SEOUL -- Samsung Electronics on Monday announced an $8 billion acquisition of U.S. autoparts supplier Harman International Industries, setting a course for new opportunities in the growing "internet of things" field amid troubles in its mainstay smartphone business.
The South Korean electronics giant plans to turn Harman into a wholly owned subsidiary by fall 2017. Harman is known for its GPS navigation and audio systems, as well as for safety features designed to prevent accidents. It rang up about $6.9 billion in sales and $680 million in operating profit for the fiscal year ended in June, with over 60% of sales coming from automotive components.
Samsung decided in December to set up a team for developing electronic auto components, outlining a plan to enter a field expected to grow on the back of the IoT boom. But while the company leads the world in smartphones and semiconductors, the auto sector is beyond its expertise. It had tried and failed to break into the industry before. The new automotive components team was looking to acquire an established player in order to make quick inroads into the field. Harman, which counts such global automakers as Toyota Motor, Volkswagen and BMW among its partners, caught the team's eye.
Compared with the electronics industry, companies in the auto industry prefer to trade with affiliates, which results in formidable barriers to entry for newcomers. But once they are in, they can expect a stable revenue stream off of multiyear contracts.
Taking cars to the next level, such as through self-driving systems, involves artificial intelligence, semiconductor sensors and other technology traditionally within the realm of electronics. Samsung hopes to conquer the autoparts market by creating synergies with Harman.
This will be the largest acquisition yet by a South Korean company, topping the $4.9 billion record set by Doosan Infracore's 2007 purchase of U.S. construction machinery maker Bobcat. It is also the first major decision by Samsung heir apparent and current Vice Chairman Lee Jae-yong since winning a board seat at the end of October.
Group unit Samsung Biologics debuted on South Korea's bourse on Thursday, ending the session with a market capitalization over 9.5 trillion won ($8.11 billion) on bullish investor sentiment. In addition to contract manufacturing of biopharmaceuticals, Samsung plans to bolster its efforts in developing and selling next-generation treatments called biosimilars, aiming to turn the business into a core segment alongside auto components.
Samsung barely broke even in its mainstay smartphone business in the July-September quarter after suspending sales of its fire-prone Galaxy Note 7. The number of smartphones shipped globally during the quarter fell 13% on the year, according to a U.S. market research company. With Chinese up-and-coming manufacturers quickly gaining ground, the smartphone market could be completely transformed in a few years.
But the South Korean company expects the market for auto components to more than triple in the decade through 2025 to $186.4 billion. "Harman perfectly complements Samsung in terms of technologies, products and solutions, and joining forces is a natural extension of the automotive strategy we have been pursuing for some time," Samsung Vice Chairman and CEO Kwon Oh-hyun said.
Panasonic and Japanese players are also working to turn automotive businesses into core operations. Samsung could follow in their footsteps, just as it did in the electronics market.