Why HTC Is Losing ‘Relevance’ in the Smartphone War

HTC, the world’s No. 5 smartphone maker by shipments, is fast losing its “relevance” in a highly competitive market, as cheaper alternatives pose a threat to its growth in China, say technology analysts.

A visitor examines an HTC smartphone at the Vodafone stand at the CeBIT Technology Fair in Hannover, Germany.
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A visitor examines an HTC smartphone at the Vodafone stand at the CeBIT Technology Fair in Hannover, Germany.

In a report titled “Is HTC Still Relevant,” Dale Gai, Analyst at Barclays Capital writes that the Taiwanese company, which was among the first to sell smartphones powered by Google’s Android operating system, is losing its technological edge, and may soon be overshadowed by smaller players in the field as superior hardware technology becomes more accessible.

“HTC sees China as a major growth driver, but this story may not work,” says Gai.

According to Barclays, Taiwan-based mobile chipmaker MediaTek, will start supplying the Chinese market with mass produced high-tech chips by the third quarter of this year, allowing the smaller unbranded mobile handset makers to offer better features and applications on their phones at cheaper prices.

This, according to Aaron Jeng, Analyst atNomura, will hurt HTC’s sales in China and threaten the company’s market share.

“MediaTek would be disruptive as it would enable low-end smartphones to provide more features and functions, but with lower retail prices,” Jeng said in a report.

According to Gai, “these (low priced chips) will allow smaller handset makers to compete with HTC in the mainstream market, its key growth area, at under 1,000-2,000 yuan ($157-$315)."

HTC currently has about 5 percent market share in China, the world's largest smartphone market, and 10 percent of its earnings last year came from there.

Samsung Closing In

Besides increasing competition from smaller players, HTC is also under pressure from market leaders Apple and Samsung in China as well as in the U.S.

HTC was the top seller of Android-based smartphones in the U.S. in 2010, with a market share of 11.8 percent, but lost the top spot to Samsung in 2012.

“HTC will likely be Samsung’s main target for further share gains,” says Gai. “Samsung’s greater scale and full range of product mix enhances its cost structure to be very competitive. Samsung has much lower unit costs than HTC for very similar (offerings).”

This year, Gai forecasts HTC will see a 10 percent decrease in the average selling price of its smartphones compared to 2011, due to fiercer competition.

“The company (could) fall significantly short on earnings in the next 2-3 years. The industry dynamics are becoming increasingly unfavorable to HTC,” he said, adding that, "HTC has good hardware, but it is not strong on the innovation side which is becoming increasingly important."

Last month HTC reported a 70 percentfall in net profit for the first quarter, just below forecasts, as it struggled to regain market share lost to Apple's iPhones and Samsung's Galaxy range at the end of 2011.

By CNBC's Ansuya Harjani