On the line

HTC has no easy exit from competitive rut

HTC shows how far tech fortunes can fall. Taiwan's biggest mobile handset maker was one of the first smartphone makers. Now it is in the doldrums. It posted a quarterly loss, and shares have collapsed nearly 90 percent in two years. The company may sell off some factories and outsource production to help staunch cash losses, Reuters reported on October 23. An outright takeover might seem logical, but while HTC's products are attractive, the valuation is not.

The rise of Apple's iPhone and Samsung's Galaxy has been unkind to HTC. The company had a nine per cent worldwide market share in 2011, but that has fallen to two per cent in 2013, according to Canalys. Though tech-heads applaud its design, the company's new HTC One model isn't selling well. HTC lacks the economy of scale of Apple, which can dictate terms to component manufacturers. That makes it hard to compete on top-end models.
 
Things are getting worse, not better. Analysts estimate that by the end of 2014, HTC's revenue will be half of what it was at the end of 2011, according to Eikon data. With margins falling, one option to protect profits would be to fold the firm into a larger manufacturer who can shift production to places cheaper than Taiwan. Selling off its manufacturing arm would yield cash, but won't move more phones.

One problem with a takeover is price. With T$227 billion ($7.7 billion) of revenue forecasted for the year ending in December, and an enterprise value of T$65 billion, investors are currently paying $0.29 for each dollar of sales HTC makes. True, Nokia sold its handset business to Microsoft for $0.33 per dollar of sales in September. But Nokia's long history as a handset maker left it with many valuable patents. The 35 per cent leap in Nokia's share price on the day of the deal suggests the US software giant was already being rather generous.

HTC's Chairwoman Cher Wang said in an interview this month she is not interested in selling. Instead, she is becoming more involved with running the business. HTC hopes to double its share in the over-$500 smartphone segment, and expand in China. But that will be tough. The company's overall mainland market share is a tiny two per cent, lower than upstart Xiaomi, and the company refuses to consider selling cheaper phones. If HTC doesn't want to sell, disheartened investors will.