Online Extra: HTC: Stepping Out of iPhone's Shadow?

A standby in the Taiwanese electronics industry, High Tech Computer struggles to stay ahead of the competition, namely Apple

By Bruce Einhorn

The BusinessWeek 50

In the decade since its birth, High Tech Computer has become the old faithful of the Taiwanese electronics industry. Other companies experience their ups and downs, but HTC—one of the world's most advanced designers and manufacturers of smartphones—has always just charged ahead, each month reporting bigger and bigger sales. That consistent performance helped HTC rise to No. 2 in this year's Asia BusinessWeek 50 rankings. The good times of ever-expanding sales and soaring stock prices, though, now seem to be ending for HTC. The company's Taipei-listed shares have lost a third of their value in the past year amid investor concerns about increasing competition in HTC's key market—phones and PDAs that use the Microsoft (MSFT ) Windows operating system. HTC is the world's biggest supplier of such devices, which have many more computer-like functions than ordinary cell phones or handhelds.

But other Taiwanese companies are now acquiring the knack of making these complicated devices and are therefore becoming more aggressive. And even more worrisome, Korean powerhouse Samsung Electronics is moving into the segment, too, with plans for three different smartphones operating on Windows.

Further Threats

  And don't forget about the threat of competition from another company, a little outfit from California named Apple (AAPL ). Ever since Chief Executive Steve Jobs introduced the iPhone early this year, Apple has been the talk of the telecom industry. The iPhone's cool design and advanced technology has made the gadget a huge hit among U.S. consumers, and Apple is now looking to expand into European markets that up until now have been strong for HTC. Suddenly, after years spent winning kudos for its innovative designs, HTC is at risk of being eclipsed by a telecom newcomer.

Some analysts, therefore, are skeptical about HTC's prospects in the future. "We see little chance of HTC expanding its share" from the current 65%, wrote Skye Chen, a BNP Paribas analyst in Taipei, in an August research report. "Furthermore, price competition is also expected from peers such as Samsung."

Yet HTC Chief Executive Peter Chou says his company has what it takes to stand up to its challengers, especially the one from America. "The iPhone definitely has the most hype and the most talk," he says. While "we are not as famous as Apple," he adds, all the attention that the iPhone has generated "is a hugely positive impact to HTC."

Touch Down

  And why is that? Chou says the popularity of the iPhone's touch screen will lead people to pay more attention to the same sort of innovation that HTC launched in its most high-end model, the HTC Touch. The Taiwanese company launched the Touch in June, around the same time that Apple began shipping the iPhone, and Chou says the results have been encouraging. The new screen, which eliminates the need for a stylus, "makes the whole navigation experience so much simpler, so much more intuitive," he says.

While the technology is similar, Chou believes that HTC ultimately will have an edge in its fight against the iPhone because of its experience working with telecom operators over the past 10 years. Apple may call its device a phone but Chou doesn't think that, as a handset, it's up to HTC standards. "The iPhone design is very beautiful," he concedes. "However, the phone design is quite weak; it's very, very basic." HTC, in contrast, understands the different needs of cellular operators and so can tweak its handsets as necessary. That, claims Chou, gives HTC "a huge advantage."

Up to the Task?

  That may be, but investors are also worried about Chou's plans to build up HTC's own brand rather than staying in the background and letting the telecom operators carry the brand name. As part of that new push, HTC in May announced that it was buying the non-China operations of Dopod International , which had been selling phones and PDAs under its Dopod brand in Asia. The plan is for HTC to substitute its own name for Dopod in Asian markets, and also build up HTC-brand sales (BusinessWeek, 5/10/07) in Europe and North America.

Given the difficulty that many Taiwanese companies have had in trying to build up their own brands in the U.S., Chou admits that investors have good reason to ask whether HTC is up to the task. "These are fair concerns," he says. "But I have to say that our brand development is going better than I expected." HTC is making some headway in developing more business in the U.S., where it has traditionally been weakest. Last month, the company scored a big win by signing a partnership with Sprint Nextel (S ) to provide the carrier with the HTC Touch and its CDMA cousin, HTC Vogue. On Sept. 5, HTC announced a new partnership with Qualcomm (QCOM )—HTC plans to put the San Diego chipmaker's semiconductors in about a dozen new models. HTC is also teaming up with Harris Corp. to provide smart devices to workers who will be taking part in the 2010 U.S. census.

Einhorn is a correspondent in BusinessWeek's Hong Kong bureau

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