Feb 18

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2/18/2011 3:56 PM  RssIcon

2011-2-18-selenium1
Blake Augsburger, EVP Harman, President Professional Division, Americas Country Manager (left) is joined at the Selenium display during Winter NAMM by Harman Brazil Country Manager, Rodrigo Kniest.
By Frank Wells.

In 2010, Harman acquired Brazilian speaker manufacturer, Eletrônica Selenium. During the January NAMM Show, Pro Sound News discussed the transformation of Selenium into Harman Brazil with Blake Augsburger, EVP Harman, President Professional Division, Americas Country Manager, and Rodrigo Kniest, Brazil Country Manager for Harman Brazil, which includes Selenium. What follows is the full transcript of that conversation:

When last year [2010] was the Harman purchase of Selenium finalized?

AUGSBURGER: June. That was good because it occurred at the very beginning of our fiscal year--we had one month in the last fiscal year, so July 1st, we were all aligned.

What was the motivation behind the Selenium purchase—obviously, JBL’s been a speaker manufacturer for a long time already.

AUGSBURGER: There were a couple of different things. One is a big push to grow our business in the emerging markets. You can do that at a very slow pace by setting up an office and starting to put people in there or you can move it at a step function-type rate by acquiring a local business. Brazil is a very exciting market for us with the Olympics, with the World Cup, so we were already looking at opportunities there and then Selenium became available. We’ve known about Selenium for years; I looked at Selenium five years ago. It aligns very well with our portfolio in that there weren’t a lot of conflicting products where we had to focus things out in favor of JBL product or some other brand that we might have, and it’s just been very complementary. So it’s been a perfect match for us from a lot of different synergistic avenues.

Why was Selenium looking to sell? What was the motivation?

KNIEST: In fact, Selenium was doing great. We had our best year in history just in 2008. 2009 was a little bit slow because of the world economy. In fact, in the 2009 calendar year, second semester, we just got back to the same level as 2008--so just the first semester, of the 2009 calendar year, that was really a downturn for us. We got back really fast. In fact, much faster than our competitors in Brazil. We did our homework really well; we are performing really well. The former owners of the company were really happy about it and we were planning to have 2010 as the best year in the history of Selenium. But when Harman approached us, we started to discuss business opportunities in Brazil; we found that there were so many synergies and we could, at Selenium, grow so much faster and be so much bigger, and the opportunity was so good that the previous owners of the company they decided that, “Wow, it really makes sense.” They were the first generation that started the company, and three of the four owners, they were between 70 to 80 years old, so the timing was perfect.

AUGSBURGER: They were looking for an exit strategy. They were older and ready to do different things in their lives, and it all matched up pretty well. It wasn’t one of these deals where it was a distressed sale; it was quite the opposite.

Were there challenges in the integration?

AUGSBURGER: Well, we’re still involved in the integration. Our plan [is expected to take] basically a year before we expect to feel that it’s fully integrated and we’re taking advantage of all the synergies that we identified during the deal. But it’s been really smooth; it’s gone very well. There were a couple of different thoughts. We’re looking to grow the business, so the first part was, “How do we grow our sales in Brazil with Selenium?” And then the second point was, “How do we grow Selenium sales outside of Brazil through our current distribution channel?” So we had those two pieces, plus the import duties into Brazil are very high, so we’re looking at, “How do we manufacture more Harman product in Brazil to address those high import duties?”

So, there are business aspects that made a lot of sense because you are now a local company?

AUGSBURGER: Yes. If you look at those three key items--and then the fourth item was that, as a public company, we’ve got to set Selenium up on our systems; we have to make sure that we’re following the same Sarbanes-Oxley requirements that we do with our other businesses. We have to integrate them into our SAP system--all those are fundamental things to make the business operate. That was all done very quickly. Within the first 60 days, we were releasing and reporting on the Harman structure. The sales within Brazil have just been fantastic. We’ve transferred away from our distributor in the country, and so we now sell direct in Brazil through reps and the Selenium team manages that sales process for Harman products.

And then we are making very good progress on Selenium products outside of Brazil by introducing the Selenium product line to our current distribution partners.

In the U.S., we follow the same model as in Brazil where we sell direct through reps. U.S. sales got going about 30-45 days ago, so we’re starting to see some good progress there. Our goal is to be manufacturing basically two systems out of our two facilities in Brazil. We have one in the south, which is the corporate headquarters, and then we have a facility in the Manaus, which is the Amazon region where you get all these tax credits. It’s a free zone. In that facility we’re manufacturing two Harman systems. We hope to be shipping those products by the end of our fiscal year, which is in June. We’re on a very good path to make that happen.

I think everything is far exceeding plan. If you look at the financial performance of the business, we’re blowing it away. When you do a deal you’ve got to generate enough cash to pay for the deal. That’s the easy part for us. Our challenge is building some product down there and “How do we continue to grow our sales?” We’ve done more sales through this new arrangement by selling direct with the Selenium team and their reps than we did all of last year.

And even though those are imported products and you’re still paying import fees, you’re still able to sell more because of the relationships that Selenium has already built and established.

AUGSBURGER: Yes. Before we had one distributor and that distributor had a few reps. Now we have …

KNIEST: …88 different reps all over Brazil that handle our client portfolio, around 2,000 clients in Brazil, and it’s widespread. Those stores now can access Harman products much easier, because we have the relationships and we have the sales force. The previous [Harman] distributor did not have a large footprint outside the Sao Paulo region. And now we have all the Brazilian country to work with. For instance, there is the most important audio fair in Brazil, Expo Music with the Brazilian NAMM [though smaller]. We launched Harman Brazil at Expo Music. Harman Brazil that would be the former Selenium company. During the fair, on the three selling days, we basically sold what the previous distributor used to sell in a whole year.

So Harman benefits. Your reps benefit because now they have two product lines that they can sell that aren’t competing. What rep doesn’t like to be able to diversify their product line within a given category?

AUGSBURGER: A third piece that’s really helping us is that, by taking the distributor out of the equation and going direct, we were able to adjust price points--not so much for the end user but for the dealer so the dealer can make more money by selling Harman product. As you know, in this business, our customer is really that dealer.
 
And that’s been, in my opinion, a big driver of what we’re seeing, as well as adding local support. I know people feel very comfortable doing business with us now. Before, we were just another import brand. Now we are a local Brazilian brand.

KNIEST: In Brazil, this is really important. Brazil is a country that imports a lot of high tech products [from companies that sometimes don’t] really do a good job in warranty or technical support. When there’s a company inside Brazil, when you are local, the customers, the end users mostly, they really rely on you. They start to really understand that you are there for them and they are more confident that you’re going to help if something wrong happens. We already have a warranty chain, shops that help if there is any warranty issue and so on--about 150, all over Brazil. The previous distributor did this by himself in his facility with just a couple of offices.

Tell me about the Brazilian market. Where are your products going and what end user categories are the most significant for you?

KNIEST: We used to sell basically 85 percent of revenue, of our income, selling transducers, and just 15 percent from systems (we started to develop [Selenium’s systems business in Brazil only] about 5 years ago). Our portfolio in those systems was really narrow. Harman on the other hand, is exactly the other side. It’s 90 percent from systems. It’s so complementary. For instance, we were starting to develop our line array product line. We have three developed systems. But now the market’s opened much larger for us in Brazil. For the World Cup, soccer, with Harman we have now huge size systems that can support the professional soccer stadiums. We’ve got most of the connections for those markets and now we can sell a VerTec.

While the company is now Harman Brazil, the Selenium brand will be retained?

AUGSBURGER: The way we look at our business today is, the company is Harman. And JBL, Crown, Selenium [et al.] are brands for products. So Selenium no longer exists as a company but the brand we still use and you’re going to see JBL and Selenium becoming closer and closer together. We’ve begun to share technology across both ways. I don’t think you’ll see Selenium being retained as a major brand. I think it will become a subset of JBL and a brand to designate product series versus a company. That’s kind of what we’re doing with all of our businesses. In the past we used to always talk about JBL. JBL the company. You have Crown. Today we don’t do that. We have three business units. We have the amplifier business unit. We have amplifiers and signal processing. We have mixing and headphones. We have loudspeakers. So that’s the way we look at it. And all these brands fold up underneath those business units. When we do acquisitions, the acquisition would line up with one of those business units and become a product brand within that unit. By doing that now we can share technology. We can make the best of what those particular heritages bring us.

How about Selenium’s worldwide sales? How important has that been traditionally and where do you see it going?

KNIEST: We used to sell in more than 70 countries over the world. We had a sales office over here [in the USA] in Redondo Beach, in fact, to serve the North American market, and another one in Spain to serve the European market. But it represented just 8 percent of our sales. So now the potential is much bigger.

AUGSBURGER: And that’s where we see the opportunity. Most of our distribution partners are large enough for Harman product that they don’t have to sell any competitive product. So we have 100 percent of their mind share. They’re out working for us, independent but captive. Now Selenium becomes part of that. Before, Selenium was sharing [reps and distributors] with a bunch of other brands. It was difficult, because to go out and sell components is a little bit harder than going out and selling [systems like] VerTec. So we see, by folding this product brand into our distribution channel, we can significantly grow the sales. We’re really focused on OEM applications, too, for transducers.

You are also, here at NAMM, introducing DigiTech instrument amps that use Selenium technology.

2011-2-18-selenium2
Blake Augsburger, EVP Harman, President Professional Division, Americas Country Manager (left) and Harman Brazil Country Manager, Rodrigo Kniest with the Selenium Maverick technology powered DigiTech instrument amplifiers that debuted at Winter NAMM.
AUGSBURGER: That’s an interesting one. Selenium manufactured a very good guitar amplifier called Maverick. If you were to compare Maverick with other guitar amplifiers, it would exceed or be as good as some of the best. The problem is it’s not well known. It was difficult to make the investment to build up this brand. We’ve been for years talking about how to move DigiTech into modeling amplifiers and there’s a lot of synergies when you look at guitar amplifiers and what we’ve done in our history. Years ago, JBL was involved a little bit in guitar amplifiers so we have some history there. This just opened the door for us. With Maverick, we tweaked it and rebranded it as DigiTech and we’re building off of that by launching a line of modeling amplifiers that we’re showing here at the show that are brand new products that we have designed. I think if you look at our library of algorithms that we have in Harman, we should be able to dominate this space and go with the right products. We’re very excited about it and it looks great.

KNIEST: Yes, a perfect match. Now [in addition to Selenium’s amplifier line] we have the best pedals in the world.

With Brazil as a market where Harman was looking to expand, with this acquisition, you gained instant manufacturing capability. How would your progress have been different if you were investing in and building the manufacturing capacity on your own?

AUGSBURGER: It would have taken years. We could have never got to this point. We couldn’t even compare [the expense]. Selenium is a 60 year old business. It’s interesting how all of these companies, Studer or AKG and Crown and JBL, they’re all 60 year old businesses. There’s a lot of lessons learned in those 60 years. And if you look at what Selenium does, they’re very vertically integrated. Because it’s an emerging market, because the cost structure is right, they’re able to build everything through the entire loudspeaker manufacturing process. We don’t necessarily do that [in other Harman companies]. They’re 9001 certified and one of the first companies in Brazil to be 9001 certified. It’s a world class operating facility. If you look at what we do now, we build loudspeakers in Mexico and Brazil. I’m in the process of opening up a factory in China. Our own factory, not a contract manufacturer. So, we have a pretty good footprint for serving the world with world class loudspeakers.

Will having a Brazilian operation change what’s being done in Mexico?

AUGSBURGER: No, I don’t think so. Like I said, we have two facilities in Brazil. We are using the Manaus facility in the Amazon region to build Harman electronics so we’ll continue to put as much production in there as possible to eat up the overhead.

Aside from speaker components and guitar amps, are there other areas of electronics areas that Selenium was involved in?

AUGSBURGER: Yes, they have some mixing consoles that they’re manufacturing. And there’s a couple of amplifiers, three or four, and some of the power amplifiers for the power speakers. We’re rationalizing that at the moment but I think we’re on the right path. Taking over the guitar amplifiers was a good deal.

Do you see yourself moving manufacturing of products from some of the other Harman brands for Brazil into your Brazilian manufacturing facilities?

AUGSBURGER: Yes, that’s what we’re going to build in Manaus. We’re building a Crown amplifier. We’re building some dbx processing, analog processing. We’re building a Soundcraft mixing console. So, we’re building basically a full Harman system; we’ll have Selenium loudspeakers powered by Crown amps with a Soundcraft mixer, dbx processing and an AKG microphone. All that will be built in Brazil. Today, we look at everything pretty much in a system perspective, so we’ve assembled two portable PA systems, because the entry-level retail market is very good in Brazil.

And because, as opposed to the big concert touring systems, that’s where the volume is?

AUGSBURGER: Well, usually with concert touring, even the large concert touring [systems], most of the guys are using imported product and most of it’s JBL to be honest with you.

And the volume may not justify building VerTec’s in Brazil at this point?

AUGSBURGER: Yes, I think it’s all about all around the import duty more than anything. That’s really not a problem for us [when selling] VerTec. If Bon Jovi’s going to show up in Brazil, he’s going to come in with a rider. And that rider’s not going to include Brazilian product, it’s going to be JBL or L-Acoustics or Lab.Gruppen or Crown and they’re going to have to go out and get those products for him for the concert.

How about automotive? Are there, I assume the Selenium acquisition with help brands outside of the Harman Professional brands expand into Brazil.

AUGSBURGER: We are also building a position to do automotive--we do automotive today but most of it’s not done in Brazil. Several of the Fiat lines in Brazil use Harman branded audio products. There’s a couple of different car companies that use Harman components, so we’re going to build an automotive group and start working with our customers on the Brazilian side versus working with just our automotive [business groups] in the U.S. and European and Asia.

So, Harman Brazil will be a resource for other Harman companies that want to enter the Brazilian market, or to expand their presence there?

AUGSBURGER: Rodrigo’s is Harman Country Manager for Brazil so he runs all of our businesses in Brazil. I have two roles. I am the president of [Harman] Professional worldwide but I am also in charge of Harman in the Americas so I’m responsible for automotive, consumer and professional in North, South America and Canada. So we don’t just think about pro, we’re looking at the total business. In fact, I probably spend 30 percent of my time outside of professional audio,  really working on automotive and then some consumer. We still do quite a bit of manufacturing for automotive in the Americas, two factories in the U.S., two in Mexico and building one.

Is the automotive sector one that’s continuing to grow for Harman?

AUGSBURGER: Yes. The way automotive works is, basically you’re building product near where they’re producing cars because you want your pieces to arrive when that part of the car’s there, it’s all JIT [Just In Time]. More car companies are coming back to building the cars in the U.S., like BMW, most of the cars that they’ve built for the U.S. market are built here. We have to position our factories so that we can be competitive by providing product real-time and cost effectively to those factories. So we will keep building our structure as our business grows.

Does the Brazilian base help you in the rest of South American professional audio market?

AUGSBURGER: It’s kind of a toss-up. I think that the Brazilian team can help support some of the countries that are further down south, but you’ve got to realize, Chicago to Sao Paulo is a 14 hour plane ride. It’s a long ways down. It’s probably more effective to manage Mexico from Puerto Rico than it would be to manage Mexico from Sao Paulo.

KNIEST: Yes, for sure, and I would say that there is South America and there is Latin America. In South America, Brazil is really the leader. All the countries that are neighbors from Brazil can really follow basically what happens in Brazil so in that sense yes, we can help quite a bit in South America. And in the Caribbean region, Mexico and so on are much more attached to North America…

AUGSBURGER: … Columbia, Venezuela, but South, you get into Bolivia, Chile, Argentina--we see some synergies there with Brazil. You’ve also got to realize that Brazil speaks Portuguese. The way we look at this is that Brazil is such a big opportunity for us; we are going to be busy, in my opinion, for quite some time just trying to take advantage of everything that’s there.

As you note, Brazil is the leader in South America, it’s the strongest economy, it’s the market driver.

KNIEST: 80 percent of the South American market, if you take the gross income, is Brazil. There’s huge opportunities [in Brazil] that we have to leverage first [before looking outwards]. There is this seeking for local content by every single company in Brazil because there are those import duties that help the local companies to leverage their size and, of course, this is to give jobs for the people. That’s the tradition in Brazil. So, every company that is settled in Brazil would like to have local suppliers, to have higher local content, and then take advantage of the taxation advantages.

AUGSBURGER: If we can acquire a large order from an OEM, we are now in a position to build a Harman factory to supply automotive components. Before we did the Selenium acquisition, that would have been very difficult--for us to come in, to try and set up a factory We tried to do it for years because we were trying to build pro products, [asking] all of our content manufacturers in China, “Can you set up a factory for us in Brazil?” It’s just too hard. Now we have that opportunity.

KNIEST: Now we are the local guys. As local guys now we can open many doors that are not really so easy to open. You mentioned automotive. We’re starting to set up meetings--when Harman tried to set up the meeting, they would be asked for the passport number and the country of origin of the gentleman that’s come to visit. I say, “Oh, I’m Brazilian.” It really helps because then if they start to ask, “Wow, you are Brazilian but you work for Harman?” “Yes, now Harman is in Brazil. We have two facilities to manufacture products in Brazil. Now we are local. We have local content.” “Oh, okay,” then the meetings are set.

And as we discussed that allows you to go far beyond transducers…

KNIEST: Yes.

AUGSBURGER: I believe it’s going to play a big role in the upcoming Olympics and World Cup, which will be a very big job for us. And I think having a Harman position in Brazil gives us a huge advantage over the competition.

KNIEST: We already have one professional soccer stadium that has Selenium and it was just by chance that we are finalizing the project as we got acquired by Harman so we get the chance to introduce also Crown amplifiers, Soundcraft. In that case we were in the business because of all the transducers, now it’s because of everything and it’s flagship for us right now in Brazil. We have a reference in Brazil now that there’s one stadium done by Harman of Brazil and it’s completely Harman products.

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