Harman Sets Sights on Emerging Markets, Pushes Infotainment, Audio Businesses

Harman International reported net operating income of $53 million for the second fiscal quarter ended Dec. 31, compared with a profit of $13 million a year earlier. Net sales were up 3 percent to $956 million, the company said.

The company continues to “balance its footprint in western and emerging markets,” Harman CEO Dinesh Paliwal said on the company’s quarterly earnings webcast Thursday, and to focus “globally to take advantage of rapid growth in emerging markets.” He said the company is “gaining momentum” with its next-gen scalable infotainment platform, which has booked $2 billion in orders since its introduction a year ago (CED Nov 3 p8). Toyota launched the system at CES last month, and Harman received a $1.2 billion contract from VW Group, Paliwal said. The new platform has the flexibility to produce revenue “more quickly than traditional R&D-based systems,” he said. Production of the first order for Toyota Europe will start in low volume this year, Paliwal said, and “I would not expect any revenue from this new platform business to come in fiscal 2011.” He repeated company forecasts of an “upside” in that business in 2012 and “a decent upside” in 2013.

Paliwal reaffirmed the company’s aggressive buildup of automotive capability in China to address the “world’s largest automotive market,” which he said is expected to top 30 million vehicles by 2015. Harman recently broke ground in Dandong in northern China for an R&D and manufacturing complex due to go on line this summer to serve the “rapid growth of domestic demand in China” from the company’s automotive, professional and consumer divisions, Paliwal said. He referred to “record numbers” -- 60-90 percent growth -- that Harman customers Audi, BMW and Mercedes are posting in China and said the 430,000-square-foot Dandong facility will be Harman’s largest site, complementing Chinese operations in Shanghai, Shenzhen and Suzhou.

Many vehicle sales in China will be to first-time owners, Paliwal said, and Harman wants to establish its brand with customers early on. He estimated the Chinese penetration rate for infotainment systems in luxury vehicles -- from makers in the U.S., Japan, South Korea and Europe -- at 25 percent, “more than in the U.S.” and in line with European penetration. The systems range from low-end to high-quality systems, he said. He sidestepped a question about Harman’s share of luxury infotainment market but said, “You should expect a lot more to come from Harman” so the company accounts for a bigger share of supply, including in China.

Harman’s biggest profit-making opportunity is in branded audio, Paliwal said. Unlike infotainment, a “very challenging business” in terms of profit, audio will create “a very good bottom line for our business."

While Harman is expanding globally, including its presence in Hungary and Mexico, it said it is contracting domestically. The company said it will close a Washington, Mo., manufacturing plant by 2012, and shift some production to a Franklin, Ky., plant.

Despite a buildup in liquidity to $1.3 billion, Paliwal said Harman is not stepping up acquisition plans, adding that “the best return on investment is through organic growth.” The company will look at opportunities in technology and channel access, like its deal with Eletrônica Selenium in Brazil, he said. “I don’t think we're interested in any large acquisition unless somebody comes to us with a magically compelling case that makes our profitability look better.” He said the company is looking for $50 million to $200 million companies “opportunistically” to bolster its portfolio on the technology side in the U.S. and on the distribution side in emerging markets where it can “gain broader distribution and faster access to manufacturing and resources.” Harman shares closed 12 percent higher to $48.79 in Thursday trading.