Harman bets on built-in systems for your dashboard

Image: Mathew Furman for Forebs

Harman CEO Dinesh Paliwal: If your phone gets hacked, it’s a headache. With a car it’s life or death

BMW 328i starts at $38,350 but will cost you thousands more once you start adding premium upgrades like fancier wheels, heated seats and advanced driver-assistance systems. If you want navigation with real-time traffic, you can choose the $2,750 technology package. Or you can just prop your iPhone in the cup holder like most people do.

There’s no question that drivers want access to the internet for everything. By 2022, 94 percent of all new cars will be connected to the cloud, up from 34 percent last year, predicts IHS Automotive. But how will they connect? Will it be through an embedded modem in the vehicle? Or will it be through the driver’s smartphone with systems like Apple CarPlay and Google’s Android Auto?

The “built-in vs brought-in” debate has huge implications for companies like Harman International Industries, the leader in embedded technology. It sold $3.1 billion worth of infotainment systems to carmakers in the fiscal year ended June 30, 2015, accounting for half of its $6.2 billion in total revenue.

On January 28, Chief Executive Dinesh Paliwal said Harman was on track to meet its 2016 financial targets as planned. But investors were spooked by the fact that revenue growth from the company’s connected-car division slowed to 9 percent from the prior quarter’s torrid 19 percent, sending the stock down 13 percent.

It was nothing new for Harman, which despite 11 straight quarters of steady earnings growth has been riding a roller-coaster on Wall Street. Shares soared from about $40 in early 2013 to nearly $150 last year before tanking to a recent $85. “It’s a big debate stock—second only to Tesla,” said JPMorgan’s Ryan Brinkman.

Paliwal shrugs it off. “I don’t understand the math,” he says. The 58-year-old CEO is so confident that built-in systems will prevail (largely for security and safety reasons) that he has wagered more than $1 billion in the last year to give Harman an advantage. Since January 2015, the company has made three strategic moves to acquire critical technology for the era of connected cars. It paid $780 million to buy California software maker Symphony Teleca for its cloud computing and analytics capability. It spent $170 million to buy Israeli tech firm Red Bend, whose software enables over-the-air vehicle updates. And two months ago, it added Israeli cybersecurity firm TowerSec for its anti-hacking software.

In a future world of autonomous driving, Paliwal’s bet is that Harman will become much more than a supplier of infotainment. It will be an important technology provider for the connected car of the future, supplying the brains that will enable vehicles to safely drive themselves and keep vehicle occupants securely connected to their homes and offices.

The vision is all part of Paliwal’s methodical transformation of Harman since taking the reins from the company’s founder in 2007. Sidney Harman and his partner, Bernard Kardon, were audio pioneers who got their start in the 1950s making sound equipment. In 1956, Harman bought out his partner’s interest in the company and later sold and repurchased Harman Kardon twice during the next few decades, eventually renaming it Harman International Industries. It has been publicly traded since 1986.

In April 2007, the 88-year-old Harman was ready to sell once more—this time for $8 billion to a unit of Goldman Sachs and Kohlberg Kravis Roberts (KKR) that had recruited Paliwal to replace the founding CEO. But the deal never happened—KKR and Goldman Sachs backed out five months later, citing concerns about Harman’s financial condition—and Paliwal was left holding the bag.

A native of India with master’s degrees in engineering and business from the Indian Institute of Technology and Miami of Ohio, Paliwal spent most of his career at ABB Group, the Zurich-based global energy and industrial company, rising to president. He liked the turnaround opportunity at Harman, so despite the failed deal, he decided to remain.

“Harman had great brands, but the processes were falling apart,” he says. “Costs were out of control, innovation was taking a backseat, and there was no globalisation.” The situation, he thought, was not unlike the challenge Lou Gerstner faced when taking over IBM. “The opportunity to transform the company was very attractive.”

But it meant tough decisions. After posting a $500 million loss the first year he was in charge, Paliwal cut a half-billion dollars in costs by eliminating luxuries like a corporate jet and by shifting manufacturing to China and other countries where automakers wanted their suppliers to be.

Working with the company’s lead director, Ann Korologos, who was labor secretary in the Reagan administration, Paliwal also over- hauled Harman’s board, replacing the founder, his daughter and a close ally with independent directors.

He also sought to reinvigorate Harman’s culture of innovation, which meant identifying future trends like the growing demand for connectivity. He reviewed Harman’s research and development (R&D) efforts and came up with a plan to develop or acquire the technology needed to capitalise on those trends. In six years, the company doubled the number of patents it held to 5,700, and since 2013, it has boosted R&D spending by an average of 15 percent a year.

Under Paliwal, Harman has added more than 16,000 employees. Revenues have almost doubled since 2010, and pretax earnings have nearly tripled to $700 million.

He knows investors are watching closely to see how the connected-car market plays out from here. Today about 25 percent of new cars, mostly luxury models, have embedded systems like Harman’s. But they’re expensive, and the content, like maps, becomes outdated quickly. Another 25 percent come with cheaper display audio systems linked to a smartphone. The rest have neither system, just a traditional AM/FM radio.

One thing’s for certain: Those car radios are going away fast. And Paliwal expects the smartphone-based systems to grow faster. People are just comfortable using their mobile devices and want the same experience in the car. That’s why Harman launched its own display audio system for entry-level cars last year.

Within a few years, though, Paliwal is convinced the built-in vs brought-in debate won’t matter anymore. “Once these cars come to market with our cybersecurity and over-the-air updates, this battle will be settled, because people know it’s safer.”