Reality check

The past few years have not been kind to Taiwanese smartphone manufacturer HTC. After creating the world’s first Android smartphone in 2002 the company prospered for almost a decade, building up a global market share of 10.7% by 2011. Since then it has come crashing back down to earth.

According to Gartner data, HTC had a market share of less than 2% during the second quarter of 2015 after being squeezed by Apple and Samsung at the high end of the market (with respective market shares of 14% and 21.7%), as well as by Chinese vendors such as Xiaomi and Huawei at the lower end (5.3% and 8.9%).

The company’s recent second quarter results did not make happy reading. Revenues dropped 49% year-on-year to NT$33 billion ($1.02 billion), resulting in an operating loss of NT$5.1 billion. And the third quarter is shaping up to be more depressing, with sales down an even steeper 53% year-on-year in August to NT$6.89 billion.

Unsurprisingly, HTC’s share price has taken a pounding. Between February and late August, it lost almost 75% of its market value and was dropped from the Taiwan TWSE 50 index. At one point last month HTC was only worth NT$33 billion, which was less than its cash pile at NT$47 billion, an indication that investors believed its brand to be worthless.

To be fair, a lot of companies were oversold during the recent stock market rout, but analysts have warned that HTC’s cash reserve will be gone in three years unless the company does something drastic.

In March HTC responded by replacing CEO and co-founder Peter Chou with Cher Wang, also a co-founder and a previous chairwoman. She has since announced a restructuring, which involves 2,500 job losses (about 15% of the total) and a 35% reduction in operating costs. In future, the company plans to be more focused on profitability rather than building scale. The new goal: to create a niche at the very top end of the smartphone sector, while moving aggressively into new technologies such as virtual reality.

So far this plan has received a thumbs-down from analysts. The financial pruning may stabilise the share price, they say, but HTC is facing too many structural impediments and it will continue to get squeezed in an increasingly competitive and mature smartphone market.

Berenberg, an investment advisor, has always taken a particularly negative stance on HTC on the basis that the horizontal structure of the Android smartphone industry makes it very difficult for hardware manufacturers like HTC to differentiate themselves from their competition. Apple, by contrast, controls its own ecosystem (i.e. the operating system, the App Store and iCloud).

And yet, while the headlines and analysts reports remain resolutely negative, the stock price has jumped almost 60% over the past three weeks. Is this a dead cat bounce in response to the job cuts, or signs that HTC is on the turn?

At the end of September, HTC is scheduled to launch its new smartphone, the HTC A9. It is rumoured to be one of the most powerful of its kind with a 10-core Hello X20 processor and 4GB RAM.

HTC has also been investing heavily in virtual reality as the game industry’s new technological frontier. Naysayers highlight that all the big tech companies are doing the same and say it will take years before the technology goes mainstream. Facebook, for one, paid $2 billion for virtual reality developer Oculus Rift last year.

However, tech websites are pretty unanimous in their view that HTC’s virtual reality headset, or HTC Vive, is superior to the ones being developed by Oculus Rift and Sony via Project Morpheus.

All three are scheduled to go on general sale early next year. But whereas Oculus Rift and Project Morpheus are both armchair based, HTC Vive enables users to walk around, immersing themselves in a virtual world. To make sure users don’t stumble into a very real piece of furniture, the headset is also equipped with sensors.

HTC has developed the product in a joint venture with Valve, one of the world’s leading gaming companies, and is also developing content with Google, Lionsgate and HBO.

The company’s weak smartphone sales reduced it from hero to zero. Can the new Vive brand do the opposite and help HTC to revitalise?

© ChinTell Ltd. All rights reserved.

Sponsored by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.