business

Taiwan Phone Maker Seeks the Spotlight

HTC is no longer content to play a background manufacturing role for foreign technology giants; it's pursuing its own branded-goods expansion plan

In just 10 years, Taiwan's High Tech Computer Corp. has grown from a startup launched by a handful of engineers from Digital Electronics into one of the world's most innovative designers of wireless products. A key partner for Microsoft (MSFT), HTC is the leading producer of smart phones using Windows software and also works with other big-name tech giants such as Intel (INTC), Qualcomm (QCOM), and Yahoo! (YHOO).

A key part of HTC's strategy has been its willingness to stay in the background and let its customers command the spotlight. The Taiwanese company designs and manufacturers gadgets for almost all of the big cellular operators—its client list includes Vodafone (VOD), Cingular, and Sprint (S), among many others—but few consumers know about HTC because it typically doesn't put its own brand name on the smart phones or wireless PDAs it makes.

That's now changing. As Taiwanese rivals enter the business and competition heats up, HTC is ready for its close-up. No longer content to be the anonymous manufacturer for others, HTC on May 8 announced it was paying $14.5 million to acquire assets of Dopod International, a Taiwanese company owned in part by Dopod's Chairwoman, Cher Wang, that sells its own brand of smart phones and wireless PDAs in Asia.

Settling for Spin Off

The acquisition of Dopod (the name is pronounced doo-pod) is part of a bigger strategy to build up HTC as a consumer brand. The company will be phasing out the Dopod brand in Asia and instead will be selling HTC phones and PDAs in the region. HTC will also be trying to sell its own brand in the U.S. and other Western markets. "In the past, we had limited resources, so we were very focused on technology," explains Peter Chou, HTC's chief executive officer. Looking forward, though, "if you really want to capture the value of innovation, you must have a brand identity."

HTC is pushing to build that identity even though other Taiwanese companies have struggled to make the transition from behind-the-scenes manufacturer to consumer-brand player. Computer maker Acer struggled for years trying to have it both ways—selling its own brand while also operating a contract manufacturing business—before spinning off its manufacturing arm as a separate company, Wistron, in 2002.

Another Acer spin-off, cellular-phone and consumer-electronics maker BenQ, is the best example of the challenge that HTC now faces. BenQ enjoyed early success as an outsourcing designer and manufacturer of handsets for companies such as Motorola (MOT). However, BenQ has stumbled following its attempt to shift more to a name-brand strategy. To accelerate its growth, the company acquired the cellular division of Siemens (SI) in 2005.

This Time It's Different

But the brand didn't win acceptance among consumers, and BenQ liquidated the German business last year. With BenQ now a rival selling its own branded phones in Western markets, former outsourcing customers moved business to other manufacturers. The company has suffered $1 billion in losses since the Siemens acquisition. And Taiwanese regulators have been investigating alleged insider trading involving top executives. On May 8, investigators in Taiwan announced indictments of BenQ's CEO, president, and chief financial officer, as well as two other officials. BenQ denies any wrongdoing by its executives.

Despite such difficulties, HTC's Chou says that his company will succeed where other Taiwanese have failed. "We're different," he declares. Other companies from Taiwan didn't succeed, he argues, because they sold "me-too" products that weren't original enough. "All our products are innovative," he says. Besides, adds Chou, the company doesn't have much choice.

Focusing on manufacturing for others has worked for the first phase of the company's life, but as other companies become more adept at the type of technology that HTC helped to develop, profit margins will shrink unless HTC makes a change.

Investors aren't convinced. HTC, once a high-flying stock, has under performed the Taiwanese market. The stock price is down 41% in the past 12 months, compared to a 10.5% rise for the Taiwanese stock index. Chou admits that the new strategy won't be easy. But, he adds, "if you're afraid of failure and don't try, you will never succeed. We believe we have the chance."

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