Sales disconnect

HTC revival may rest on return to no-brand roots

HTC needs to halt falling sales. The Taiwanese handset-maker just reported a full-year loss, raising fears it is following rivals Nokia and Blackberry into a downward spiral. HTC's old strength was to focus on design and let others worry about marketing. A possible deal to make China Mobile-branded smartphones may be its best hope of a turnaround.

HTC's poor fourth quarter results show its sleek high-end phones haven't made much of a dent in the market for expensive handsets, which is dominated by Apple and Samsung. As sales dwindle, it becomes increasingly hard for HTC to generate the economies of scale it needs to compete. Revenue in 2013 was less than half the 2011 level.

Any sales boost will probably depend on getting access to China, and particularly China Mobile's growing base of 3G subscribers, which had hit 181 million as of November 2013. HTC's own China sales have been limited. In the third quarter of 2013, the company shipped roughly one million units to China - that's only around 1 percent of the market, according to Canalys.

One way to boost those numbers would be for HTC to produce co-branded smartphones with China Mobile. Analysts at Daiwa reckon such a mid-range smartphone might cost around 1,000 yuan ($170). That could be offered at little or no cost to subscribers who take out a contract. Assuming a margin of 17 per cent, HTC would need to sell roughly eight million phones a year through the deal to return to the black in 2014.

Abandoning its ambition to build a standalone brand might be something of a climb down for HTC. But the company's early success was helping to engineer products for companies like Palm and Compaq in the 1990s. Lingering in low-volume doldrums could leave the group trapped in a cycle of falling sales and shrinking margins.

Despite the bleak picture, HTC shares are pricing in a lot of hope. Strip out net cash of about $1.35 billion, and the company's market value is more than 20 times expected Ebitda for 2014. Going back to its no-brand roots is HTC's best hope of fulfilling those expectations.