HII Founder Seeks to Pump Up Volume : Audio: At an age when most people would be retired, Sidney Harman is out to repair the damage at his speaker company.

Sidney Harman, 74, has quite a life. He has stock holdings worth more than $45 million, thanks to a long business career. Good health. A big house in Marina del Rey. A wife who’s in the U.S. Congress. Two young children.

So why is he driving to Northridge each day and putting in long hours at the office? He’s trying to rebuild the company he founded.

Harman International Industries Inc. makes consumer and professional loudspeakers and other audio gear carrying such familiar brand names as JBL, Infinity and Harman Kardon. The speakers cost anywhere from $100 to $60,000 a pair.

By the late 1980s, HII was plodding along with modest profits, usually 3 cents or less per dollar of sales. Harman, who also was undersecretary of commerce in the Carter Administration, lived in Washington--which technically is still HII’s headquarters and where Harman’s wife, Rep. Jane Harman, now represents the South Bay area--while his deputies kept watch at the company’s operations center in Northridge.

Then, in its fiscal year ended June 30, 1991, HII’s profit disappeared. The worldwide recession, the slump in auto sales--which account for 30% of HII’s business--and the company’s own missteps led to a $19.8-million loss on sales of $587 million.

Harman promptly moved to Southern California to fix things. His former president and likely successor as chief executive, Donald J. Esters, was dismissed. Harman also began changing HII’s way of doing business.

“A whole series of matters drove me to the conclusion that the company would not prosper if it continued along the course it was headed,” Harman said.

Until Harman moved back to the West Coast, HII was a loose federation of companies, each catering to a group of audiophiles devoted to either JBL, Infinity or HII’s other brands. The result: HII had an inefficient corporate structure stretched across 21 divisions. Harman merged the 21 sections into five units, eliminating duplicate departments--such as accounting--for each division.

The cost savings mean Harman can pour more cash into marketing, which he needs because he’s moving many of HII’s consumer products into mass-merchandising outlets, such as Circuit City and Good Guys, and away from specialty stereo outlets aimed at audio buffs.

The changes are beginning to work. In fiscal 1992, the company earned $3.5 million on sales of $605 million, and in the six months ended Dec. 31 its profit totaled $1.97 million on sales of $322.1 million, up 8% from a year earlier. Harman also doesn’t argue with Wall Street projections that HII will earn roughly $10 million for all of fiscal 1993.

HII’s stock, which went public at $15 a share in 1986 but spent much of the next few years wallowing around $7 or $8, closed Friday at $17.375, up 37.5 cents in New York Stock Exchange composite trading.

Giving the stock a boost recently was no less than Peter Lynch, the renowned former manager of Fidelity’s Magellan Fund, the nation’s largest stock fund. He recommended HII’s stock on grounds that the company’s car-speaker business will increase because auto makers such as Chrysler and Ford are using more of HII’s speakers per car, and because car sales generally are rising.

(Fidelity, incidentally, is HII’s largest outside stockholder, with a 10.2% stake.)

HII still has financial problems, though. The company’s long-term debt as of Dec. 31 totaled $178 million, or 1.7 times its net worth. Although HII has plenty of cash flow to fund its business, “we’re not at all satisfied with our balance sheet,” Harman conceded.

Harman has yet to demonstrate that, with the changes he’s made, HII can restore even the modest profit margins it had three or four years ago, said Jeffrey Kessler, an analyst with Lehman Brothers in New York. “The company should be able to get back” to those levels if HII gets “its volume up relative to its increased marketing costs,” Kessler said.

But why does Harman himself want to oversee the changes, especially at an age when most people are retired?

He said he’s “flat-out uninterested in being retired. I don’t give a damn how old I am. I can run the pants off everybody working in this place.” Harman, who’s addressed as “Dr. Harman” by his employees (he has a doctorate in social psychology), is a lean, mercurial, occasionally brusk man who exercises six days a week.

Of course, his enthusiasm for reviving the company may have something to do with his own investment in the business. Harman owns the biggest stake in HII, at 25%.

He started the company 40 years ago, later sold it and then, in 1980, bought most of it back. His current strategy of merging many of the operations of his various speaker brands is a sharp change from past years.

Harman’s old core of customers, he said, “liked the imagery of small, specialist companies. They found abhorrent the notion of a big company.” They also were willing to pay thousands of dollars to own JBL or Infinity speakers.

But Harman decided the audiophiles would not carry HII through the 1990s. “They represent a decreasing percentage of the buyers,” he said. Seeing the success of Circuit City and other mainstream electronics retailers, he decided to market more to everyday music lovers. They want a good sound system but are “far less interested in imagery,” Harman said. “Their focus is on value, quality and service.”

That’s a combination Japanese producers such as Matsushita Electric Industrial Co. (Panasonic), Sony Corp. and Kenwood Corp. have long been happy to provide, often at a lower cost. And therein lies HII’s dilemma, according to experts.

Focusing on the mass market means it’s a struggle to maintain profit margins when you’re selling lots of lower-priced speakers, said Arnie Nudell, the founder of Infinity who sold the company in 1978, worked for Harman after HII bought Infinity in 1983, and who now runs Genesis Technology, a Vail, Colo., maker of expensive speakers.

Can HII make it up on, well, volume?

“I don’t think they can, but that’s their goal,” Nudell said. HII’s gear often costs more than rival brands because it’s indeed of a higher quality, but, Nudell said, “there’s no one that can demonstrate that superiority” at mass retailers such as Circuit City.

Lehman analyst Kessler said it can be done, but only if HII’s marketing push can further educate salespeople and the public about the company’s speakers.

In the auto market, brand competition isn’t as much of a worry because, besides the American car makers, HII is locked in as the supplier to certain Mitsubishi and BMW models. Lucky for Harman, many of today’s cars use five or six speakers when two used to do. HII is particularly benefiting as the supplier to Chrysler’s new line of mid-size sedans, which are selling briskly.

All of which means HII’s auto-related sales by fiscal 1995 “will be double what they are now, on a dollar basis,” or roughly $380 million, Harman said.

Harman plans to be there when it happens. “I’m here, and there’s no dreadful hurry for a successor to be in place,” he said. Although “there’s a very good chance’ he’ll be followed by Bernard Girod, HII’s chief operating officer, Harman added, “I expect that I will be here and actively engaged for 10 years, or most of the 10 years.”