Harman to phase out hardware production

Suppliers see money in software

Harman to phase out hardware production

Paliwal: Half of revenue comes from automotive infotainment.
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Editor's note: An earlier version of this story incorrectly described Harman International's annual revenues.

Harman International, a top producer of speakers and other in-car audio equipment, plans to ease out of hardware so it can concentrate on software as its core automotive product.

The company in Stamford, Conn., will make a gradual transition into software during the next four or five years, CEO Dinesh Paliwal said.

About half of Harman's $5.3 billion revenue comes from automotive infotainment, and software accounts for 75 percent of those infotainment revenues, Paliwal said.

The company eventually will outsource production of speakers, the control boxes in vehicles' instrument panels called head units and other hardware to vendors that will produce those parts according to Harman's specs.

Paliwal expects to reduce Harman's manufacturing work force to 3,000 employees from 6,000 today.

"This is not about to happen tomorrow or the day after," Paliwal said during an interview Tuesday, Aug. 12, with Automotive News. "Automakers won't have to make any changes over the life cycle of their products. But we'll split off hardware and software in four or five years. Harman is pushing that."

Harman's shift comes at a time when a number of Tier 1 suppliers are focusing on the expanding need to develop software for infotainment and collision avoidance.

For example, Delphi Automotive expects to increase its annual sales of active safety systems by $200 million from 2013 through 2016. Much of that will come from software sales.

"It's huge," Jeff Owens, Delphi Automotive's chief technical officer, said in an interview during the 2014 CAR Management Briefing Seminars in Traverse City, Mich., this month. "You've got a lot more volume coming in that space, despite big price pressure."

Once a vehicle has been equipped with forward-looking radar and cameras, say, for intelligent cruise control, automakers can add features such as pedestrian detection simply by adding software.

And that software can fatten a supplier's revenues despite declining prices of cameras, radar and other hardware.

Harman, which claims a 24 percent share of the global infotainment market, already is a big software provider.

Its audio systems, for example, typically have software for digital signal processing, noise cancellation and optimized tuning.

German luxury brands such as Audi, Mercedes-Benz and BMW, Harman's biggest customer, have developed a voracious appetite for software as they engage in a can-you-top-this race to improve their infotainment systems.

The proposed transition comes at a time when Harman has been winning its share of contracts. In 2016, for example, Harman will start producing infotainment hardware and software for all General Motors brands, a deal that has grown from an original $900 million to $2.4 billion, according to Paliwal.

But Paliwal has focused on growth opportunities for software rather than speakers, head units and console screens.

"Harman always made a lot of software, but we weren't getting paid [enough] for it," Paliwal said. "We put 20 million lines of code in every vehicle we touch."

You can reach David Sedgwick at dsedgwick@crain.com.


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