rainstorm on a distant mountain.

"For HTC the merger brings short-term benefits and long-term disadvantages," believes J.P. Morgan analyst Alwin Kwok.

HTC is embroiled in a patent dispute with Apple. With big brother Google – a backer of the Android operating system – at its side, HTC can fight back against Apple with more confidence now.

Google's inhouse Android core development team counts less than 100 people, or just 0.5 percent of its global workforce, yet with this US$12.5 billion acquisition, the Internet giant has demonstrated its resolve to defend the Android system.

Yet HTC faces long-term disadvantages, as speculation is rife within the industry that Google will hand the latest version of the Android system to Motorola for the development of new products. After all, Motorola is the company that released the world's first mobile phone 28 years ago and has managed to stay at the top of the mobile telephony game for almost an entire decade. Should Google opt to support Motorola, then Samsung and HTC, which produce half of all Android-based smartphones, will be left out in the cold.

Ultimately, Google does not want to be saddled with unnecessary baggage and will not allow Motorola, which was still in the red in the second quarter of this year, to drag down Google's own profits.

"It would be best if they could sell off Motorola's handset hardware. That would make everyone happy," says Kwok, naming China's Lenovo and Huawei as potential purchasers.

Against this backdrop and faced with a rapidly changing industry environment, HTC management prefers to keep a cool head instead of panicking day in and day out. Consequently, the company has started to build long-term core competencies – soft power.

Shifting Allegiances

"There's no difference! HTC's first top customer was Microsoft. The second is Google. Neither has been particularly good to us," laments one HTC executive in private. "After HTC was successful with its own brand smartphones, Microsoft looked for a dozen other companies, including Quanta Computer form Taiwan and LG and Samsung from South Korea, telling them ‘Look how much money HTC is making' to encourage them to make Windows-based handsets."

With Google it is the same old game. While orders for Google's first Android phone last year were given to HTC, the next generation of phones was manufactured by Samsung. This year orders for tablet PCs with the latest Android OS version were placed with Motorola.

The international high tech giants are playing a game of shifting allegiances. Having served both giants, HTC knows from experience what it is talking about. "We still need to rely on ourselves. The HTC team is truly running like crazy," the HTC executive reveals.

In the past HTC used its R&D speed and close relations to telecommunications companies to build a stable niche market. While Nokia spends 15 months to develop a new handset model, HTC takes only nine.

HTC, which pursues a strategy of swamping the market with new models, will have to release another dozen smartphones before the end of the year. The rationale is being the first to market, since given a handset life cycle of just nine months, manufacturers make the highest profits in the first three months.

Moreover, aside from strong competitor Apple, HTC's closeness to telecommunications providers is unrivaled. "HTC is dispatching engineers around the globe to fix bugs," notes Lu Chun-kuan, an analyst at market research firm Gartner Taiwan. If AT&T in the United States has a telephone out of commission, HTC is ready to spend money to fly an engineer over to debug the device and take back the changed mobile phone for instant production.

"These contacts have been cultivated for five, ten years. Therefore, HTC completely understands each telecommunication company's network situation and its testing environment," Lu asserts. "This is HTC's biggest asset. Not a single company in Taiwan can catch up to them."

Splashing Out NT$23 Billion on Soft Power

HTC, however, has already joined the ranks of international competitors. Its rivals are no longer Taiwanese high-tech companies, but the global champions of the industry, Apple and Samsung. HTC's own output has jumped fivefold from 10 million phones three years ago to an estimated 50 million this year. This has inevitably altered the company's management, strategy and brand positioning.

With a look at HTC's investments this year (See Table), it becomes quite obvious that HTC has already spent about NT$23 billion (US$800 million), more than its net profits in the second quarter of this year, to build its own brand and patent strength.

HTC is deeply aware that it needs to set its services apart from its competitors to retain fickle consumers.

And when it comes to soft power, HTC is sticking to its "fast, fast, fast" style. Since the company didn't have time to develop its own game platform, HTC recently bought up multimedia delivery platform specialist Saffron Digital from Britain, appointing its founder and CEO Shashi Fernando as chief content officer.

HTC also intends to acquire or invest in more content providers, including small app maker start-ups in Taiwan, to enrich the full range of content services it plans to unveil – HTC Listen, HTC Play, HTC Watch, and HTC Read.

Translated from the Chinese by Susanne Ganz