Dinesh C. Paliwal: The Rainmaker

Date:   Wednesday , April 04, 2012

Dinesh C. Paliwal: The Rainmaker
It is often said, that change is the only constant but it is how one embraces the change that decides whether one is to stay for long or just perish. Founded in 1953 by Dr. Sidney Harman and Bernard Kardon, Harman International (NYSE: HAR) rose to become the powerhouse in the U.S. stereo industry. The company made its mark by pioneering the concept of separate components; instead of selling stereo systems as integrated units, Harman began selling separate receivers, speakers, amplifiers, and other pieces that buyers could purchase separately and wire together to tailor their own home sound system. By 1995, the company had forayed into automotive electronics business, providing luxury automakers like Mercedes, Volkswagon, Toyota, GM and more with both audio systems as well as infotainment systems combining navigation, wireless connectivity, and multimedia capabilities. The automotive division grew quickly, and by the mid-2000s was Harman’s biggest business unit, contributing over $2billion in revenues. But as they say, all great things often come to an end. 2006 onwards saw a Harman going into a downward spiral. Once the kings in the infotainment segment, the company was struggling with the competition from other players in the industry. Additionally the company was also struggling to deal with internal turmoil; the product deliveries were long over due, the operational costs had risen tremendously and the R&D pipeline had weakened tremendously. The price of shares had plummeted down considerably. By Q3/2007, the company was almost about to disappear from NYSE due to buy-out by KKR and Goldman Sachs Capital Partners.

Unable to solve the mounting problems, in 2009, Dr. Harman stepped down as the CEO and hired Dinesh C. Paliwal as the company President and CEO. Paliwal was a veteran of the corporate turn-around, who had previously proved his mettle the heavyweight Swiss-based automation provider ABB. During his tenure as President of U.S. operations for ABB, the company moved from a money-losing and siloed organization to one with double digit growth, doubled its share price in one year, and saw its bond ratings upgraded by Moody's and Standard & Poors. It was a similar magic that was expected of Paliwal at Harman.

“I was quite ecstatic to take up the role. Harman was known to be a good company with great products and business prospects and turning the company’s fortune for good was a challenge that I was aspiring to take. The first three months were quite grim, the balance sheets were bleeding red, overburdened with orders and a very weak R&D pipeline,” reminisces Paliwal.

The out going CEO had promised the stakeholders that Paliwal was going to turn things around and take Harman to its former glory. And for Paliwal the challenge was to prove him right. Decisions were made, bringing drastic changes into the company. Within just a year, he instituted major change initiatives at Harman to simplify and strengthen the company’s operations. These include the formation of a diverse and multi?cultural board, recruitment of a seasoned executive management team, expansion of the company’s footprint and revenue in the emerging markets, propelling HARMAN’s innovation pipeline dramatically. To put the company on a profitable growth trajectory, he transformed the company culture and launched best in class business processes which delivered an unprecedented $450 million in sustained cost savings. At Harman Paliwal’s magic touch had begun to show results and in 2008 he succeeded Dr. Sidney Harman as the company’s Chairman as well.

By indentifying areas of overspending, Paliwal put several processes and cut costs drastically and heavily invested those savings into company’s R&D in order to deliver some of the complex projects which otherwise were in the serious risk of being cancelled from the client end. “When I joined Harman, we were in the midst of developing multi-billion dollars worth of automotive audio and infotainment platforms, a task which had never been done before! Company was ill prepared and was not able to fulfill on these commitments. Although many investors were asking me to cut costs, I decided to increase the investment in R&D and told the market, ‘That’s not going to happen. I'm here to make this company win long-term”. He issued a profit warning very early in his life with Harman and announced, "We're going to invest as necessary in engineering and R&D in order to protect our customers and Harman’s long term future. Not delivering on a promise to these customers was not a choice." This was a personal risk Paliwal took based on his judgment and today he is to happy to say that the decision was correct and that the company delivered all these ambitious commitment on time and on quality. The grateful customers rewarded Harman with new business, contributing to the $14 billion backlog that it enjoys today.

Many were quite appalled when he went one step further by moving a large part of the R&D out of the company’s U.S. center to India and China. A great believer in the concept of ‘reverse innovation’, Paliwal knew the new order of the day was in emerging markets. When he had joined the company he saw that automotive infotainment division had a 70 percent share of the market and accounted for two-thirds of the company’s $3 billion in revenues. But because the high end had little room for growth or margin improvement, hew sought new opportunities in emerging markets, where India’s Maruti Suzuki and other manufacturers had achieved price points that would have been unimaginable in the developed world. Harman had previously tried to move into these markets through glocalization, adapting its premium products for lower-priced segments. The scaled-down infotainment systems had performed poorly.

“The previous leaders at Harman had tried to venture into emerging market a lack of knowledge and with a slight arrogance that since Harman was associated with luxury brand, it would be quite unaffordable by the consumers there,” he says. Paliwal’s decision to move R&D to these markets was rewarding. The team of nearly 2500 in China and India showed quick turnarounds in the projects that were long over due and helped win many of the customers back.

Adapting to new trends & Reverse Innovation

No one understands the strength of emerging markets as much as Paliwal does. As a part of ABB, he spent quite a large part of his tenure in China and India. Hence he strongly believes that emerging markets are the biggest drivers of emerging technologies such as cloud and mobility as cost effectiveness is the biggest concerns here. The same are also the challenges in developed economies like U.S. and certain parts of Europe. Hence, it is logical that one takes these solutions from new markets to the developed ones.

"Whatever we develop in the western world, sometimes we over engineer it, sometimes we completely miss the real need of customers in other markets like South America or Asia. Through reverse engineering, we gave our labs in India & China, products that did not solve all their problems and asked them to break it into pieces, simplify it and come up with a whole new solution that could not only be applied to emerging market but also in developed ones. The results were simple mind blowing," states Paliwal. One such example is developing leisure and infotainment solutions for our customers like BMW, Audi and Mercedes, which included navigation, connectivity, internet, telematics and more. This was developed exclusively from the company’s labs in China and India. The result was that the customers received a solution that was a lot more scalable and nimble and at half the price they used to buy earlier. "I strongly believe this feat would not have been managed if the same was carried out by labs in developed markets," Paliwal claims.

Another example is the solution Harman developed for the iconic motorcycle manufacturer Harley Davidson. The tam in Bangalore created an entire electronic and software system using which bikers could now talk to each other even if they were 100s of miles apart. This peer to peer communication system and wireless audio video streaming can be used by drivers and passengers alike. When presented to Harley Davidson and they were very impressed and now the company also intends to offer the same companies like Hero Honda and Royal Enfield.

In the last few years, Paliwal has bullishly driven the adoption of new technologies with in Harman and created new solution concepts. Cloud, connective lifestyle, signal processing and mobility are areas where Harman has taken a deep dive. This dive has also been driven by demands of its customers like Porsche & Audi who in turn want their customers to have a complete connected experience while on road, i.e. is access to their data whether it is banking, audio, video, gaming or access to all the personal favorite sites and more. Harman’s infotainment solutions will allow users to connect their audio/video or smart devices to access their data of choice.

In other areas of infotainment, the company has been providing acoustic solutions for large events like the Grammys, Oscars and most recently the Bejing Olympics. "Events such as these have big performances which the organizers would like to provide hundreds of millions of people at real time. We provide them digital signal processing and networks so that they can take then online both audio and video. Though we have proprietary networks, we are also developing new networks protocols with Apple, Cisco, Intel and other companies. These protocols will go beyond today’s internet networking protocol," explains Paliwal.

Harman has now recently introduced hundreds of products and technologies, including timely initiatives as its energy efficient GreenEdge technologies, new acoustics-sound management solutions for electric cars, and a new scalable automotive infotainment system that will give us access to a $5 billion global market largely unaddressed by the company in the past.

Driving Innovation

Paliwal often says that if he is not almost paranoid about innovation then there is something wrong with him. There have been times when his colleagues have asked him that if ‘things are going well, still why are you so paranoid?’ He is quick to tell them, "When something is extremely well that means I am not thinking about other things as much as I should. I should be thinking about what could be disruptive to a well run product." In truth, this is what creates a culture of innovation and or in case of Paliwal, a culture of reverse innovation. Today he feels extremely excited as well as seriously responsible. A major chunk of the automotive industry is relying on Harman to solve issues of cloud based connectivity, connective lifestyle, and digital signal processing. This means the company must continue to focus on innovation. Thanks to Paliwal, much is happening in the company’s R&D labs. In the past five years, he has opened multiple R&D labs including Bangalore, Shanghai, Sangin, Ukraine, and a latest one for connected lifestyle in Paulo Alto, California.

But Paliwal also knows that R&D labs alone do not constitute to innovation. Most problems are generally solved when a solution is found in the grass-root level by an average employee. "You need to create momentum and motivation for all 13,000 employees of the company, so that they have the confidence to come up with any innovative ideas. To achieve this we have put in place an ecosystem where innovation is open to everyone in the company. It could be innovative product ideas, innovative technology ideas, process ideas or customer problem solving ideas, and we reward the best ones. We get a lot of nominations round the year, and we celebrate those," he explains. With a strong driver like Paliwal, it is no surprise that the company has filed for more than 200 patents in the last 12 months, one fifth of which were from the company’s lab in Bangalore.

Paliwal can not be happier and prouder. "Most people think that innovation always comes from the western world and this is far from the truth. In my experience, innovation can come from anywhere in this world and all you need to do is motivate and unleash the energy," says he.

This apart, Paliwal has also created an innovation counsel where he constantly invites CTOs of leading companies like Intel, Texans Instruments, Cisco, Nokia, Motorola, Airsoft and the National U.S. Lab to their office. He takes this as an opportunity to ask these experts for feedback and opinions about areas in which the company is slow in pushing the envelope.

Challenges & Priorities as a CEO

Despite the tremendous achievements that Paliwal has achieved at Harman, he is still perturbed by certain challenges & priorities, foremost of which are — finding and retaining top talent at all levels, innovation and push for new technology based products and solutions and maintaining a strong balance sheet.

"We have tremendous untapped opportunity in India and other emerging markets, where economic growth is far outpacing mature countries. When I arrived at Harman in 2007 I was shocked at the limited amount of business we were doing in these countries; we had hardly any presence outside the OECD countries.

Diversity in our geographic reach became an immediate priority for me," says Paliwal. In just few years, Hamrman has been able to make some significant progress. In India, it established an Innovation Center and global Engineering center, and booked more than $250 million worth of orders in last three months.

One will soon see the announcement of second phase of investment in India which will include manufacturing and testing facility. The company has also acquired a company in Brazil called Selenium, which is accelerating Harman's growth plans in the central and South American markets. "But our major growth is coming out of China, where our revenues last year alone grew at 200 percent. We have operations in several cities across China, including R&D, engineering, manufacturing. We’ve opened a flagship retail store, and have announced automotive contracts with several Chinese automakers. We’re making great strides, but we still have many opportunities to capture," Paliwal states.

He also believes that one can not be the profit leader without being the cost leader. To achieve this, Harman has installed a multi-year efficiency improvement program called STEP Change to simplify Harman’s organization, reduce the cost structure and optimize the global footprint. The program delivered $450 million in permanent enterprise-wide savings by 2011, making significant contributions to its bottom line and margins. More importantly, it created a new "cost-conscious" environment which lives on in Harman’s corporate culture. The company has achieved dramatic reductions in discretionary spending, instituted exceptionally tight management of working capital and inventory, made adjustments to its factory loading in collaboration with customers, and double-digit reductions in capital expenditures.

Leadership and Beyond

PaliwaI thinks that his global exposure has taught him the importance of work cultures, ethics, discipline, a sense of purpose and focus on deliverables. Whether its food, music, or cultural values, he has a deep appreciation for global diversity, and this is a quality he looks for in his senior team as well."As for my business philosophy, there really is no substitute for courage, passion, hard work and calculated risk taking - the key to delivering results. I believe in people, their strength of conviction and ideas. It’s been proven to me time and again if you can light the passion within talented individuals, their potential is unlimited," says he.

Being a leader also means, one must be able to read future trends, anticipate your customer’s emerging needs, and engineer the solutions before anybody else. Specifically on the automotive front, Harman is now stepping ahead of its competition in two key areas. The first is the area of "green" audio where Harman is pioneering a new approach to audio design that dramatically reduces power consumption and weight without loss of audio performance. This initiative, called "GreenEdge," means that Harman’s audio systems will be especially well suited to electric and hybrid cars where electric power demands are constrained.

"Extending this technology to our consumer and professional audio systems will also help to save energy use and carbon emissions around the world," Paliwal explains.

Secondly, Harman is driving the development of active noise management systems through an exclusive partnership with Lotus Engineering of the UK. It is developing acoustic technologies to examine how actively creating sound can actually help make cars quieter in their interior for a more pleasant driving experience. "We are also working on technologies to synthesize exterior engine sounds for quiet electric and hybrid cars to improve safety for pedestrians and nearby vehicles," Paliwal says.

At Hamran, it is definitely good times, and Paliwal, the rainmaker, is continuing to weave his magic!