HTC is the No. 1 maker of Android handsets, the one segment growing faster than iPhones

By Bruce Einhorn

The vodka and whiskey flowed freely in a Taipei exhibition hall the size of an airplane hangar on Oct. 7. A six-piece cover band entertained guests with Queen’s We Will Rock You and Engelbert Humperdinck’s Quando, Quando, Quando. The occasion: Taiwanese smartphone maker HTC was launching a line of handsets using Google’s (GOOG) Android operating system. HTC, a brand virtually unknown in the U.S. two years ago, is the market leader in Android phones—the one segment of the market that’s growing faster than Apple’s (AAPL) iPhone. Before the music started, executives from wireless carriers and other partner companies took the stage to praise HTC’s chief executive officer, Peter Chou. “The true inventor of the smartphone is Peter Chou and his team,” said Yves Maitre, a senior vice-president at French operator Orange. “He is the one.”

HTC’s stock has jumped 94 percent this year, and with a market cap of 552 billion Taiwan dollars ($18 billion) the company is now the third-most-valuable Taiwanese technology company after chipmaker Taiwan Semiconductor and contract manufacturer Hon Hai Precision Industry, better known as Foxconn. HTC launched the first Android smartphone in 2008—the T-Mobile G1—and has a 39 percent share of that market globally. Thanks to the success with Android, which just passed Apple’s iOS as the fastest-growing mobile platform in the world, analysts expect sales to soar 78 percent this year, according to data compiled by Bloomberg. That’s far better than rivals Apple, Nokia (NOK), Research In Motion (RIMM), and Samsung Electronics.

Chou is looking for ways to extend his Android lead. Drew Bamford, HTC’s director of user experience, says he plans to make Android phones better able to access video, music, and other content. That’s been “a soft spot with Android products,” he says. HTC is teaming up with U.S. e-commerce site Kobo to sell e-books and hopes to sign deals with retailers such as Amazon.com (AMZN) and Barnes & Noble (BKS). There’s also an expected launch by early next year of an Android-powered tablet PC to compete with the iPad, something Chou and others at HTC won’t discuss.

HTC is an unlikely Android leader. When the company got its start in 1997, it manufactured personal digital assistants for Compaq. HTC followed the tried-and-true Taiwanese outsourcing formula of designing and manufacturing gadgets for other companies without a brand name of its own. Chou got his first big break in 2002 when Microsoft awarded HTC a contract to make smartphones, and the manufacturer quickly became the world’s top producer of Windows phones. It set up its U.S. headquarters in Bellevue, Wash., to be close to Microsoft’s home office.

Even as the Microsoft business was growing, Chou says he worried that a brandless HTC would forever remain a low-margin manufacturer of commodity products. “We were doing pretty well, we were making a lot of profit,” he says. “But we were mostly minor partners” for telecom operators that bought and resold HTC phones. In 2007, the year Apple introduced the iPhone and set the smartphone market on fire, Chou decided to move away from the anonymous contract-manufacturing business. Last year, HTC spent $100 million on a fourth-quarter marketing blitz, and Chou says he’ll spend up to $400 million this year. The company is now the world’s fourth-largest smartphone manufacturer after Nokia, RIM, and Apple, according to IDC.

HTC’s rise to the top tier of handset makers has given it more clout with partners—hence the accolades at the October launch event. Chou says wireless operators are more willing than before to work with HTC on technology and marketing plans. Operators profess admiration for Chou’s hands-on approach. “He breathes his business,” says Mark Liversidge, chief marketing officer at Hong Kong cellular operator CSL.

HTC’s relationship with Microsoft, which is struggling to stay relevant in smartphones, is also changing. “We are a major partner, not a junior partner,” Chou says. He first saw the design concept of Microsoft’s just-introduced mobile system, Windows Phone 7, a year and a half ago. “I told them they are going in the right direction,” he says. On Oct. 11, Microsoft and HTC unveiled five handsets using Windows Phone 7. Although Microsoft’s fortunes in mobile software have fallen (it’s now the No. 5 player), Chou and others at HTC argue there are customers out there who do want what Windows Phone 7 has to offer. “Our commitment to Windows is unwavering,” says John Wang, HTC’s chief marketing officer. HTC’s new Windows Phone 7 handsets allow Microsoft users to connect with their Xbox Live games and Zune music, and some businesses want easy access to Office applications such as Word and Excel.

Analysts point out that for HTC there’s little downside to giving Microsoft another shot. Microsoft plans to spend big on marketing Windows Phone 7, which means the Taiwanese company won’t have to worry about getting the word out. HTC “should benefit the most from Windows Phone 7’s kickoff,” a team of Macquarie Securities (MGU) analysts led by Daniel Chang wrote in an Oct. 6 report.

The main events, though, are HTC’s Android devices—and keeping up the momentum against the iPhone. Chou is now focusing on expanding sales in the U.S. and on making inroads into mainland China. The HTC team, he brags, is very global. “More than half my direct reports are non-Taiwanese,” he says. E-mail and documents have been in English “from day one,” says Chou. “We just want to come up with our own innovations, our own flavor.” And what about the competition from his most formidable rival, Apple? “HTC is HTC,” he says impatiently. “I don’t care about the iPhone. I don’t even look at it.”

The bottom line: HTC, once unknown in the U.S., has become the top handset maker in the Android market, a segment that’s growing faster than Apple’s iPhone.

Einhorn is Asia regional editor in Bloomberg Businessweek’s Hong Kong bureau. With Olga Kharif in Portland and Tim Culpan in Taipei.