MANAGEMENT: Dinesh Paliwal sets out to overhaul the fortunes of Harman International.
When Dinesh Paliwal left ABB in June last year, a lot of his colleagues as well as analysts were taken by surprise. As president (global markets & technology), chairman and CEO of North America and a member of the high-profile group executive committee, most people thought he was a strong contender for the top job at the Zurich-headquartered global engineering major.
Paliwal had left to join Harman International of USA, a producer of personal, professional and automotive communication devices (speakers, amplifiers, audio systems etc). With a turnover of $3.5 billion, it was much smaller than ABB (2007 revenue: $29 billion) but had over a dozen well-known brands like JBL, Infinity, Mark Levinson and Harman Kardon in its portfolio.
What made Paliwal move to Harman was a call from Henry Kravis, the co-founder and head of leading private equity firm Kohlberg Kravis Roberts & Co (KKR). His firm had initiated Harman’s acquisition for $8 billion and wanted to have its own man on the driver’s seat.
In July 2007, Paliwal joined Harman. The timing couldn’t have been worse. The financial markets took a turn for the worse soon. In a few short weeks, the KKR deal fell through and the Harman stock fell by half. But Paliwal decided to stay on. Instead of penalising KKR for backtracking on the acquisition, he got a $400-million, five-year loan from it at one per cent interest!
It did not take long for Paliwal, 51, to see the problem areas. Harman had orders worth $5 billion on its books from top automobile makers to be executed from 2009 to 2012 but little investments in research and development to support these orders.
The 8-10 acquisitions done in the past were not integrated with the parent in order to retain their entrepreneurial nature. “These were all functioning like independent silos,” says Paliwal. This added to the costs. To make matters worse, about 95 per cent of the company’s engineering and manufacturing was at high-cost locations in Europe and the US.
The problems were not too unfamiliar to Paliwal. At ABB, he had pioneered the expansion into China and India, low-cost production countries which are also rapidly-expanding markets. The result was sizeable savings coupled with better market penetration. He decided to put in place a similar strategy at Harman.
Paliwal shut four units in the US and downsized three in Europe. He opened a new plant in China and doubled the size of plants in Hungary and Mexico. In the bargain, about 400 Harman employees in the US lost their jobs.
Last week, Harman tied up with Wipro for a research & development centre at Bangalore. Some 200 people, all on Wipro’s payroll, will do research for Harman on areas like hands-free, navigation and Bluetooth technologies. Many of these people, Paliwal says, have been sent to Harman’s large automotive customers in Europe to evaluate their requirements.
At the same time, all the 20 business units of Harman have been integrated with unified functions like global sourcing (worth $2.5 billion) and human resources. All told, Paliwal hopes to save $400 million in costs by 2010.
Harman has also invested $250 million in research & development for automotive products. This is Harman’s largest business and accounts for almost 70 per cent of its business. The company think tank too has got a makeover. Almost 70 per cent of the board and 75-80 per cent of the top management of Harman is new.
Cutting costs is just one part of Paliwal’s strategy. On the market expansion side, a consultant has been hired to study the full market potential of China. India and Russia will follow next. “These three countries are less than 10 per cent of our business right now. It should be 30-40 per cent in five years,” says Paliwal. In November, the Harman management board travels to China. Paliwal says there is a good chance it may come to India as well.
Paliwal has deep roots in India. His father was a freedom fighter who fought the British along with Mahatma Gandhi. Paliwal studied at St John’s College at Agra and then at the Indian Institute of Technology, Roorkee. He worked for two years (1979-81) with Ballarpur Industries before leaving for the US. Till recently, he had an Indian passport. Now, he is an American citizen.
In February this year, Paliwal replaced Sydney Harman, the founder of the company and a five per cent shareholder, as chairman. He may have won the board’s vote, but Paliwal still needs to win the trust of investors. The Harman share price has been lying low for long.
Also, Harman’s consumer business faces stiff competition from large Asian players. Paliwal admits there is a small loss in this business and will be content if it stabilises in a year or so. But he does not want to sell it. The brands in this business, says he, have an important play in his other two business lines, professional and automotive.
