After a Month Delay U.S. Customs Lets HTC Handsets Trickle Through

HTC Corp. (TPE:2498) had some happy news to report Monday.  Its handsets — including the Evo 4G LTE and the One X — finally began to be inspected and cleared U.S. Customs and Border Patrol checkpoints.

I. HTC Handsets Finally Start to Pass Customs

HTC, based out of Taoyuan, Taiwan, has suffered deep losses to revenue at the hands of U.S. Customs.  U.S. Customs seized the handsets after Apple, Inc. (AAPL), a U.S. smartphone manufacturer, won a preliminary injunction against HTC from the U.S. International Trade Commission.  The injunction dealt with a single patent on “data-tapping” — U.S. Patent No. 5,946,647.  Data-tapping involves converting strings such as phone numbers to actionable links.

The One X and Evo 4G LTE were shipped with a fix, which implement a new feature not found in Apple’s iOS, dubbed “App Associations.  Despite the workaround removing the infringing properties from core Android apps, the HTC handsets were held up at Customs for over a month, with the ban first taking effect on April 19.

With the leisurely pace of the review, HTC faced major revenue losses.  The U.S. is HTC’s biggest market, and the world’s second largest smartphone market.  HTC, like Apple, manufactures its smartphones in China.  Some have suggested that U.S. manufacturing could be used as a workaround, but this would be problematic given HTC’s minimal U.S. engineering presence and the cost of finding local plants and retooling them.  Thus HTC remains largely at the mercy of Customs.
 
HTC One X == FREED The company reported Monday, “Some of our products have passed the review and have been delivered to our telecoms operators’ clients in the US.  The company is closely working with the US customs to speed up the review.  The company is confident that the problem will be resolved soon.”

II. Pressure is Growing For Customs to Avoid Lengthy Bans on Compliant Phones

U.S. Customs faced a lot of pressure to resolve the issue more expediently as news of the ban spread.  AT&T and Sprint were both upset at the ban as they had already started preorders of the new HTC Android handsets.  And blogs such as The Verge obtained samples that showed that the infringing features were gone, raising further criticism of U.S. Customs’ slow response.

The notoriously secretive and self-contained government agency is working to resolve the screening within 3 weeks, according to statements by HTC.  This newfound speed may help to decrease financial harm to HTC, which is already struggling.

The relief is much needed — Q1 2012 saw HTC handset sales plunge to 7.68m units, down from 9.3m units in Q1 2011.  The 17 percent drop in handset shipment was largely blamed on strong sales by Apple and Android rival Samsung Electronics Comp., Ltd. (KSC:005930).

Before the bad news of the ban HTC told analysts it was hoping to grow revenue by 55 percent in Q2 2012, to NT$105 billion ($3.55B USD).  It is unknown how much the delay in shipments of flagship products might have cost HTC.

The timetable for a somewhat timely review/screening is good news for Android handset maker, Motorola Mobility Inc. (MMI) who is facing an import ban from Microsoft Corp. (MSFT) in less than two months from now.

Unlike Motorola, which resisted Microsoft’s licensing demands, HTC pays Microsoft an estimated $10 USD in patent protection money per handset sold.  That licensing pact did not save it from an import ban, though.

HTC licenses Microsoft’s patents, but was banned by Apple.
[Image Source: Asa Mathat/All Things D]
The ITC gives guidance to Customs based on exclusion orders.  But according to ITC officials, Customs operates largely autonomously.  While damaging Taiwanese phonemaker HTC might not have been a domestic problem, Customs faced scrutiny due to the implications for American telecoms.  Customs will likely face even more pressure to give a timely review to Motorola, which is currently the largest American cellphone hardware designer after Apple.