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Challenging Apple with a Tournament of Ideas


Challenging Apple with a Tournament of Ideas


Taiwan's smartphone powerhouse HTC now stands as the surest check on Apple's dominance. With its orders expanding by leaps and bounds, can HTC keep focused squarely on innovation and divine what the consumer demands?



Challenging Apple with a Tournament of Ideas

By Ching-Hsuan Huang
From CommonWealth Magazine (vol. 472 )

From the introduction of the first mobile phone handset running the Windows operating system to the timely provision of key products to telecom firms during the developmental leap from 2G to 2.5G mobile telecom technology, from the subsequent inception of its unique operational model of intimate collaboration with telecom firms to the release of the world's first Android platform handset, HTC's pent-up capabilities have burst forth in spectacular fashion since Apple Inc. joined the fray in stirring up the global smartphone market.

HTC's shipments of smartphones last year doubled to 25 million units, and the company now commands a 28.9-percent share of the Android segment of the market, tops in the world.

Operating revenue for last year soared to NT$278.7 billion, a 93-percent increase over the previous year, while earnings per share (EPS) reached NT$48, eclipsing all rivals in the Greater China manufacturing sector.

In an interview with American media in early May, outgoing Acer Inc. CEO Gianfranco Lanci, who resigned at the end of April, said Acer must boost investment in software, smartphones, tablet PCs and touch technologies, but that the company's core problems arose from its desire to retain software and hardware integration tasks in Taiwan.

"This was not possible," Lanci said. "We needed to go outside of Taiwan."

Lanci's comments not only raised hackles with Taiwan's technology sector, but venture capitalist Jamie Lin, founder and partner at appWorks Ventures, also took to his blog to fire back a salvo in response to Mr. Lanci.

"Taiwan is not lacking [talent]. HTC is the prime example of that," Lin wrote.

The fact is, however, that HTC has scooped up virtually all of Taiwan's smartphone engineering talent. Over the past several years, HTC has quietly gone about establishing a software development team numbering more than 2,000, more than 300 of whom are tasked with brainstorming on cutting-edge technologies and applications unrelated to ongoing internal HTC projects, including the creative R&D staff at the company's "Magic Lab."

"Other companies also take these things into consideration, but none have ever really allocated the manpower to it because of concerns over costs and the fear of bleeding cash," says one HTC engineer who previously worked for another mobile phone handset maker.

In the past, their unique cooperative arrangement with Microsoft and telecom providers allowed HTC to enjoy a lofty 30-percent profit margin, and once the company obtained that first pot of gold, it began to put increasing distance between itself and other, more cost-oriented, Taiwanese competitors.

Planned 30% Boost to R&D Team

According to a forecast by international technology research and consulting agency Gartner Inc., shipments of smartphones will this year grow another 60 percent to 467 million units. In the past, HTC was leading the market and creating demand, but now that the major global players have joined earnestly in the chase, HTC has to move even faster.

"[We're] really shorthanded, and the project teams are feeling worked to death right now," says one HTC engineer.

As a result, HTC will soon launch a high-profile recruitment drive for more than 1,000 R&D personnel, the company's most aggressive recruitment effort since its founding, which will expand its R&D staff by 30 percent.

And it's not just R&D personnel. Over the past year HTC has continued to poach executive managerial talent from abroad to meet the demands of the continually expanding scope of its operations. Executives brought on board during that period include new Chief Operating Officer Matthew Costello, Chief Strategy Officer Ron Louks and Chief Product Officer Kouji Kodera, all of whom are former top executives at Sony Ericsson.

Day of Innovation

As one top HTC exec puts it, where once the company had experience in handling 10 million handsets, last year it shipped 25 million, and this year shipments can be expected to increase several times over. Internally, no one had the management experience on such a massive scale, whether in terms of prepping raw materials or inventory management.

"With just last year's numbers alone, management issues began to arise," he says, "we had orders that could not be shipped. We were short of stock. It was a real mess."

But things have changed since Costello, a former Sony Ericsson exec, took over management of all operations, including manufacturing, procurement and supply chain management.

"Deliveries are going smoothly now," says the executive.

In the wake of the calamitous earthquake and tsunami in Japan, more than a few industry analysts found themselves amazed at how little disruption there seemed to have been in HTC's supply chain.

Much the same could be said about the hot topic of the month of May, when HTC finally launched its first tablet, the Flyer, two months behind the release of the iPad2. At the press conference formally announcing the launch, staffers found themselves continually bringing in more and more chairs to accommodate the crush of media and distributor representatives. Even top execs from Chunghwa Telecom, Taiwan Mobile and Far Eastone were on hand with ringside seats.

Where the island's big three telecom providers formerly emphasized their status as "exclusive provider" of one or another model handset, this time their strategy was the same as their procurement of the Apple iPhone: each would simultaneously sell the Flyer.

"Operators can ill-afford to lack a check and balance against Apple, and they see HTC as having sufficient clout to be the best check and balance at this stage," says Gartner analyst Lu Chun-kuan.

That ability to be the best check and balance is largely due to HTC CEO Peter Chou, a figure every bit as hard to please and obsessed with the end user experience as Apple's Steve Jobs.

Once a year HTC holds a "day of innovation," where each of the company's departments, including the design center at One & Co., a San Francisco-based subsidiary HTC acquired two years ago, go all out in demonstrating their newly developed technologies for the CEO. No matter how enthusiastically the engineers make their presentations, Chou is likely to respond with a steely: "I just need you to tell me what the consumers' impressions will be or what sort of different user experience they will have once they use it."

The new technologies presented at this tournament of ideas each have a shot at becoming one more in the repertoire of end-user experiences that shape HTC's image.

During the Flyer launch gathering, application functionality and user environment were constantly emphasized – for example, the unique phased audio recording technology whereby the touch screen interface, write function and on-board audio recording capability combine to automatically playback an audio version of written text at the light touch of a character on the notebook screen.

Even with the unveiling of the world's first 4G smartphone handset early this year, HTC is still not discussing specifications for their CPU or operating system.

"His language is a direct appeal to the consumer," says Arthur Hsieh, executive vice president with UBS Securities. "He fears that one day smartphones will become a staple commodity, so he wants to downplay these specifications and not rely on others coming and sticking their labels on his products. Instead, he insists on relying on HTC, these three letters, to sell his goods."

In just five short years, HTC's brand development trajectory has put the company in the position of an international brand capable of challenging Apple's supremacy.

"I think our company has really been quite fortunate, but part of that good fortune is because we like to be on the front lines, where the opportunities are naturally greater," HTC boss Chou says.

Perhaps no one can foresee what HTC's destiny will be, but its pursuit of innovation and its desire to dream boldly can certainly be replicated indefinitely.

Translated from the Chinese by Brian Kennedy