HTC Chief Chou’s Last Chance At Turnaround Rides On One Handset

HTC Corp. (2498) President Peter Chou called his latest smartphone One. As sales slide and market share shrinks, that name may represent the number of chances he has left to turn the company around.

Product delays, marketing failures and management turnover at the Taoyuan, Taiwan-based company pushed net income down 98 percent last quarter to the lowest on record. Once the top- selling smartphone vendor in the U.S., HTC now lags Samsung Electronics Co. and Apple Inc. (AAPL), which ship 10 times as many handsets globally combined.

“If HTC fails one more time, then they’ll be under pressure to replace the CEO,” said Birdy Lu, an analyst at Daiwa Securities Group in Taipei who cites the appeal of the new handset as reason for his outperform rating. “HTC One is their last chance to come back after the past two years of declines.”

HTC, the first maker of phones using software from Microsoft Corp. (MSFT) and Google Inc., last month reported profit of NT$85 million ($2.9 million) as its global smartphone market share fell to less than 4.2 percent from 10.3 percent in the third quarter of 2011, according to IDC data. During that period, Samsung and Apple shipments more than doubled, helping trigger a 40 percent drop in HTC’s stock last year after a 42 percent decline in 2011, according to data compiled by Bloomberg.

Shipment Delays

Once a contract manufacturer before promoting its own brand in 2006, HTC started sliding at the end of 2011, and at least six senior executives have left in the past two years.

HTC said it “dropped the ball” on products, pointing to weaknesses in design and engineering. The unveiling of models One X, S and V in February 2012 was supposed to herald a reversal of fortune, yet a lag of as many as six months before shipment, and complaints about connection problems and overheating, saw sales miss analyst estimates.

Chou told employees in an August e-mail about a lack of “strategic direction or sense of urgency,” according to a copy obtained by Bloomberg News.

Sitting at a conference table in HTC’s Taipei office for his first interview since last month’s profit announcement, Chou’s strongest reaction to the complaints put to him came from the suggestion that he stifles innovation.

“If we don’t let people bring out their ideas, then how could we come up with a breakthrough product like this?” Chou, 56, said, pointing to a metallic-silver HTC One on the table. “Maybe some guys who aren’t happy will make these points.”

Not Consistent’

Chou said the company was “not consistent” in delivering products on time and maintained it has addressed the weaknesses, with delays between release and shipment cut to two months, from six. He declined to comment on complaints about management or suggestions he will depart.

Calvin Huang, director of Sapphire Capital Partners in Taipei, sees the HTC One and its success as a distraction from endemic problems at the company which remain to be solved.

“I don’t think there’s a lot to justify people buying into HTC right now,” said Huang, who was short on the stock until last month when his fund closed its position. “The fundamental problem of Chou and his management aren’t changed by HTC One being a good product.”

Nokia Oyj (NOK1V) posted six quarters of revenue declines including its first loss in at least 13 years during the two years prior to CEO Olli-Pekka Kallasvuo being replaced in 2010. Research in Motion Ltd. had two quarters of falling sales, after a year in which market value shrunk 75 percent, before co-CEOs Mike Lazaridis and Jim Balsillie left the BlackBerry maker in January last year.

Consumer Shift

Chou pointed to a consumer shift toward “franchise brands” from the model-by-model strategy HTC employed, as the major reason for his company’s recent slide.

“The market changed, and it was a little unexpected,” Chou said. Now, the company will adapt by boosting its marketing, he said.

HTC’s share of global smartphone shipments has declined for six quarters, yet Chou said the company he co-founded in 1997 hasn’t peaked and is just starting to build its brand.

Its short-lived reign at the top of the U.S. market, when it had 24 percent in the third quarter of 2011, was the product of good fortune and a strong relationship with wireless operators, he said.

“Sometimes we do well in terms of sales and volume, but we knew that it doesn’t mean we have built a strong consumer brand, yet,” he said.

New Approach

As the company’s first franchise product HTC One is different, Chou said, because it follows the Apple and Samsung strategy of releasing a single product to multiple operators simultaneously in the same market, reducing reliance on an individual carrier and boosting availability.

Made with a thin aluminum case, HTC One includes an UltraPixel camera, full high-definition screen and front-facing speakers. The device was described by New York Times reviewer David Pogue as “gorgeous” and by Bloomberg’s Rich Jaroslovsky as “state of the art.”

“This is a watershed moment for HTC,” said Chou, who became president in 2004 and chief executive officer in 2005. “This is really the first time we are able to enter into that area of being a top global consumer brand.”

HTC One will prove critics wrong and marks a turnaround for the company after learning from the past two years of missteps, he said.

Analyst Upgrades

“People say when a company has a failure, they will never come back, but the reason they never come back is because they react so slow,” Chou said. “At HTC, we want to be a company that acts quickly before we have a big problem.”

Analysts also see an improvement, with at least four brokerages upgrading the stock last month. Goldman Sachs analyst Robert Yen wrote that “after two years of product errors and execution issues, we see internal and external changes that should pull HTC out of its trough.”

For Chou, who’s borne the brunt of criticism for HTC’s performance, the troubles of the past two years are part of a longer journey of transforming the company from a manufacturer to global brand.

“We are the kind of company that has very strong resilience,” Chou said. “We are not that easy to give up.”