Short Cases / Discussion Memo - Business Strategy
9/9/13 A Long Fall for Taiwan Smartphone Maker - NYTimes.com www.nytimes.com/2013/09/09/technology/a-long-fall-for-taiwan-smartphone-maker.html?pagewanted=2&ref=technology&pagewanted=print 1/5 September 8, 2013 A L o n g F a l l f o r T a i w a n S m a r t p h o n e M a k e r By CAIN NUNNS TA IPEI — Just tw o years ago, H TC, the Taipei-based m obile devices m aker, w as riding the crest of exploding global prem ium sm artphone sales. It w as racking up aw ards, a record stock price and a string of acquisitions, and w as busy poaching rival executives for a continued assault on the dom inance of A pple, Sam sung and R esearch In M otion. Those days are little m ore than a m em ory. Its stock price has plum m eted m ore than 88 percent since its A pril 2011 high. Profits for the second quarter, w hich ended June 30, w ere dow n 83 percent. The com pany w arned that the third quarter looked bleaker still. It gets w orse. Several of those poached executives, brought onboard to help increase shipm ents and w ork on acquisitions have w alked aw ay, and there is a grow ing chorus for the ouster of the em battled chief executive, Peter Chou, as reports filter out of Taipei about an autocratic leader w ho is out of touch w ith the industry. There w ere also the arrest last w eek of five departing executives accused of stealing com pany secrets and padding expense accounts. H TC had filed a com plaint against the executives, w ho included the vice president of product design, Thom as Chien, and the research and developm ent director W u Chien-hung. “W e are cleaning up inventory and at the sam e tim e rebuilding our brand,” said the com pany’s chief m arketing officer, Ben H o. “If w e don’t, there really is no tom orrow for us. The shock cam e last year. This year w e have tried to repent. A re w e forgiven? N o, the m arkets w ill punish you if you don’t repent and recover fast enough.” Form er em ployees say that m arketing, sales and distribution problem s, along w ith spiraling inventory costs, have killed m om entum and are dragging H TC into unprofitability. In the quick-m oving m obile devices industry, a lack of m om entum is tantam ount to a death sentence. Just ask M otorola or BlackBerry. H TC set up shop as a contract electronics m aker in 1999. Founded by Cher W ang, daughter of M ORE IN TECHNOLOGY G o o g le in F ig h t O v e r C o n te n t T h a t A p p e a rs in S e a rc h R e su lts R ead M ore » 9/9/13 A Long Fall for Taiwan Smartphone Maker - NYTimes.com www.nytimes.com/2013/09/09/technology/a-long-fall-for-taiwan-smartphone-maker.html?pagewanted=2&ref=technology&pagewanted=print 2/5 the billionaire form er chairm an of Form osa Plastics, W ang Yung-ching, it had to w orry only about its m argins. The clients took care of the rest. Business w as good. In 2002, it listed on the Taiw an Stock Exchange, starting a run of profitable quarters that w ill m ost likely be snapped w ith the next earnings report. H TC has said that it expects an operating m argin of zero or a loss of as m uch as 8 percent for the third quarter. By 2006 it had grow n w eary of slapping other com panies’ brand nam es onto its products and decided to go it alone. A few years later, H TC developed the first sm artphone that used G oogle’s A ndroid operating system . “H TC has alw ays m ade great products,” said a recently departed executive, w ho spoke on condition of anonym ity because of the sensitivity of the situation. “There are no problem s on the hardw are side of the ball. It just can’t sell to save itself. It’s relied too heavily on operator subsidies, and those are drying up for the prem ium phone m arket H TC likes to play in.” The m arket research firm G artner said that H TC had shipped 24.6 m illion sm artphones in 2010, accounting for about one in every 12 sm artphones bought globally. In 2011, that share increased to 9.1 percent, w ith purchases surging to about 43 m illion units. In Taiw an, H TC w as feted in the local m edia as the little com pany that could — the form er contract m aker now on the big stage for its innovation. Politicians urged the public to buy patriotically. H TC w as an electronics flag bearer. The com pany w ent on an acquisitions binge, spending m ore than $700 m illion, including splashy purchases of the U .S. graphics m aker S3 G raphics for $300 m illion and the prem ium headphone m aker Beats Electronics for $309 m illion. Beats, founded by the hip-hop producer know n as D r. D re, view ed it as a com pany on the rise w hen it sold H TC a 51 percent stake. Investors grum bled that H TC had overspent. Beats eventually bought back half of H TC’s stake in 2012 for $5 m illion less than it had been paid and is looking to purchase the rem aining shares. By 2012, according to G artner, H TC sold about 32.1 m illion sm artphones. M arket share plunged to 4.7 percent. It did m anage, how ever, to resolve a long-running, costly and distracting patent dispute w ith A pple by agreeing to a 10-year licensing term from the technology giant. G artner says H TC sold about 5.4 m illion sm artphones in the first quarter of this year. Its m arket share fell again — this tim e to 2.5 percent. M any of the foreign executives brought in to oversee the acquisitions or sales and m arketing left or w ere let go. 9/9/13 A Long Fall for Taiwan Smartphone Maker - NYTimes.com www.nytimes.com/2013/09/09/technology/a-long-fall-for-taiwan-smartphone-maker.html?pagewanted=2&ref=technology&pagewanted=print 3/5 “They w ere too diversified,” said Jason Chien, a form er m obile phone analyst w ith Topology R esearch Institute in Taipei. “Their portfolio w as a m ess and they w anted to m ake A ndroid, M icrosoft and Facebook phones. They should have concentrated on A ndroid, instead of w asting their m oney on W indow s and Facebook.” The second quarter im proved slightly w hen it sold about 5.9 m illion units, am ounting to 2.6 percent of m arket share. The flagship H TC O ne m odel, w idely praised by review ers as an im pressive piece of hardw are, w as supposed to lift sales. Its release, how ever, w as delayed until A pril. W hen it did m ake it to m arket, suppliers had problem s m anufacturing enough of the prem ium parts to keep up the m om entum . In a G oldm an Sachs research note in A ugust, w hich dow ngraded H TC’s stock from neutral to sell, the investm ent bank w arned that it did not expect the com pany to return to profitability until the second quarter of 2014 at the earliest. The report pointed to “lim ited clarity on strategies” and H TC’s recurring inventory problem s and said that “sales execution and channel m anagem ent rem ain below industry standards.” O ther issues w ere that the com pany w as potentially burning cash because of a “deteriorating product cycle” and the possibility of m ore debt. M em bers of the com pany’s staff w ho w ere not authorized to speak on the record said it w as too focused on the “super prem ium ” phone m arket and w as oblivious to a slow dow n in that segm ent, w hile ignoring the boom ing m idrange and low er tiers in developing countries like India and Indonesia. C.K . Lu, an analyst w ith G artner, said, “H TC doesn’t know how to m ake a cheaper phone. It isn’t in their D N A . They don’t know how to do it by cost, or differentiate. They usually dow ngrade from their prem ium segm ent and that doesn’t w ork. It’s a very, very old-fashioned approach.” M r. Chou, w ho joined H TC in 1997 and has led the com pany for a decade, is view ed as a w orkaholic design guru w ho w orships at the tem ple of innovation and quality. H is critics say he is aloof and autocratic and does not realize that a great product w ill not fix sales, m arketing and distribution problem s. “The com pany is in trouble and Peter has to ow n that,” said W ong Teck Zhung, an analyst w ith the m arket research firm ID C. “The clock is ticking. If he can’t turn around the bottom line and m orale this year, I w ould expect som e change at the top.” 9/9/13 A Long Fall for Taiwan Smartphone Maker - NYTimes.com www.nytimes.com/2013/09/09/technology/a-long-fall-for-taiwan-smartphone-maker.html?pagewanted=2&ref=technology&pagewanted=print 4/5 M r. Chou declined interview requests. But M r. W ong and others also caution that the com pany has no clear internal successor. Because of H TC’s top-heavy Taiw anese corporate culture, it w ould be extrem ely difficult to replace him w ith som ebody from the outside. “They have got to keep the ship steady for now . If they change captain, it’s going to be one issue after another — an endless stream of them ,” M r. W ong said. H TC hopes that the release last m onth of H TC O ne on the U .S. carrier V erizon and the introduction of its m idrange phone, the O ne M ini, w ill help im prove sales. “They are stuck in quicksand. They think the launch of the flexi m odels w ill get them out. But the m arket is sucking them back in. They w on’t get back to the heights of 2010 and 2011,” M r. W ong said. Staff m em bers dism issed recent reports that the com pany w as looking to m erge w ith another com pany and played dow n speculation that it w as ripe for a hostile takeover by Chinese vendors like the surging Lenovo G roup. Lenovo, w hich already ow ns IBM ’s com puter business, increased sm artphone sales 144 percent year-over-year, according to G artner, but it relies heavily on the dom estic Chinese m arket. M s. W ang has repeatedly said the com pany is not for sale. H TC, w hich had a m arket capitalization of $4.4 billion in late A ugust, announced a buyback of 15 m illion shares that m onth. The buyback represents about 1.8 percent of its outstanding stock. “The m arkets are not here to forgive us,” said M r. H o, the chief m arketing officer. “Investors w ant profits and w e are being punished for that. Consum ers and operators are not m essed w ith. They w ill rem em ber you forever.” “It is very challenging,” he added. “I w on’t deny that. But m anagem ent believes w e have a good chance to com e back. W e aren’t short of cash and w e have no intent to sell.” 9/9/13 A Long Fall for Taiwan Smartphone Maker - NYTimes.com www.nytimes.com/2013/09/09/technology/a-long-fall-for-taiwan-smartphone-maker.html?pagewanted=2&ref=technology&pagewanted=print 5/5
