Samsung's $8 billion purchase of audio and automotive specialist Harman earlier today may come as a surprise to some, given the company's penchant for building smartphones. However, this acquisition could turn out to be one of utmost importance for one of the company's future strategies.
In its press release, Samsung made it quite clear that it was most interested in Harman's industry leading automotive technology, and the company is quite clearly looking to become a leader in the automotive market too. But why?
Building a complete package
Samsung has actually been stepping up its focus on the automotive industry over the past year or so, particularly with a view to providing integrated circuits and processors for the market. Last year the company started up a business division focused exclusively on automotive electronics. Samsung recently acquired a stake in Chinese carmaker BYD for $455 million in July, too.
Currently, Samsung's automotive division makes advantage of the company's leading memory technology by designing DRAM, NAND flash, and memory controller modules for vehicle computer systems. This division is also working closely with Samsung's industrial CMOS image sensor (CIS) technology to develop object recognition systems for driver assist technologies.
Harman, on the other hand, is a product and equipment designer, meaning that it is focused on producing the end systems for vehicles that consumers will end up using. Harman already has industry leading embedded infotainment solutions on the market, which include voice recognition technology, camera video input, object detection, augmented navigation, multimedia, security, and apps for device integration. These systems are already being sold to the likes of BMW, Audi, Chrysler, and Porsche, just to name a few.
That being said, Samsung has been working on its own solution for connected vehicles based on its Tizen OS, called Samsung Connect Auto. The little dongle was shown off at MWC, and offers Wi-Fi connectivity and real time alerts from a simple OBD II plug. However, this system is not as deeply integrated or as comprehensive as Harman's and other connected vehicle options on the market.
Combined, Samsung will now likely end up supplying the components for future Harman Kardon systems, while using the expertise at both companies to develop new technologies for the connected automotive market, all under one roof. Making a play for the automotive market is actually in line with Samsung's longer term smart product strategy, rather than an aberration.
A fight to secure IC share
While we're on the topic of components, we should highlight just how important the automotive sector is becoming to chip manufacturers. Automotive integrated circuit (IC) sales were estimated to have been worth $20.5 billion in 2015, and are expected to reach a global total worth of around $27 billion by the end of the decade.
In 2015, analog ICs and microcontrollers accounted for approximately 74 percent of market sales. Memory ICs, which Samsung specializes in, accounted for 7.8 percent of total revenue. However, this is expected to climb to 12 percent by 2019, and the automotive memory market may be worth around $3.3 billion annually.
Furthermore, automotive systems are anticipated to be one of the fastest growing technology market segments. Growth is expected to hit an average compound annual rate of 4.7 percent through to 2020. This is ahead of industrial and medical applications on 4.3 percent and is growing much faster than consumer electronics, Samsung's current target market for ICs, which will average 2.8 percent growth a year.
In recent years, Samsung's semiconductor division has become an increasingly important part of the businesses profitability. In Q2 2016, Samsung's operating profit for the IT & Mobile Communications division, which includes smartphones, came to KRW 4.32 trillion. The company's semiconductor business achieved a KRW 2.64 trillion operating profit in the same quarter. The division has become increasingly important for Samsung as the global smartphone market shows its first signs of stagnation. The company is clearly eying automotive as the next big boom sector for semiconductor sales, which will help to drive profits in the future.
It's also worth noting that connected car shipments are expected to show huge growth themselves over the next half decade. Despite being well known as an audio specialist company, Harman already generates 45 percent of revenue, and 49 percent of operating income, from its connected car business. Annual revenue for the company totalled $7 billion as of September 2016. With the number connected cars on the road expected to hit 380 million by 2021, there automotive market is looking like the smartphone market did a decade ago, right before its mass-market explosion.
Keeping up with the competition
Of course, Samsung and Harman aren't the only companies looking to capitalize on the anticipated explosive growth in connected vehicles. This trend was largely behind Qualcomm's recent $47 billion purchase of NXP Semiconductor. NXP had been investing in microcontroller and other IC developments for the automotive industry.
Similarly, Texas Instruments, another broad IC developer, reported a huge 21 percent increase in its latest quarterly profits, due to strong demand from the automotive market. However, Texas Instruments and NXP are primarily focused on microcontroller and analog chips, while Samsung specialises in memory technologies.
Rival LG Electronics is offering a range of similar infotainment solutions to Harman.
This trend is not limited to IC component designers though. Rival LG Electronics is offering a range of similar infotainment solutions, which include navigation, safety, security, audio, and HUD features. Even GPU giant NVIDIA has developed hardware for smart and connected vehicles, including its latest cutting edge DRIVE PX 2 computer for self-driving vehicles. The technology not only processes the space around the car, but can locate itself on a map, and plan paths ahead with new deep learning technology.
Samsung has previously been linked to the self-driving car market, but this is a little outside the scope of its current technology and recent Harman acquisition. However, the camera and sensor technology developed by the two companies could eventually lead into this field too. Currently, Google and Tesla are the two major players in the self driving car market, with Tesla already backing its Autopilot technology into consumer models. Tesla's automotive hardware is supplied by NVIDIA. Smartphone rival Apple has also been involved in self-driving car development, although recently the company re-assigned its 1000-strong team to focus on software rather than hardware.
Apple now looks to be focusing on the software side of the market with CarPlay, as is Google with its Android Auto system, along with a selection of manufacturer designed system. Samsung's little talked about Tizen In-Vehicle Infotainment project was its rival to Android Auto, but we will have to see if the company will attempt to push Tizen into Harman's Smart Essentials platform.
Harman already offers choice of operating systems and software ecosystems (QNX, Genivi, Linux, Android, HTML5) for its hardware, and Smart Essentials is designed using a flexible Linux OS framework that leverages today's smartphone experiences, including CarPlay and Android Auto. It would be unlikely for Samsung to lock this down without a viable alternative of its own. At the very least, we can expect Samsung's future smartphones to play nicely with its automotive technology.
Wrap Up
In summary, Samsung is looking to the automotive market as the next big growth sector for its hardware business. Not only is the company aiming to capitalize on the hardware and IC supply side of the growing market, but now wants to become involved in selling complete infotainment systems to vehicle manufacturers too. The software aspect of the company's plans remains rather more unknown, but there's scope for Samsung to tie automotive in with its growing ecosystem of smart products and smartphones. Regardless, the acquisition of Harman immediately propels Samsung near the top of the connected vehicle market.
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