Apple files lawsuit against HTC

Apple’s patent lawsuit against HTC will not cause major problems for the Taiwan technology company in the short term, analysts said Wednesday. But it could strain its relations with partners in the crucial U.S. market and test its leadership, adding to its challenges in the increasingly competitive smartphone field.

About half of HTC’s revenue comes from the United States, where its smartphones are bundled with services from providers like T-Mobile. HTC makes the Nexus One phone for Google under contract and also makes phones under its own brand.

“The short-term impact will be pretty minor,” said Jeff Pu, a handset analyst at Fubon Securities in Taipei, adding that such lawsuits can drag out over three or four years. “But from a long-term perspective, many carriers in the U.S. may take a more conservative stance in adopting HTC’s new products because of the lawsuit risk, or ask for price cuts to compensate for the risk.”

In focusing on HTC, Apple is taking on what many analysts regard as one of the island’s best-managed technology companies.

From its humble beginnings as a small laptop vendor in 1997, it has become a technology giant under the leadership of its co-founder and chairwoman, Cher Wang. She is one of nine children of Wang Yung-ching, a petrochemicals owner, now deceased, who was one of Taiwan’s richest men.

Mrs. Wang, who holds a masters degree in economics from the University of California, Berkeley, made her own name by guiding HTC early into the promising smartphone segment. The company won the contract to make the iPaq handheld personal computer for Compaq in 2000. Later, it introduced phones using Microsoft’s Windows Mobile platform and Google’s Android system.

In the fourth quarter of 2009, 95 percent of HTC’s revenue came from phones with its own brand, Mr. Pu said.

According to the technology consultant IDC, HTC had a 4.6 percent global share of the smartphone market in 2009, compared with Apple’s 14.4 percent (both firms trailed Nokia’s 38.9 percent share and Research in Motion’s 19.8 percent). Apple is already locked in a separate legal dispute with Nokia.

Last year, HTC was ranked as the fourth most valuable Taiwanese brand by the Taiwan External Trade Development Council, after the PC maker Acer, the anti-virus software giant Trend Micro, and the netbook pioneer Asustek.

But Mr. Pu said that HTC had struggled recently with new smartphone competitors. It introduced a brand-bolstering campaign in October and is diversifying into lower-end smartphones, but faces shrinking margins and falling profits, he said.

HTC’s 2009 consolidated revenue was 144 billion Taiwan dollars, or $4.5 billion, down 5.2 percent from the previous year. Gross profit in 2009 was down 9.5 percent, according to a data released by the company in January.

Its 2009 operating margin was 15.5 percent, down from previous years, and is expected to fall to between 12 percent and 14 percent in the first quarter of this year. “The company is now facing severe margin and pricing pressure,” Mr Pu said.

Gary Chia, head of Greater China research for Yuanta Securities in Taipei, said the lawsuit was in some ways a measure of HTC’s success.

“This is what happens in Silicon Valley,“ said Mr. Chia. “When you’re big enough to become a threat, I’ll slap a suit on you sometimes just to slow you down.”

Mr. Chia said he did not foresee any immediate effect on HTC’s shipments, and he noted that HTC could appeal or even countersue, since the company had its own patents.

“This is a cloud hanging over the company, but I wouldn’t say it’s a huge cloud,” Mr. Chia said.

He described HTC as one of Taiwan’s best-managed firms and one of the better-managed firms in all of Asia, and said the lawsuit would test that leadership.

“We know the smartphone market is heating up, with platforms competing against each other, and now you have this big behemoth going after you,” he said. “If management is worth its salt, this is where they show their value, now.”

John Cheng, a Taipei-based mobile devices analyst for IDC, said that HTC was one of a handful of Taiwan firms that were shaking off the island’s contract-manufacturing model of the past and establishing Taiwan’s own brands.

“HTC is not just doing contract business, but has also tried to be a brand vendor,” said Mr. Cheng. “Most people think Taiwan companies don’t invent too many technologies, but HTC has changed this kind of impression.”

HTC’s stock slid nearly 2 percent Wednesday on the Taiwan Stock Exchange after the lawsuit was announced.