HTC’s woes reflect Taiwan’s troubles in high tech

Reporting from TAIPEI, Taiwan —  In 2008, when most cellphone makers were still producing old-style models with push buttons, Taiwan’s HTC designed one of the first Google Android smartphone handsets. By 2011, HTC smartphones enjoyed market share over 10% worldwide, gaining a following even in the United States.

But as fast as HTC’s fortunes rose, so have they fallen. Last month, the company announced it would cut 15% of its 15,700 employees, and on Monday the Taiwan stock exchange dropped HTC from its top 50 companies index.

HTC’s woes reflect problems throughout Taiwan, a global high-tech hardware center. After decades of contract work for brands such as Apple, Dell and Toshiba, Taiwan is struggling to make a transition into designing and selling its own name-brand consumer electronics. Much of the basic contract work is now moving or has moved to mainland China and Vietnam, where labor costs are lower.

That’s bad news for Taiwan’s export-dependent economy. The output of Taiwan’s high-tech companies declined 2% last year to $131 billion, after an 11% drop from 2012 to 2013, according to Taiwan’s Market Intelligence & Consulting Institute.

Analysts say the problem lies in Taiwan’s company cultures, where the drive to invent and market new products is not sufficiently prized. Relatively few mid-level managers know how to gauge consumer tastes and run marketing campaigns in foreign countries, they say.

“Taiwan’s other high-tech companies [also] face questions — from R&D to sales and earning money,” said Sean Kao, research manager with tech market research firm IDC in Taipei. “You have to understand every country’s situation, like their language and customs. If you talk about branding, they can’t rival Apple.”

How to jump-start innovation is a key issue in the presidential election set for January. There are growing complaints that wages have stagnated or fallen, particularly for recent college graduates.

“As indigenous industries grow up in China … Taiwan is facing furious competition from Chinese counterparts. Our challenge is how to keep up the competitive edge,” said James Huang, a key advisor to Democratic Progressive Party candidate Tsai Ing-Wen, who is leading in the polls.

“The problem of wages with the young generation is that they all join big companies doing this [contract] work, they work long hours for low pay, and their creativity is wasted in that industrial structure,” he said.

The DPP says it will foster innovation with new incentives for young people to start their own businesses. But that process will take time — and probably won’t have much direct effect on the fortunes of mainline companies like HTC.

Founded 18 years ago, HTC started out in high-tech contracting. After its Android handset breakthrough, it seemed en route to an independent reputation and brand. It sought to build on its growing market share with the One series high-end smartphones with specs similar to Samsung’s Galaxy Note models.

They sold well initially in 2013, but consumer interest dropped off after a lack of new must-have features. In 2015 and 2016 combined, the company will lose $675 million, London-based investment consultant Arete Research forecasts.

HTC’s share prices have fallen steadily since April 2011. The stock has dropped more than 53% from a year ago, leaving the company with a market value of around $1.6 billion.

HTC slipped, analysts say, by spending too little on marketing to vie with Samsung, the top Android smartphone seller, or to create buzz in Western markets where Apple has a tough-to-beat reputation. HTC entered China, a large and fast-growing smartphone market, only after local brands such as Huawei and Xiaomi already had followings.

“Like many Taiwanese hardware makers, HTC’s innovation in business models and services has failed to catch up with its hardware innovation,” said Jade Chang, an analyst with the Taipei-based Market Intelligence & Consulting Institute.

After the layoffs, HTC plans to turn itself around by continuing to work on smartphones and “extend” them into virtual reality and connected devices, the company said in a statement.

HTC is not alone in its struggles. Taiwan’s Asustek Computer was among the world’s first PC makers to try laptop-tablet hybrids in 2011 but could not reposition itself as a major tablet brand.

Acer, the island’s other major PC developer, lost a chance to grab more Western market share when Italian-born Chief Executive Gianfranco Lanci quit in 2011 after a dispute with Taiwanese management. Lanci’s sales connections in Europe helped Acer rank as the world’s No. 2 PC vendor, a title it has lost since he left.

With 23 million people, Taiwan’s home market is small. If it wants to create world-class brands, the nation’s companies must attract followings abroad. Mainland China — which shares a common language and deep cultural ties — in theory should represent a bright spot for Taiwanese products.

“It’s not just that we understand the language, it’s that we understand the way they live, the philosophy of life, what colors appeal to consumers, how to display things, everything,” said Lee Chun, deputy director of a trade-policy think tank in Taipei called the WTO and RTA Center. “But of course China moving up the value chain hurts Taiwan.”

Deputy Minister of Economy Shih-Chao Cho noted that mainland China buys 40% of Taiwanese exports — but demand is weakening as China’s economy slows and China builds up its own tech industries.

“We are doing more diversification of our export markets, to southeast Asian countries, and emerging markets like India, Turkey and Brazil — those are our new target markets,” he said. “But of course that will take time.”

It will probably take 10 more years for Taiwan to catch up, said Jamie Lin, founder of Taipei venture capital firm AppWorks Ventures. “It takes a few cycles to develop these managers.”

Delays in sourcing parts also sought by offshore rivals and hesitation to spend money on marketing have further hurt branding efforts by Taiwan’s tech leaders.

“You really can’t nail it down to lack of innovation alone,” said John Brebeck, senior Taipei advisor with Hong Kong investment consultant Peace Field. “Lack of an R&D culture and global marketing savvy plays a role.”

Jennings is a special correspondent. Makinen reported from Taipei.

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