Samsung Seeks Auto Expansion — WSJ – Nasdaq

Business
November 15, 2016
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By Jonathan Cheng

Smartphone maker to buy U.S. firm Harman in $8 billion cash deal

Samsung Electronics Co. agreed to buy a U.S. automotive technology manufacturer for $8 billion, the South Korean
electronics giant’s biggest deal ever and its latest attempt to branch out beyond smartphones in the wake of its Galaxy
Note 7 fiasco.

Samsung doesn’t plan to make cars itself, but sees automotive technology, and the broader shift toward connected,
driverless vehicles, as a promising growth area to sell more of its semiconductors, display panels and mobile services,
according to a person familiar with the matter.

Harman, perhaps best known for its Harman Kardon speakers and other audio gear, has diversified under Chief
Executive Dinesh Paliwal into software development and components for connected cars, such as Wi-Fi connectivity and
navigation systems. Much of that has been done on the shoulders of major acquisitions, such as a $780 million deal last
year for Mountain View, Calif.-based software-services company Symphony Teleca Corp.

Samsung’s move into the car-technology business comes amid concerns among executives that it is too reliant on
smartphones, the main driver of the company’s growth in recent years. These concerns were compounded by the recent
decision to scrap its overheating Galaxy Note 7 devices, a move that has cost Samsung at least $5 billion in losses.

Cars have evolved to include an ever-rising number of chips and tens of thousands of lines of programming code, and
auto makers rely on suppliers for an increasing amount of technology in their cars. Samsung knows this well, as it
serves as a provider of costly and complex lithium-ion batteries to Nissan Motor Co. and several others. It is also the
world’s biggest producer of memory chips that go into virtually every consumer electronics product.

Cars also feature a growing number of display panels, of which Samsung also is a leading manufacturer. In the most
recent quarter, which was marred by the Galaxy Note 7 debacle, chips and display panels accounted for 84% of Samsung’s
operating profits.

“We think technology is more critical than being in the metal-bending business,” Young Sohn, Samsung’s strategy
chief, said in a September interview. “If Apple wants to build cars, we want to be their supplier; Detroit, too.
Anybody.”

Samsung, which had a war chest of $71 billion at the end of September this year, has proven its willingness to
spend freely to quickly gain a dominant position in a new industry. In just five years, it plowed roughly $3 billion
into complex biologic drugs, where it is already one of the world’s biggest contract manufacturers.

The Harman deal instantly makes Samsung a major player in car technology, and pushes its complicated relationship
with Apple Inc. and Google parent Alphabet Inc. — the South Korean company is both a partner and a rival to both —
into a new arena. The three tech giants all are positioning themselves to be major players in the field, using differing
strategies, as are tech upstarts such as Tesla Motors Inc. and Uber Technologies Inc. as well as traditional auto
companies.

“Strategically, this is a very big play for Samsung,” said Mark Boyadjis, an analyst for research firm IHS Markit.
“Samsung will get an instant and significant head-start into monetizing the automotive industry with Harman as a
subsidiary.”

IHS Markit estimates the market for automotive hardware for infotainment, acoustics, display and other systems will
soar to $61 billion in 2022 from $42 billion this year.

The acquisition of Harman is a rare big deal for Samsung, a sprawling company that has long preferred to develop
its own technologies in-house.

Samsung’s third-generation heir Lee Jae-yong has sat on the board of directors of Exor SpA, the controlling
shareholder of Fiat Chrysler Automobiles NV, for the past four years, and Samsung last year assembled a task force to
look into different ways to jump into the automotive world.

But after looking at how long it would take Samsung to build up those capabilities internally, executives decided
it would be much faster to make an acquisition, according to the person familiar with the matter, who added that talks
with Harman began during the summer.

Harman, which had revenue of $6.9 billion in its last fiscal year, has won big new contracts with General Motors
Co. and Fiat Chrysler. It has projected an order backlog of $24 billion. About two-thirds of its current sales come from
auto makers. The Samsung deal is subject to approval by Harman shareholders.

The technological revolution in cars has driven changes in the chip and software industries. Qualcomm Inc. last
month agreed to pay $39 billion for NXP Semiconductors NV, the world’s largest developer of chips for automobiles.

Google parent Alphabet has been testing software that enables cars to drive themselves, using modified Lexus SUVs
and its own prototype vehicles. The Google cars have driven a total of more than 2 million miles, gathering data to
refine performance and safety.

Apple has been working on building its own electric, self-driving car, in a secret initiative code-named Project
Titan. This summer, after a number of stumbles, the company assigned Bob Mansfield, a veteran Apple executive, to take
over and he subsequently shut some elements of Titan, The Wall Street Journal reported in September, leaving Apple’s
exact strategy a mystery.

This isn’t Samsung’s first foray into the automotive industry. In 1994, Chairman Lee Kun-hee launched Samsung
Motors, with assistance from Nissan, before being forced to sell control of the company to Renault SA in 1998, after the
Asian financial crisis.

Evercore Partners Inc. advised Samsung, while J.P. Morgan Chase & Co. and Lazard Ltd. advised Harman.

–John D. Stoll in Detroit and Tim Higgins in San Francisco contributed to this article.

Write to Jonathan Cheng at jonathan.cheng@wsj.com


  (END) Dow Jones Newswires
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