Why Samsung buying Harman is a big deal for the car industry
Main page Technologies

After losing more than $5 billion thanks to self-inflaming Note 7 devices, the South Korean tech giant is trying something that can well outshine the company's reputation as a leading smartphone manufacturer and change the entire industry.

Yesterday morning, Samsung (KRX: 005930) announced the acquisition of Harman International Industries (NYSE: Harman International Industries [HAR]), an American automotive technology manufacturer, for $8 billion in cash. Samsung has been criticized by its own executives for relying too much on its smartphone business that, as it turned out last quarter, is able to cast a shadow over the company's growth. Therefore, Samsung's foray into the automotive industry, starting with the biggest acquisition in the company's entire history, could be the manufacturer's best bet to recover from the scandal around Galaxy Note 7.

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Samsung will pay $112 per share in cash, or a total of approximately $8 billion, for Harman as soon as the deal is approved by Harman's shareholders. The Wall Street Journal reported that Samsung offered 28% more than Harman's last week's closing price, what helped the company's shares jump 25% on Monday on the news of the generous acquisition offer. The shares settled at a little over $109, which is still under Samsung's offer.

But let's look at why Samsung was ready to place such a generous offer for a relatively young Stamford-based firm right after suffering from huge losses of the Galaxy Note 7 recall. According to Barron's experts, Harman is one of the few companies working on automotive connectivity technologies or 'smart cars' and Samsung wants to be the one to revolutionize the neglected area of this car technology with Harman's help, and it seems like Samsung has all the chances to do so.

“We think technology is more critical than being in the metal-bending business. If Apple wants to build cars, we want to be their supplier; Detroit, too. Anybody,” Young Sohn, Samsung’s Chief Strategy Officer, told The WSJ in an interview.

With the craze around developing self-driving and fuel-free cars, with such companies as Tesla (NASDAQ: Tesla Motors [TSLA]), Uber and Google (NASDAQ: Alphabet Class A [GOOGL]) pushing the technology light years ahead, the technology used inside of the car dashboard remains virtually unchanged for the last decade. Barron's compared car dashboards to flip phones popular years ago as they still do the needed job but could be so much more. Similarly, the technology inside car dashboards did not move much further than providing scarce multimedia options, connecting with the driver's smartphone in some advanced models as well as offering other smaller additions while it still remains largely "closed" from the outside world.

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Apple (NASDAQ: Apple [AAPL]) was one of the first tech companies to dive into the development of in-car technology with its CarPlay interface about 3 years ago. The project was meant to develop a software capable of making car dashboard mirror an iPhone display, though the company has not shared any promising news about CarPlay by now. At the same time, Apple has been working on developing its own electric self-driving car under a 'secret' initiative called Project Titan, reports Fortune. However, the project was cancelled and re-assigned to several different executives over these years, making Apple's exact plans for Project Titan unclear.

Missing connectivity

And what Samsung could do right now, with the help of Harman's well-established market position, is to tap into the area of automotive connectivity faster than Apple, or any other rival, and bring real innovation to this lagging but important part of car technology. Harman has made its name by manufacturing in-car audio devices but the company also has superior expertise in building telematics systems that allow the cars to share information about its operation processes to the 'outside world' like emergency updates or real-time traffic reports, adds Barron's.

Harman said that it had already embedded its technology into more than 30 million vehicles, giving Samsung a head start into developing its own connectivity software and hardware. The company said in yesterday's press release that the acquisition gives Samsung a chance to "gain access" to Harman's 8,000 software engineers and designers already trained in developing connectivity technologies. The WSJ adds that thanks to the partnership with Harman, Samsung will be able to develop several automotive technologies such as telematic control units, allowing for communication with other vehicles and remote servers, navigation and infotainment systems, connected safety systems that collect information about accidents and vehicle dysfunctions and, of course, audio systems.

“The vehicle of tomorrow will be transformed by smart technology and connectivity in the same way that simple feature phones have become sophisticated smart devices over the past decade. We see substantial long-term growth opportunities in the auto technology market as demand for Samsung’s specialized electronic components and solutions continues to grow. Working together, we are confident that Harman can become a new kind of Tier 1 provider to the OEMs by delivering end-to-end solutions across the connected ecosystem,” Young Sohn said in the statement.

Despite the major losses from Galaxy Note 7 recall last quarter, the experts believe that Samsung is in a good shape for switching lanes from being mostly a smartphone manufacturer to exploring car connectivity technologies. According to the WSJ analysts, in the last quarter, chips and display panels constituted 84% of Samsung's operating profits, giving the company a rare chance to utilize its already existing hardware developments with the latest connectivity technologies of Harman. The company said in the press release on Harman deal that automotive electronics and connectivity technologies were expected to become a more than $100 billion market by 2025 and were a strategic priority for Samsung.

With Harman winning two new contracts with General Motors (NYSE: General Motors Company [GM]) and Fiat Chrysler (NYSE: Fiat Chrysler Automobiles [FCAU]) worth over $20 billion for the next year, Samsung could jump into new promising business right away.

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