China might be helping the iPhone, but it's hurting HTC

HTC turned to China early on to help boost flagging smartphone sales. That strategy isn't working as the company is revising guidance downward amid competition from the iPhone.

China.

It's the next big frontier for smartphone sales due to its high population and low smartphone penetration.

Unfortunately, that frontier is helping Apple's iPhone while presenting new challenges for HTC's Android handsets.

On Friday, HTC published its monthly, unaudited revenues for the month of May, also providing revised guidance for the future. Aside from the numbers, HTC says sales in the world's most populous nation are trending lower it anticipated:

HTC has revised 2Q 2015 guidance to be NT$33-36 bn in revenue, 19%-19.5% in gross margin and EPS of -NT$9.70 to -NT$9.94. The change for revenue outlook is due to slower demand for high-end Android devices, and weaker than forecast sales in China, while gross margin is revised primarily on product mix change and lowered scale.

The statement reads as a double-whammy to me because HTC is also highlighting less demand for high-end Android phones. That segment is where profit margins can be the highest and where HTC competes directly with the iPhone 6 and 6 Plus.

Contrast the situation with Apple, where last quarter's revenue from China grew 71 percent year over year, helped mainly by strong sales of Apple's larger new phones. Even worse for HTC in China -- and for other Android device makers -- is that Apple is seeing higher switching rates from Android to iOS.

Simply put: HTC is caught between a rock and hard place.

Apple's iPhone sales in China are surging while HTC is not only competing against the iPhone but also with Samsung, Lenovo, Huawei and Xiaomi, to name a few, when it comes to Android phones.

I met with some of the company's representatives in January where I heard HTC will expand beyond smartphones; something it already started to do with the release of last year's Re camera. Watch for HTC to branch out even further with non-smartphones this year, perhaps adding smarthome and more connected products.

That's a great idea since China isn't panning out the way HTC had hoped. The only problem is: HTC's main competitors are doing the same thing with wearables and other devices.

See also: Five reasons to choose the HTC One M9 instead of the Samsung Galaxy S6 Edge

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