HTC Corp and Sony Corp Earnings Paint a Bleak Picture for Smartphones

While Sony has a much more diversified product portfolio than HTC, both companies are highly dependent on demand for their smartphones for revenues and profit. Therefore, slowing growth and intensifying competition in smartphones have been particularly detrimental for both companies, and results announced on 31 October indicate that despite making headway in their turnaround efforts, Sony and HTC are still in an extremely difficult position.

Deteriorating market conditions

For both companies, the source of all difficulties is the lacklustre performance of their respective smartphone lines, particularly the high-priced models. While both companies have released very competitive line-ups that received praise from critics and reviewers for design and build quality, both companies were too small to compete with the marketing budgets of Samsung and Apple. Exacerbating the problem for high-end devices was slowing growth in developed markets.

Global Volume Sales of Smartphones

Source: Euromonitor International

With growth becoming ever more reliant on emerging markets, Sony and HTC have to be competitive in lower-price ranges. But here they are being continuously undercut by low-cost Chinese and Indian brands that are gaining steam going into 2015. This is making it extremely unlikely that either Sony or HTC will see significant volume sales growth in 2015.

HTC Corp

In Q3 2013, HTC Corp suffered its first ever quarterly loss, as sales collapsed after the company cut the model line-up to focus on high-end devices. In Q3 2014, revenues declined year-on-year and quarter-on-quarter. The quarter-on-quarter decline in both revenues and profits was due to declining sales of the company’s flagship HTC One (M8) following its launch in March 2014. The turnaround at HTC has been dependent on the success of its flagship HTC One line, but most of its largest competitors, including Sony, have also staked their immediate future on high-end smartphones. As a result, the company’s acclaimed line up is just one of many very high quality flagship smartphones available. HTC needs to diversify away from smartphones, but the company had a hard time in previous attempts with tablets. Exploring wearable electronics and contract manufacturing in addition to expanding its smartphone line up would sustain revenues on a more consistent basis.

Sony Corp

2014 was a difficult period for Sony Corp as the company struggled with expenses stemming from the sale of its Vaio business unit. In Q2, the Mobile Communications business unit recorded a ¥176 billion impairment of good will as sales of Xperia smartphones remained lower than the company expected over 2014. Outside smartphones, however, the company’s turnaround efforts have resulted in rising profitability. Most importantly, operating income and revenues from image sensors have driven growth in the Devices business unit. Restructuring and lay-offs have also returned Imaging Products and Solutions, as well as Home Entertainment and Sound, to profitability despite low revenue growth. Despite making headway, Sony remains in a difficult position. Sony needs to produce critical components in quantities far exceeding its own needs to provide revenues for research and development and lowering per unit costs for its own products.