they say bad news comes in threes: after nokia and blackberry, now it’s htc’s turn

56 | GlobeAsia September 2015

Technology

H TC has been ailing for a while now, but in August something truly shocking happened: the market valuation of

HTC fell below its available cash on hand. This theoretically means that should investors start to buy up all of HTC’s stock at its current valuation, the company would actually be paying those investors to take it over.

In short this means that the company is effectively less than worthless. In recent years the company slogan has run the gamut from “quietly brilliant” to “here’s to change” and finally “It’s anything you want it to be,” perhaps betraying increased desperation in a company looking for its identity in a crowded marketplace.

It may seem strange to the average consumer who has seen HTC churn out hits like the HTC One M8 and the M9 that such a company could just collapse. It almost strains credulity to think that a company that just a few years ago held a respectable 10.7% of the market share is in trouble. How could the company that brought us such hits actually be in such deep trouble?

No surpriseFor those who have been watching, HTC’s collapse should come as no surprise. As early as October 2013, Computer World’s Mark Hamblin predicted that HTC’s collapse would happen within two years. That collapse began to take on an air of inevitability with its $101 million net loss in the third quarter of 2013.

This was the first loss in the company’s history but even then the writing was already on the wall. An analyst from Asymco pointed out that “once a company begins to generate negative operating margins from phone sales, that phone business never recovers.”

His opinion was based on tracking the fortunes of other former mobile behemoths like Nokia and Blackberry, both of which had about two years before some sort of liquidity event (whether acquisition or merger) overtook them.

By August 15 this year, HTC had announced its biggest quarterly loss of $253 million.

Poor strategic planningHTC has a canon of phones that really start to get ridiculous once you start listing them. There’s the One, the One M8, One Mini, One XL, the HTC Desire line, and that’s not even an exhaustive list. The amount the company must spend to put out these phones is a colossal waste of precious resources for a company that should’ve been paring down its line to a maximum of three products. HTC decided to imitate Samsung (which has an even greater stable of phones) but without the safety net that is the rest of Samsung’s portfolio.

Then there was an exodus of talent. When HTC’s long-time head of design Scott Croyle (credited with the design of HTC’s One line) announced his departure in April 2014, few expected that he would be followed so closely by Jonah Becker (head of product design) who exited just 11 months later.

The company barely had time to breathe before HTC announced the exit of Peter Chou from the CEO role and his replacement with HTC co-founder Cher Wang. No business would be unaffected by the loss of such key personnel but the rapid exits gave HTC the air of a sinking ship and doubtlessly affected morale negatively.

No other business to offset lossesThe fact is that the profit on Android smartphones is minuscule. A recent report from

They say bad news comes in threes: After Nokia and Blackberry, now it’s HTC’s turn

As early as October 2013, Computer World’s Mark Hamblin predicted that HTC’s collapse would happen within two years.

September 2015 GlobeAsia | 57

R&D costs alone are prohibitive, not to mention that each phone has to be designed, tested and then marketed to the consumer. These costs eat into manufacturer’s profits.

Add to this that the market has essentially split with Apple in the high end and pretty much everybody else in the “other” category. Unfortunately for HTC, It is not economical for it to make budget smartphones (although they have tried) so they are really only competitive in the high end. In that range of course, HTC is forced to compete with Samsung and Apple, both of which have massive cash reserves on hand and make a greater profit per device.

The major issue for HTC is that it has no accompanying business to speak of, while almost every one of its competitors from LG to Samsung are not dependent on their mobile business alone to stay profitable.

When LG sells phones at a profit of 1.2 cents, it’s doing so because it sees the larger implications of maintaining a market share in the mobile space. The company realizes that a strong mobile offering helps with its overall ecosystem of products, but HTC has no such ecosystem.

Some phone manufacturers like Xiaomi sell their phones almost at cost and then depend on their app store for the majority of their revenues. The fact is, of course, almost every other manufacturer has some sort of ace in the hole. Even Blackberry continues to trudge along in some capacity because it has significant holdings outside its mobile business. For HTC though, there are no side businesses waiting in the wings to offset its losses.

Attempts to diversify met with little successIt’s not as if HTC has not attempted to diversify, it’s just that their attempts have thus far not been what you would call a resounding success. Take its $40 million investment in OnLive for example. The company showed enormous promise and HTC hoped the investment would round out its mobile strategy. Instead HTC had to book the entire amount as a loss when OnLive went through corporate restructuring in August 2012.

Other investments, almost $50 million in Saffron Digital, an acquisition of Inquisitive Minds for $13 million and an $18 million investment in Dashwire all failed to mitigate

LG put their numbers at about 1.2 cents per smartphone! The vast majority of the profits in the smartphone industry (about 90%) is captured by Apple with Samsung soaking up most of what’s left.

Because of how the industry has come to arrange itself, Android manufacturers build hundreds of new phones every year for which the

Jason FernandesTech commentator and the founder of SmartKlock.

HTC Corporation headquarters in Xindian, New Taipei City, Taiwan.

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Technology


Assigning blame, and the road aheadWired published an article this August titled “HTC’s Epic Tailspin Isn’t Even Its Fault,” where they argue that because HTC innovated and put out new phones with competitive features the company couldn’t blame itself for its failure. That’s a bit too charitable a view of HTC.

There’s quite a bit more to running a company than putting out good products with innovative features; strategic planning helps. HTC should’ve seen the writing on the wall earlier and discontinued all but an extremely select group of core products. HTC’s situation right now is a textbook case of a company failing because it tried to be all things to all people without the cash reserves that such an approach would require.

HTC’s response to the crisis has been to announce that it will trim its staff by 15% to reduce costs. Unless trimming their staff will also lead to a culling of the HTC cannon, it’s highly doubtful that cost cutting alone is going to solve this. Many a company (think Apple in the 80s) has been saved by focusing on a very limited set of products and ensuring those products are the best they can be. This is conceivably the best way forward for HTC.

They should shrink their mobile catalog down to two or three devices. A high-end, a mid-range and maybe a low-range. Because HTC is best at making premium devices they ought to focus on that, while also offering one mid- and one low-range device at a competitive price to lure price-conscious buyers in markets like India and China.

The company will likely save quite a bit on R&D and marketing costs once they cull their catalog, and these savings can be put towards lowering the price on whatever mid- and low-range device they choose to offer so that they can be competitive in this area of the market as well.

HTC has a lot of fans and if it manages to maintain its design DNA, their loyal following will likely continue to buy devices the company puts out. Cost-cutting can help, but HTC will have to give some serious thought to their strategic choices going forward and they have a very limited window within which to fix this. In other words, if HTC doesn’t shape up soon, their products won’t ship out at all.

HTC’s losses. Not HTC’s fault perhaps, but poor investment decisions have done the company no favors.

Perhaps the greatest tragedy is what HTC’s collapse does for the world of design. It’s no secret that HTC as a corporate exudes great design sense. The One series of phones, for example, could easily go toe-to-toe with the best in design. HTC alumni have gone on to make their mark in excellent design - the Gogoro scooter company was founded by former HTC execs.

In fact, one of the most anticipated smartphones in recent times is due to be launched by Nextbit, again a company started by HTC alumni, in this case the aforementioned Scott Croyle, the former design chief at HTC. It’s clear the loss of these executives was a blow to HTC.

If HTC doesn’t shape up soon, their products won’t ship out at all.

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Columnists16 Paulius KuncinasPhilippines’ budget gives boost to health sector

20 Steve Hanke Instability in China

52 Jamil Maidan FloresIran makes a nuclear deal and comes in from the cold

56 Jason Fernandes They say bad news comes in threes: After Nokia and Blackberry, now it’s HTC’s turn

80 Scott YoungerTravel by train

82 Keith Loveard The gengsi factor

contentsVOLUME 9 NUMBER 9 / SEPTEMBER 2015

COmpanies40 Karuna Murdaya emerges with Hinet 4G LTE Karuna Murdaya, a scion of the Berca Group, is attempting to muscle in on the 4G LTE market.

44 Beyond safety Volvo Trucks invited GlobeAsia to explore its factories, test drive its trucks and witness the Volvo Ocean Race in the marque’s home town.

48 NavAir: Tired guardian of Indonesia’s skies

Special reports60 New economic ministers, new hopePresident Joko Widodo reshuffled his cabinet in the hope of injecting some new thinking and urgency in economic policy making.

64 Mineral smelting: Slow progress The ban on exports of unprocessed mineral ores in January last year was designed to encourage the development of the smelting industry, but little progress has been made.

68 Sectoral Snapshot: Tourism

70 Smart cities: Slowly getting smarter Indonesian cities have started to introduce Smart City concepts to better serve their citizens but much work lies ahead.

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74 Innovation nationGeneral Electric Indonesia hosted the GE Garage to gather the nation’s ‘makers’ and expose new equipment to help take their innovations to the next level.

77 GE’s global talent search

Book review86 Exploring new areas in the Indonesia-India partnershipIndia’s ambassador to Indonesia aims to bridge knowledge gaps between two of Asia’s biggest economies with the launch of the book Masala Bumbu: Enhancing the India-Indonesia Partnership.

EVENT89 Indian ambassador’s book launch celebration

90 President awards Bintang Jasa Utama medal to Lippo Group founder Lippo Group founder Mochtar Riady has been awarded the Bintang Jasa Utama medal for his services to the country.

living the goodlife100 Horses, watches and the good lifeLongines invited GlobeAsia to experience the good life in the idyllic French country-side.

Back Page104 Dutch Business Office

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These are challenging times for Indonesia. Once again the country finds itself

trapped in a vicious cycle of a fast-depreciating currency, a slowing economy and the threat of corporate bankruptcies.

It seems as if the country has gone back to the dark old days of 1998 when political paralysis and economic crisis created a deadly cocktail. For the first time in nearly two decades, the rupiah is trading at close to 14,000 to the US dollar. The country’s fiscal position looks shaky and banks are starting to feel the heat of non-performing loans.

President Joko Widodo has reshuffled his cabinet and brought in two strong technocrats to occupy key economic portfolios. Both Tom Lembong, the new Trade Minister, and Darmin Nasution, the Coordinating Minister for Economic Affairs, have strong credentials and are market-friendly.

But the talk in the business and banking community these days is centered squarely on where the rupiah is heading. It is conceivable that the currency will depreciate further and possibly touch the 15,000 level against the greenback. If that happens, all bets are off and Indonesia will be in unknown territory.

At that level, capital will flee, banks will collapse and companies will go bust. As in 1998, the economic dislocation will quickly transition into financial dislocation and ultimately social dislocation.

The country is not at that point yet. And it can still prevent an economic and financial meltdown if the government changes both its rhetoric and its policy direction.

For the past 10 months since President Jokowi took office, the rhetoric and economic policy have been driven by nationalist sentiment. The government has banned imports on a wide range of

Editor’s NoteEditorialEditor in ChiefShoeb Kagda

Managing Editor Yanto Soegiarto

Deputy Editors Muhamad Al Azhari

Editor at LargeJohn Riady

Senior EditorAlbert W. NontoDenverino Dante

Contributing EditorsFarid HariantoSteve HankeScott Younger

ContributorsSuryo Bambang SulistoWijayanto SamirinFrans WinartaJason FernandesJohn Denton

Special ColumnistJamil Maidan Flores

ReportersVanesha ManuturiDion Bisara

Art, Design and LayoutGimbar MaulanaElsid ArendraAgustinus W. TriwibowoNela RealinoWulan Tagu Dedo Rudi Pandjaitan

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Déjà vu

products; made it difficult for expatriates to obtain work permits; closed off certain sectors to foreign investors; forced all transactions within the country to be in rupiah only; and talked openly about supporting only Indonesian products.

That has scared off investors; caused prices of beef to skyrocket; squeezed liquidity in the banking sector; and brought manufacturing to a near standstill. Consumption, the main driver of economic growth over the past few years, is contracting rapidly and even consumer goods companies are reporting sharp falls in sales.

All is not lost, however. If the government can get its act together and disburse funds for large infrastructure projects, it can stave off economic slowdown. If it changes its tone on foreign investors and expatriates, it can win back market confidence. If it finds a way to get Indonesians to pay taxes without fearing reprisals, it might be able to strengthen its fiscal position.

It is clear that strong, decisive action is needed. Indonesia’s long-term economic potential remains intact but its short-term outlook is filled with uncertainty.

Shoeb KagdaEditor in Chief

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