Samsung targets pole position in auto-tech sector
Takeover of Harman highlights battle to colonise the inside of the
The relationship between Silicon Valley and Detroit got complicated quickly. Some carmakers see Uber, Apple and Google as allies, adopting their smartphone software into their cars’ dashboards. Others see them as existential threats that will do to them what the iPhone did to Nokia.
Young Sohn, Samsung’s president and chief strategy officer, sees ample opportunity for disruption, saying on Monday that the “car of tomorrow” will be transformed by technology “in the same way simple feature phones have become sophisticated smart devices over the last decade”.
But unlike Samsung’s rivals in Silicon Valley, Mr Sohn made it clear which side of the “frenemy” line his company wanted to be, as it announced the $8bn acquisition of automotive supplier Harman.
“We are not interested in building cars,” says Mr Sohn.
Harman’s relationship with car manufacturers over the world was “as important” as the technology that it offers, he says. “The question is, how do you integrate the technology that can compute the future of the car experience? You can’t do that without having significant relationship with the customer.”
That approach is “a big difference to the Googles and Apples of the world”, says Carolina Milanesi, tech industry analyst at Creative Strategies.
Samsung’s decision to buy rather than build its way into the car industry is the latest in a wave of multibillion-dollar auto-tech acquisitions in recent months.
Softbank’s $32bn purchase of UK-based chip designer Arm Holdings in September was driven in large part by its chairman Masayoshi Son’s conviction that connected vehicles will be the “next big thing”. Last month, mobile chipmaker Qualcomm bid $47bn for NXP, which has a leading position in automotive processors.
Samsung believes its purchase of Harman — which makes a wide range of audio, connectivity and security technology, with two-thirds of revenues coming from the car sector — will open up a market worth $100bn a year by 2025.
The Korean electronics company has been considering how to seize that opportunity for almost a year, after setting up an automotive electronics team last December and making more than a dozen investments in start-ups in the field.
Meanwhile, the smartphone market has declined and Samsung’s position has become more precarious following the costly and embarrassing recall of the Galaxy Note 7 after dozens of its flagship handsets burst into flames. That may have accelerated their efforts to diversify, Ms Milanesi says.
“If you look at Samsung, the key problem is the lack of organic growth. But with this acquisition, they have made a quantum change,” says Hwang Min Seong, an analyst with Samsung Securities.
“And it is not a big-ticket deal. If it was a big-ticket deal, I would be concerned, but this is just $8bn … that is what I like,” says Mr Hwang, comparing the buyout price with the company’s $60bn cash pile.
Samsung’s automotive division accounts for less than 1 per cent of its revenues. Now, it is in pole position in the race to colonise the inside of the car, providing an array of technology services from vehicle internet access to data analytics.
Mr Sohn says the Harman acquisition will also help it with the machine learning technology that is key to making self-driving cars learn from the environment around them.
As well as the speakers and other audio technology for which its brand is best known to consumers, Harman’s portfolio also includes over-the-air software updates — something future cars will use to upgrade their performance or fix bugs while on the road.
What it does not include, however, are things such as thermal systems and powertrains that other “tier 1” automotive components suppliers provide. That makes the pair a good fit, says Mark Boyadjis, analyst at IHS Markit, a research group.
“Harman connects very well to Samsung because there is not much overlap between the two companies yet. There are no other areas that Harman services that Samsung wouldn’t be interested in,” as there might have been with larger suppliers such as Continental, Bosch or Delphi, he says. Shares in auto suppliers such as Delphi, Visteon and Lear all rose on Monday following the deal.
IHS had previously predicted that Harman would gain about 10 per cent of the $60bn vehicle electronics market by 2022, putting it among the top three in the sector, but Mr Boyadjis believes that could increase as Samsung’s scale helps it drive down costs and prices. Samsung also sees opportunities to combine its display technology with Harman’s audio expertise.
Even as Uber, Google, Baidu and Apple all continue to work on self-driving cars, Dinesh Paliwal, Harman’s chief executive, believes Silicon Valley companies “underestimate the complexity of the industry”.
“Long-term relationships are vital to success in the auto business,” he said on a recent conference call. “This is a big move. This will shake the industry.”