Harman CEO Stakes Future in Software as Autos Become Smarter

Apr 04, 2014 9:41 am ET

(Updates with today’s trading in sixth paragraph.)

April 4 (Bloomberg) -- Harman International Industries Inc., the maker of Harman Kardon and JBL audio equipment, wants to become largely a software supplier to the auto industry, a move that would allow it to cut as much as half of its manufacturing workforce in the next five to ten years.

Harman, which makes technology for auto-navigation systems and infotainment features for cars, gets about half of its $4.3 billion annual revenue from that business. Of that, about 75 percent is from software, Dinesh Paliwal, chief executive officer, said in an interview yesterday at Bloomberg News headquarters in New York. The rest comes from the less- profitable equipment side, he said.

“We’re not in any hurry to get out of hardware, but we want to make money in it,” Paliwal said. “The money is actually in software. It’s in the software design and architecture and safety, which is what we’re spending our money on right now.”

Becoming a software company would allow Stamford, Connecticut-based Harman to reduce its manufacturing workforce to about 3,000 jobs, from as many as 6,000 now, he said. Harman employs 14,500 worldwide.

“We’ll have less blue-collar jobs, but more knowledge workers, engineers,” Paliwal said. “We have new labs in Chicago, Palo Alto and R&D centers in India, China and Ukraine.”

The company’s shares fell less than 1 percent to $108.89 at 9:39 a.m. in New York. They gained 83 percent in 2013 and had risen 33 percent this year through yesterday.

Connected Drivers

Harman, which also makes audio equipment for homes and larger venues, such as airports and concert halls, is focusing on software as more drivers look to be constantly connected. In- vehicle technology is the top selling point for 39 percent of car buyers -- more than twice the 14 percent who say their first consideration is traditional performance measures such as power and speed -- according to a study that consulting firm Accenture released in December.

Investors already value Harman, which makes the infotainment equipment on 80 percent of the luxury cars on the market, as more than an auto supplier.

The company’s shift toward software has attracted coverage from one technology analyst, who joined a field previously comprised of auto experts, Paliwal said.

Tavis McCourt, a Raymond James analyst who also covers Apple Inc. and Netgear Inc., early last month initiated coverage of Harman with the equivalent of a buy rating, data compiled by Bloomberg shows.

Harman’s price-to-earnings ratio is 32, compared with an average of more than 15 for the auto supplier industry, data compiled by Bloomberg shows.

“Our stock has been grossly undervalued for a long time,” Paliwal said. “Now the street is starting to realize we are playing a major role in connectivity in the car and we are a true bridge between the new technology companies in the San Francisco Bay area and the automotive world.”