Commentary: HTC faces new challenges after Google deal

Max Wang and Irene Chen, Taipei; Steve Shen, DIGITIMES Asia 0

HTC, which built the world's first Android-based smartphone, the HTC Dream, in 2008, is facing new challenges after it signed a US$1.1 billion deal to hand over its ODM team or half of its R&D unit to Google.

It is generally considered as a good buy for Google to spend only US$1.1 billion to scoop up a hardware team as compared to the company's generous offer of US$12.4 billion to purchase Motorola's mobile business in 2012.

On the other hand, HTC is expected to book a one-time non-operating gain of US$1.1 billion when the deal is completed in the first quarter of 2018, translating into an EPS of NT$40 for the quarter.

The deal will help enhance HTC's financial structure given that the company had only a cash position of about NT$25 billion (US$827.3 million) at the end of the second quarter of 2017, down from NT$41.5 billion of a year earlier.

HTC CFO Peter Shen also said that the sale of its ODM unit, or the "Powered by HTC" team, will help the company save its operating expenses by 30-40%.

But based on HTC's financial results for the past six quarters, a 30-40% reduction in operating expenses is not sufficient enough for the company to make a turnaround.

Cher Wang, chairperson and CEO of HTC, said that the company can utilize the new funds to continue to build its VR ecosystem, to grow its Vive business, while investing in other next-generation technologies, including Internet of Things (IoT), augmented reality (AR), artificial intelligence (AI) and 5G products.

However, Wang did not mention that a substantial cut of its R&D team will also undermine the company's R&D capability needed for its strive to develop IoT, VR, AR, AI, 5G products.

As a short-term impact, HTC is expected to see its revenues continue to wane, particularly after the first quarter of 2018, as the "Powered by HTC" team currently serves as a major source of income.

While HTC has said it will continue its branded smartphone business, the handover of half of its handset engineers to Google certainly is not smart strategy that will improve the prospects of its beleaguered smartphone business. And helping Google become a smartphone maker that may compete with HTC's own brand in the future is hardly a smart strategy.

In the long term, weakening R&D capability and diminishing market share is likely to force HTC to phase out from the smartphone market or transform itself into a white-box smartphone vendor.