Meet the Latest Tech All-Star from Taiwan

HTC is growing fast, thanks to PDAs and smart phones

For years, big U.S. tech companies such as Dell Computer (DELL ), Motorola (MOT ), and Hewlett-Packard (HPQ ) have relied on nimble Taiwanese manufacturers to make PCs, cell phones, and chips for them. This outsourcing has turned the likes of Quanta Computer, Compal Electronics, and Taiwan Semiconductor Manufacturing (TSM ) into billion-dollar players in the global electronics industry. Now, it may be time to add a new name to this all-star list: High Tech Computer Corp., based near Taipei. "HTC knocks the leather off the ball," raves Brian Burns, vice-president of Asia Pacific Ventures, a venture-capital and consulting firm in Palo Alto, Calif.

Part of HTC's success can be attributed to heavyweight friends. HTC produces the successful iPAQ handheld PC for Hewlett-Packard. Taiwanese chip-design house Via Technologies is the biggest shareholder. HTC's chairwoman is Cher Wang, daughter of one of Taiwan's richest men, petrochemicals billionaire Y.C. Wang. Cellular-technology giant Qualcomm (QCOM ) is an investor, and Texas Instruments and Intel help HTC design new products.

Oh -- and then there's Microsoft Corp. (MSFT ) Two years ago, when HTC was showing off its first "smart phone" -- a cellular handset that can double as a personal digital assistant -- the little-known Taiwanese manufacturer got a boost when Microsoft Chief Executive Steven A. Ballmer demonstrated the gizmo at a big trade show in Orlando. After that high-profile debut, HTC worked with the U.S. software giant on a Windows-based handset that would go far beyond simple voice calls and allow users to view photos, listen to music, watch videos, manage appointments, and more.

Those devices are now hitting the streets. Last year, British cellular carrier Orange started selling HTC's $300 SPV phone, one of the first to use Microsoft's new Smartphone 2002 software. This year, German operator T-Mobile, Smart Communications of the Philippines, and U.S. carrier AT&T Wireless (AWE ) all plan to introduce HTC-made phones. That's helping HTC reduce its dangerous dependence on sales of the iPAQ, which accounted for 85% of HTC's revenues in 2001. This year, brokerage Morgan Stanley estimates the iPAQ will represent just a third of HTC's sales.

All the new business is firing up HTC's results. Revenues last year grew by 32%, to $592 million, while profits jumped by 45%, to $40 million, according to the company's unaudited results. For 2003, Morgan Stanley expects sales to grow by 27% and earnings to soar by 83%. HTC's share price has shot up by 50% since September. "No one expected this little Taiwanese company to come along so fast," says Julian Snelder, a Morgan Stanley banker.

So is this Taiwan's answer to Nokia (NOK )? Well, not yet. HTC's bright light is attracting some unwanted attention. On the Internet, message boards are hopping with comments from British consumers who have purchased the SPV from Orange. Some are rapturous, but others gripe about bugs and slow performance. On Feb. 24, the companies released new software that's intended to address the problems. Perhaps even more worrisome for HTC, British phonemaker Sendo has sued Microsoft, claiming that the U.S. giant gave Sendo's intellectual property to HTC. Microsoft denies the claim. It's possible that HTC will be the next target for Sendo's lawyers, but neither company would comment.

HTC faces growing competition at home, too. Computer maker Wistron, a subsidiary of Acer, is branching out from the slumping PC business last year with contracts to make handhelds for Dell and a smart phone with Microsoft and Intel (INTC ). Compal Electronics in late December unveiled its own Microsoft-powered phone. And on Feb. 12, Symbian Ltd., the British rival to Microsoft, announced it would help Taipei-based BenQ Corp. launch a similar device this year.

HTC CEO H.T. Cho says he won't get burned by rivals. He plans to trim costs by moving some production to China as early as next year. More important, he'll concentrate on "slimmer and lighter and more attractive" machines with wireless links. He says Taiwanese newcomers to the handheld industry are more accustomed to operating in the high-volume, low-innovation PC business. Cho figures these would-be rivals aren't up to the complicated work of producing wireless devices. "We are only working on PDAs and smart phones, and the whole company's engineering and manufacturing is focused on this area," Cho says. If Cho's confidence is justified, then the world will be hearing a lot more from this Taiwan hotshot.

By Bruce Einhorn in Taoyuan, Taiwan, with Andy Reinhardt in Paris

— With assistance by Andy Reinhardt

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