16 September 2019

Lenovo and HTC could make a great pair

Consolidation is rapidly changing the landscape of the smartphone market as competition continues to intensify. 

First, Microsoft gobbled up the former mobile phone giant Nokia, then Blackberry went private. And now, rumor has it that Lenovo Group (00992.HK) is interested in Taiwan’s high-end smartphone vendor HTC Corp. (2498.TT). The two are said to have been holding talks since August.

According to reports, Lenovo and HTC could cooperate by exchanging stocks, and the HTC brand could remain independent under the deal.

Cher Wang {王雪梅}, HTC’s chairperson, has denied the company was approached by Lenovo about a strategic investment. Nonetheless, a tie-up should create value for both in view of their complementary strengths.

HTC is struggling, recording a loss for the first time ever in the latest quarter. In the three months to September, operating revenue plunged 33 percent to US$1.6 billion from a year earlier, sending the company to a net loss of US$101 million, compared with a net profit of US$170 million in the same quarter last year.

The company’s weakness lies in its marketing and positioning. Choosing to fight in the high-end arena, it decided to imitate Samsung’s “double flagship” strategy. In answer to Samsung’s Galaxy S and Galaxy Note, the company came up with its HTC One and HTC Butterfly, hoping the models’ larger monitors will lure more buyers than Samsung’s normal-sized phones. 

However, unlike Samsung, HTC finds that its supply chains and sales distribution channels are not nimble enough to support the group in launching one product after another within a short interval, typically three months for its major rivals, to cope with a rapidly changing market. As a result, HTC usually misses the best timing for a product launch, and once in the market, it finds its latest models being crowded out by early-bird rivals like Apple and Samsung. In short, it misses first mover advantage almost every time.

Its share price has slumped nearly 60 percent so far this year. Its market value is around US$3.8 billion, just half the size of Nokia and way smaller than Xiaomi, which is estimated to be worth nearly US$10 billion.

For Lenovo, cooperation with HTC or becoming its strategic investor could fill a missing piece in its high-end jigsaw puzzle. According to the second-quarter statistics from research firm Gartner, Lenovo ranked fourth in the smartphone market worldwide with 4.7 percent share, behind Samsung and Apple but fast closing in on No. 3 LG Electronics. The counter has risen 16 percent so far this year.

In China, Lenovo’s market share has reached 12 percent, according to a Morgan Stanley report. It has always been focused on the low-end to mid-range market, but investing in HTC could give Lenovo a strong product lineup to compete in the high-end field. At the same time, HTC can make use of Lenovo’s resources such as distribution channels, making their alliance a win-win deal.

But how likely is such tie-up? An unnamed senior executive at Lenovo was quoted last month in media reports as saying that HTC is a better target than BlackBerry or Nokia for the group. 

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