Samsung Electronics (NASDAQOTH:SSNLF) recently agreed to buy Harman International Industries (NYSE:HAR) for about $8 billion to expand its presence in connected and automotive electronics. Harman, a market leader in connected car solutions, supplies over 30 million vehicles with infotainment, telematics, safety, and security solutions.
About 65% of Harman's $7 billion in revenues last year came from the automotive market, and its backlog orders hit $24 billion at the end of June. Samsung CEO Oh-Hyun Kwon claimed that the acquisition "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."
Merging Harman's automotive businesses with Samsung's mobile and smart appliances businesses would make the tech giant a force to be reckoned with in the Internet of Things (IoT) market -- and that could spell trouble for companies like Apple (NASDAQ:AAPL) and Alphabet's (NASDAQ:GOOG) (NASDAQ:GOOGL) Google.
Why Samsung needed Harman
Samsung is the world's biggest manufacturer of smartphones and consumer electronics. The company's biggest weakness is its dependence on mobile devices, which accounted for 46% of its top line last quarter. That business has been shrinking due to commoditization and its costly Note 7 blunder.
To diversify away from that market, Samsung launched new wearable devices and smart appliances to expand its software ecosystem, and acquired smart home company SmartThings two years ago. To reduce its dependence on Google Android, Samsung launched its own OS, Tizen, for wearables and select smartphones.
With those products in place, Samsung carved out a decent moat against rival ecosystems like Apple's HomeKit and Google's Home/Nest. But one area where it lagged behind was the auto market. Apple's CarPlay and Google's Android Auto took over dashboards with their mirroring features, but Samsung users were stuck with MirrorLink, a clumsier protocol which is also used by Sony and HTC devices.
But by acquiring Harman, Samsung instantly becomes a Tier 1 auto supplier, and it will generate cost-cutting synergies by vertically integrating its processor and display businesses. Furthermore, Harman's future products will be built with Samsung's ecosystem integration in mind -- which should work more smoothly than products that are merely "compatible" with Apple and Google's mobile and IoT devices.
How Samsung counters Apple and Google
Simply put, a person who owns a Samsung phone, Samsung/SmartThings smart appliances, and a Harman-equipped car could easily have their personal data synchronized across all three "hubs." This is the kind of "ubiquitous computing" Google has talked about for years, and the kind of game-changing expansion Apple needs to diversify away from its core hardware devices.
Neither Google nor Apple can compete against Samsung's dominant position in first-party consumer electronics like smart TVs, refrigerators, and washing machines. Both companies need third-party appliance makers to make their devices compatible with Home or HomeKit for them to sync to their mobile apps. That strategy is a fairly safe one, since Google and Apple merely leverage their leading positions in mobile devices to expand their IoT ecosystems without shouldering the costs of manufacturing new hardware.
However, that strategy also relies on those partners making reliable appliances which work correctly with their smart home ecosystems. The same issues could affect cars which don't sync correctly with iOS and Android devices.
Why Google and Apple shouldn't worry... yet
Samsung's game plan sounds ambitious, but it could be bogged down by technical issues. Samsung's SmartThings platform was plagued with glitches earlier this year, and researchers claimed that the platform was poorly protected from malicious hacks. The recent Mirai botnet attack, which used hijacked IoT devices like routers and IP cameras to knock major websites offline, could also discourage consumers to connect everything to the internet.
Samsung's previous attempts to carve out its own non-Google ecosystem -- like Tizen, S Health, Milk Music, and the Galaxy Apps Store -- also haven't been very effective. Instead, each attempt merely revealed that the majority of Samsung owners preferred using Google's services.
Samsung might now have the leverage in mobile hardware, consumer electronics, and connected cars to start building a cohesive IoT ecosystem, but Google and Apple's clout in mobile operating systems will likely counter that push by simply convincing hardware makers to tether their products to their Android and iOS-based apps. Therefore, Samsung's purchase of Harman was a smart move which will give it a growing automotive parts business, but it probably won't enable it to topple Google, Apple, and others in the growing smart home/car market just yet.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Leo Sun has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), and Apple. The Motley Fool has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.