The talk of China

Chinese demand for smartphones has HTC quadrupling shipments

The talk of China

Very handy: an HTC smartphone

In most cases, being sued is a nasty business. But for HTC, legal action may not be all bad news. It’s recognition for the Taiwanese smartphone maker that it is being viewed as a serious player in the industry – and, amazingly, only four years after the brand was launched.

In early March, Apple filed two lawsuits in the US against HTC, claiming infringement of 20 Apple patents. The Cupertino-based company alleges that HTC “manufactured, imported, and sold… without license, many technologies developed by Apple and protected by patent issued to and owned by Apple and its fully-owned subsidiaries.”

Litigation of this type should regarded as a rite of passage, say some in the industry. “This is what happens in Silicon Valley,“ reckons Gary Chia, head of Greater China research at the Yuanta Securities in Taipei. “When you’re big enough to become a threat, I’ll slap a suit on you sometimes just to slow you down.”

Perhaps there is some truth to that. One in six smartphones sold in the US are made by HTC (short for High Tech Computer) and the company is also releasing new smartphones with technology that “matches the iPhone in terms of user interface and smoothness of touch-control functionality,” says Vincent Liao, an analyst at KGI Securities.

HTC has denied Apple’s accusations and countersued the US firm in May.

HTC’s rising clout in the telecoms sector has surprised industry insiders. The firm previously toiled in relative obscurity as an outsourcing partner for Western brands. But four years ago, it changed tack and started developing its own-brand handsets.

The move was not without risks, not least that existing clients would choose to sever ties with an emerging rival. The company also had to shift from a corporate culture that focused on execution to one that promoted innovation.

But action was essential. “We needed to establish new competency before we got into trouble,” is how Peter Chou, the chief executive of HTC, puts it.

In the long run, Chou says, Taiwanese electronics firms which concentrate on lower-margin contract manufacturing and assembly will not be able to compete with their Chinese rivals. Profit margins were already shrinking, so Chou decided that HTC needed to build its own brand to survive.

The turnaround on the new strategy has been a rapid one. In the fourth quarter of 2009, 95% of HTC’s revenue came from phones sold under its own brands.

According to research firm IDC, HTC ranks behind Nokia, BlackBerry maker Research in Motion and Apple in worldwide smartphone shipments. But some of its new phones, like the recently launched Evo 4G and Droid Incredible, are selling out. As it turns out, it’s not only the iPhone 4G that requires that names go on waiting lists.

HTC is now turning to sales in China itself, where it does not have much of a presence yet. Chou said the company plans to introduce six models with its partner, China Mobile, this year. It will also invest in additional manufacturing capacity outside of its current production in Shanghai and Suzhou. Though HTC does not disclose actual sales in China, it shipped 1.6 million handsets there last year. It plans to almost quadruple that this year.

Good news for China Mobile, no doubt. The wireless operator has been trying to lure subscribers to its 3G service with handsets made by Dell and Lenovo. But HTC’s growing influence is likely to give the wireless operator more ammunition in its domestic struggle with China Unicom, which has partnered with Apple to distribute the iPhone.

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