Harman Deems Neodymium Crisis ‘Under Control’ Via Substitute Magnets

Building on growth in Harman’s infotainment division, the company signed its first deal with General Motors, a $900 million OEM contract for “scalable advanced technology,” Harman CEO Dinesh Paliwal said on the company’s fiscal Q4 earnings call Friday. He wouldn’t say which GM models the contract covers. Harman is “well under way” on development, and the first GM vehicles with Harman technology are expected to hit dealerships “sometime in 2014,” he said. The contract follows earlier announcements during the year of contracts with Volkswagen Group, valued at $400 million, BMW for $2 billion for future-generation infotainment systems, and $500 million awards from emerging market companies Tata Motors in India and Geely, BAIC and Changan in China.

Paliwal played up Chrysler’s recent announcement of the Uconnect platform, which offers connectivity from the road using an embedded Sprint 3G modem, bypassing the need for a smartphone. The network-agnostic technology, using Harman-built electronics, will debut in a 2013 Dodge RAM 1500 pickup truck and 2013 Dodge Viper. Drivers will use buttons on the steering wheel and voice commands to do Internet searches, read and write text messages and enter navigation destinations “without multiple prompts,” Paliwal said. Vehicles with the Harman systems will also double as mobile hotspots, he said.

On Harman’s connected car strategy, Paliwal emphasized the company’s universal approach, integrating technology from Apple, Google, Microsoft and other partners, while engaging in “active safety integration.” Harman provides a software backbone comprising 3 million-3.5 million lines of code that work with a typical advanced vehicle’s “50-100 real-time sensors” and “five to six subsystems,” he said. “We're able to manipulate that data and determine the best route calculation, or the best eco-route for a green car,” he said. That’s an advanced level of processing that couldn’t be done effectively on a smartphone, he said, because a smartphone wouldn’t have access to a vehicle’s computer system.

Automotive companies have limited smartphone integration with cars’ electronics systems because “smartphones have hundreds of applications that were written by kids … anywhere from 13-17 years, especially in the case of Google,” Paliwal said. App authors don’t have knowledge of issues related to car safety, he said. Smart integration of the phone and embedded systems will co-exist, he said. He said Chrysler’s Uconnect will be agnostic and work with any phone. “We will provide technology that will allow integration of any phone” for basic level functions, he said, including turn-by-turn, point of interest and traffic advisory data. The boost in contracts from auto companies over the 6-12 months underscores that companies “get” Harman’s approach, he said. Net sales in the Infotainment division were $588 million for Q4, down 4 percent from Q4 2011 but up 5 percent based on local currency, Paliwal said.

In Harman’s lifestyle division, “excellent growth in car audio” of 28 percent was trimmed 3 percent by neodymium surcharges passed on to customers. Paliwal cited a healthy gain of home and multimedia consumer business, which has “traditionally struggled and not made money.” The division is now at mid-single-digit percentage operating profit, he said. Overall, it was a “very good year” for the Lifestyle division, he said.

Overall, Harman’s sales for fiscal Q4 rose 6 percent to $1.1 billion from the 2011 period. For the year, sales were $4.4 billion, up 16 percent from 2011, driven by strong demand in the luxury automotive segment and continued expansion in BRIC countries, the company said. Sales were up despite commodity cost increases -- largely from steep pricing increases in neodymium that challenged Harman in its Lifestyle and Professional businesses (CED Aug 31 p1). Paliwal said those challenges have “gone away.” Overall for the company, pass-through neodymium surcharges accounted for 4 percent of revenue growth for the year but at zero margin, he said.

"We'll not talk about neodymium, even if the prices are still higher,” Paliwal said. The company’s Lifestyle division “has done a very good job” dealing with the “neodymium issue,” which “should be falling off the bottom line,” he said. Harman had set a goal to be past the neodymium pricing matter this year, Paliwal said on Harman’s Q3 earnings call in the winter (CED Feb 8 p9). But it reported a gross margin decline in the Professional division of 230 basis points to 38.4 percent for the year primarily due to “higher costs for neodymium magnets and investments related to completion of new production capacity in China.” Even if neodymium is still “a bit of a headwind,” the company will find ways to deal with it, Paliwal said, adding Harman has mostly passed on price increases to customers. If the price of neodymium goes down to year-ago levels, “our customers will get a break,” he said. He also referred to “advanced development” in material sciences to find a substitute “to replace neo with better acoustics capabilities and design changes.” Questions to Harman about the substitute material weren’t answered by our deadline. “Neodymium is quite under control,” Paliwal said.

Paliwal emphasized Harman’s diversified sales where the EU5 represents 30 percent of the company’s sales, and 74 percent of that “is in the robust German market,” making Harman’s exposure to European uncertainty “hardly any,” he said. “We have nothing to do with Greece or other slumping economies.” Despite what Paliwal called an “outstanding year,” though, Harman cut guidance for fiscal 2013, citing a weak euro. The company cut its outlook to $4.3 billion-$4.6 billion vs. guidance of $4.55 billion-$4.8 billion given in October. Strong growth in BRIC countries has lessened dependence on mature Western economies, Paliwal said. North America comprised 40 percent of sales in fiscal 2012, BRIC countries 12 percent and the rest of the world 18 percent, he said.

Harman added 600 patents and patent filings during fiscal 2012 and its intellectual property portfolio has doubled over the last five years to more than 4,400 patents, Paliwal said. Harman shares closed 7.5 percent higher Friday at $45.68.