BDO Tech - Fall 2016

November 2016

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Table of Contents

The New Face(book) of Hardware
Q&A with: Michael Burdiek, President and Chief Executive Officer of CalAmp
What’s Driving Future Growth in Hardware?
Supply Chain Spotlight: What’s Next for Hardware Companies
PErspective in Technology – Hardware
Did you know...
 


The New Face(book) of Hardware

By Patrick Fichtner and Slade Fester   
         
Yahoo was once the king of the Internet, commanding a $125 billion market capitalization—as large as Facebook and Google are today. In May 2015, Verizon acquired Yahoo for $4.8 billion, which signaled the end of the search engine’s reign, and served as a harsh reminder to the technology leaders of Silicon Valley of the consequences of failing to adapt and innovate. To ensure it does not repeat this fate, Google has committed billions of dollars to develop the innovative “X-Lab” that has been researching “moonshot” projects since 2010, the most well-known of which is its driverless cars. Now, Facebook has appeared to follow Google’s lead. On Aug. 3, 2016, Facebook announced the creation of a 22,000-square-foot hardware lab, called “Area 404,” at its Menlo Park headquarters in California.

Area 404 was named in honor of the infamous HTTP 404 error, “website not found,” and will support Facebook CEO Mark Zuckerberg’s 10-year roadmap to deeply invest in forward-thinking markets of Internet connectivity and artificial intelligence. This new development will support the hardware elements of Facebook’s Internet.org initiative to bring Internet access to developing areas of the world, using solar drones, satellites, lasers and next-generation servers. The hardware lab will also support the engineers that Facebook acquired with the purchase of Seattle-based virtual reality company Oculus in 2014. Zuckerberg wrote the following post on his Facebook page following the unveiling of Area 404: “Over the next 10 years, we’re building everything from Oculus headsets to solar-powered planes. We’ve always had labs for each team, but our new lab will be a hub where engineers can work together to make even faster progress toward connecting the world.”

Area 404 houses dangerous and expensive machines more commonly found in a manufacturing plant. One of these machines is a 30-ton waterjet that can cut metal and plastic with high precision—it’s currently being used to design efficient housing for Facebook’s next-generation custom servers. Some locations of the facility are so dangerous that even Zuckerberg does not have access to them. Facebook’s skunkworks team, led by Regina Dungna, former director of the Pentagon’s Defense Advanced Research Project Agency (DARPA), also finds Area 404 as its new home. Information on projects designed by this team is not available to the public and is accessible to only a select few at Facebook.

In the second quarter of 2016, Facebook generated profits of over $2 billion on revenues of over $6 billion from advertising sales. Some might question why a company that dominates advertising and social media with expertise in software development would pivot to developing hardware. But Facebook has been developing its own hardware since 2010, when it began designing custom servers to keep up with data demands. In an era where the number of users drives the valuations of Internet companies, as evidenced by Microsoft paying almost $60 per user for its purchase of LinkedIn, Facebook continues to look for innovative ways to attract new users to its platform. Inside Area 404, the social media company is working on projects like Aquila drones that are designed to transmit Internet to rural areas via laser technology, bringing the Facebook experience to geographies that currently do not have connections to the Internet. The company is also researching 360-degree cameras that are designed to shoot extremely high resolution video, providing current Facebook users with more content to post and review. All of these hardware projects have one goal in mind—to maintain and attract Facebook’s user base.

Patrick Fichtner is a senior manager in the Technology practice at BDO. He can be reached at pfichtner@bdo.com.

Slade Fester is a partner and leader of the Hardware practice at BDO. He can be reached at sfester@bdo.com.

 


Q&A with: Michael Burdiek, President and Chief Executive Officer of CalAmp

By Anthony Ferguson

Can you tell us more about CalAmp and its objectives?
CalAmp is a leading provider of wireless communications solutions in the machine-to-machine (M2M) and mobile resource management (MRM) space. In recent years, CalAmp’s key focus has been expanding its portfolio of products and services that address a range of connected vehicle telematics applications, which are fundamentally rooted in the Internet of Things (IoT). Specifically, CalAmp has been at the forefront of growth in solutions for monitoring high-value mobile assets to access timely intelligence about asset location, use and performance.

In addition to product development, we have also been allocating resources for further geographic expansion, with good success on most fronts. CalAmp’s acquisition of LoJack, a provider of wireless vehicle tracking and recovery systems in the U.S. and abroad, aligns with our strategy to open global channels for our current and future solutions. Historically, our primary focus has been enterprise solutions; now, we’re looking through the enterprise to the consumer. LoJack’s unparalleled network of automotive dealerships provides a channel for CalAmp to deliver modern telematics solutions directly into the hands of individual consumers. 

Are there particular customer verticals that you are targeting for growth?
We have had particular success with hardware products and service offerings in the Fleet Management space. Our initial growth in this space was focused on solutions for monitoring fleet utilization as a means to manage ever-rising fuel costs. Recent areas of growth include solutions that optimize mobile asset utilization and enable mobile workforce management through centralized mobile connectivity. Other mobile applications, such as asset tracking and insurance telematics, also present good opportunities for growth. Emerging trends in insurance telematics include instant crash notification and mobile asset usage data to improve proactive asset risk management. From a vertical perspective, we are also focused on various telematics initiatives in the heavy equipment market, where we already have a strong relationship with Caterpillar.

How is M2M communications disrupting the technology industry and the industries you serve?
M2M connectivity and applications allow companies to have better real-time visibility and control over high-value assets, which have been instrumental in many diverse industries. Some early industry adopters of M2M technology include Utilities and Oil and Gas companies. These energy companies deploy large volumes of high-value assets and infrastructure, often in remote areas that didn’t previously have fixed-line communications available. More recently, M2M technologies have been deployed for various high-value mobile applications, such as Fleet Management (both local and widely dispersed fleets like long haul trucks).

Where are you seeing the greatest growth opportunities for CalAmp?
Further international expansion is one near-term growth opportunity. In particular, we have identified Europe, Latin America and South Africa as areas where CalAmp can provide innovative solutions to interested and capable buyers. On the R&D side, we are focused on developing both novel hardware products and software applications, as well as newer applications like asset tracking and insurance telematics.

From a hardware perspective, what new projects are you most excited about?
We are quite excited about the opportunity to leverage the LoJack brand and automotive dealer channel relationships to introduce new telematics-based dealer inventory management solutions with a complementary set of consumer sell-through applications that can leverage the same CalAmp telematics software platform. LoJack’s strong brand recognition and established relationships in the new car dealer channel positions it to offer new and existing sophisticated telematics applications to the consumer marketplace. Some of its new applications include early warning of unauthorized vehicle movement, instant crash notification, service and maintenance alerts and vehicle intelligence.  

In the coming year, the successful launch of applications for the LoJack dealer channel in the U.S., as well as the launch of telematics programs with roughly 30 LoJack licensees in other parts of the world, will be at the top of our agenda.

What is your biggest technology challenge?
Our biggest challenge is moving quickly and efficiently, as well as making sure that each new product and service has been intensively validated prior to launch so that they are reliable and secure in the field. Execution is the key to our plan for new products for the LoJack brand. One of our technological advantages is the ability to update firmware on distributed vehicles through our reliable and secure platform. We see this capability as translating directly to our advantage in developing, deploying and maintaining the relevance of LoJack consumer products.

Looking toward the future, how do you anticipate the Internet of Things will evolve?
For some time, I think the most successful IoT companies will be those focused on industries and applications where there is a clear return on investment for the enterprise. But in the future, I anticipate that consumers will become a more important part of the growth equation—especially as it relates to applications that increase individual productivity and enhance the security of people’s lives. With this shift in mind, CalAmp is focused on consumer high-value assets, such as cars, which are one of the most important and costly investments for consumers.

Additionally, we see the emergence of driverless cars—while still some time off in the future—as an opportunity for us to maintain our position as telematics leaders. This September, the U.S. Department of Transportation issued safety recommendations for driverless cars. As the safety considerations around automated driving continue to evolve, CalAmp is well-positioned to address consumer safety concerns by providing communication, security and monitoring solutions for driverless vehicles.  

Is there anything else you would like to add in regards to hardware or IoT?
Our capabilities and scale across the IoT value chain differentiate CalAmp’s hardware products and service offerings from other players in the industry. Looking toward the future, we are well-positioned for continued success. We are one of the very few truly successful and scaled companies in IoT and we think we can maintain a position of prominence as the market grows and new applications emerge.

Michael Burdiek is president, chief executive officer and board of director at CalAmp and has held these positions since 2011. Burdiek is a recognized M2M and IoT pioneer. He has led the company’s rapid growth as the market leader in advanced telematics and IoT innovation and spearheaded several strategic acquisitions. As a senior executive at CalAmp since 2006, he also served as president and chief operating officer, president of CalAmp’s Wireless DataCom segment and joined the company as executive vice president. Before joining CalAmp, Burdiek was president and CEO of Telenetics Corporation, a manufacturer of data communications products. Prior to that, he served as senior vice president and general manager of Comarco Inc.’s Wireless Test Systems unit and held a variety of technical and general management positions at Comarco. Burdiek began his career as a design engineer with Hughes Aircraft Company. He holds a master’s degree in business administration, a master’s degree in electrical engineering from California State University, Fullerton, and a bachelor’s degree in electrical engineering from Kansas State University.

Anthony Ferguson is a partner in the Technology practice at BDO. He can be reached at aferguson@bdo.com.
 


What’s Driving Future Growth in Hardware?

By Slade Fester

The rapid adoption of cloud technology and the Internet of Things (IoT) is driving innovation and growth in the technology industry these days—and it’s not just the software side of the business that is making gains. The hardware sector has great potential to unleash. While overall VC funding activity has declined from its 2015 peak, the first half of 2016 saw $1.7 billion invested in hardware startups, the highest amount raised over a six-month period, according to analysis from venture capital firm Bolt. Hardware companies are improving production speeds and using more advanced tools, like 3-D printing and automation, to drive innovation, according to a Fictiv report.

Demand for traditional hardware, such as personal computers (PC) and smartphones has slowed, with Gartner projecting a 3.7 percent drop in global spending on devices this year. So what’s driving future growth in the hardware sector?

It depends on who you ask. That question invited a number of dissenting opinions from a group of investors on a panel at the Bloomberg Technology Conference earlier this year. The one area of agreement? The opportunity created by connected devices.


A Connected Future

Our use of connected “things” is escalating rapidly. A recent Gartner report estimates more than 20.8 billion connected things will be in use by 2020, up from 6.4 billion this year. The report notes that “consumer use will continue to account for the greatest number of connected things, while enterprise will account for the largest spending.” It highlights a shift in coming years away from specialized vertical-specific devices to more generic devices, such as building management systems and connected light bulbs used across multiple industries.

The rise of IoT—and industrial data in particular—creates opportunity not only for electronics hardware vendors but also for chipmakers to innovate new sensor types and ramp up production. Sensors are a component embedded in virtually every connected device. The $85 billion sensor market is expected to grow to more than $115 billion by 2019 with a 7.3 percent compounded annual growth rate.

Sensor implementation also raises concerns about efficient energy management and computational capacity throughout the sensor network, driving an increase in demand for microcontroller units (MCUs) and spurring innovation. The IoT microcontroller market is anticipated to exceed $3.5 billion by 2022, according to Grand View Research.


Artificial Intelligence

New possibilities are also emerging around artificial intelligence (AI), with Amazon’s Echo virtual assistant and its expanding line of Alexa devices quickly becoming a market leader on the consumer side. Over the next five years, virtual agents and chatbots are expected to be the top consumer applications for AI, according to a recent poll of AI executives and founders.

The enterprise side also holds enormous potential for hardware manufacturers from an optimization and sales perspective. For example, AI can help marketers make better use of all of the data at their disposal to better predict customer outcomes and recommend next actions, improving the customer experience as well as inventory management. More advanced smart building systems are helping companies become more energy-efficient. Verdigris recently introduced a new IoT energy management solution to the market that can analyze millions of samples per second from an electric panel to automatically optimize building controls, reducing energy consumption and diagnosing malfunctioning equipment.

High-profile tech experts, like Google Ventures partner Andy Wheeler, are making big investments in AI, stating that it’s a transformative time to capitalize on the possibilities. Robotics, for instance, have become more cost-effective to build, enabling broader mass-market applications. Earlier this year, Walmart announced plans to design robotic shopping carts that can drive around the store, helping shoppers find items on their list. Japan even introduced the first hotel staffed completely by robots in 2015, and plans to open a second one in 2017. International Data Corporation (IDC) forecasts global spending on robotics, including purchases of robotic systems, system hardware, software, robotics-related services and after-market robotics hardware, will reach $135 billion by 2019, primarily driven by industrial demand from the manufacturing and healthcare industries. However, we are still at the early stages of its full potential; distributors are already testing commercial drone delivery.


Virtual and Augmented Reality

Virtual reality (VR) is starting to hit the mainstream, with Facebook’s Oculus, Google and Sony among the major players introducing new products to the market this year. To build excitement and draw people into its new Daydream VR platform, Google is partnering with YouTube stars and sports leagues, investing hundreds of thousands of dollars apiece in exclusive VR films and programs. IDC projects that VR hardware revenue will reach $2.3 billion by the end of 2016 and expects explosive growth by 2020.
Hardware manufacturers may understandably feel some reticence about fully embracing Augmented Reality (AR), given the failure of Google Glass. But if Pokémon Go proved anything, it proved the viability of AR from a gaming and entertainment perspective. The business case still needs to be borne out, and innovation in AR hardware and software are progressing at different rates. However, from medicine to manufacturing, the potential of both VR and AR to disrupt the enterprise can’t be overlooked.


Investing in the Next Big Thing

Deal activity in the tech market is expected to remain healthy this year. Nearly three-quarters of technology chief financial officers (CFOs) project total revenues will increase in 2016, and 31 percent believe increased revenue and profitability will be the primary impetus for driving M&A activity, according to the 2016 BDO Technology Outlook Survey of tech company CFOs.

While software deals have generated big excitement, some of the emerging technologies discussed in this article present strong pockets of growth and opportunity for the hardware sector. Many hardware organizations eyeing IoT are also expanding their software and middleware capabilities, either via acquisition or partnership, in a strategic move to boost interoperability and capture more of the market. Intel, Microsoft, Qualcomm and NXP Semiconductors made some of the biggest IoT acquisitions so far this year.

In the first half of 2016, VR and augmented reality startups raised over $900 million across 29 deals, up from $157 million a year earlier, according to Dow Jones VentureSource. One of the biggest investments in VR came earlier this year when Magic Leap, a startup developing mixed-reality glasses, raised $793.5 million in funding led by Alibaba Group. Relative newcomer GoPro also announced the acquisition of French VR software maker Kolor in April.

Robotics is generating attention too; Sarcos Robotics, a developer of industrial robots, raised $10.5 million in September from investors including Microsoft and GE Ventures to grow its team and bring products to market faster.

Good deals will be increasingly hard to find, with big players already making major investments in promising new technologies.


Beating the Cycle

At the beginning of this year, Gartner forecast a spending in the devices market to decline for the first time ever recorded—a concerning trend for device manufacturers and chipmakers. Smartphone sales have reliably increased every year for the past decade, but the industry may finally have reached a point of saturation.

This shouldn’t be a surprise; the nature of the tech industry is cyclical and what once was innovative becomes commoditized and, eventually, obsolete.

The good news is we’re on the cusp of the next transformative innovation, thanks to several emerging technologies that may ultimately be as disruptive as the cloud, mobile, social or analytics—or the nexus of those forces combined. The opportunity doesn’t lie squarely in hardware or in software; the winners of the next cycle of innovation will be those that can successfully marry both.

Slade Fester is a partner and leader of the Hardware practice at BDO. He can be reached at sfester@bdo.com.
 


Supply Chain Spotlight: What’s Next for Hardware Companies

By Eskander Yavar

Innovation and product development are paramount to the future of the hardware industry. However, breakthrough innovations don’t happen every day or even every year. But don’t discount everyday innovation: Smaller-process improvements can have a big business impact. At the end of the day, hardware companies beat out their competitors by being faster, cheaper and more reliable. Smarter supply chain management (SCM) can make all the difference.


The Intelligent Supply Chain

The ideal supply chain is a network of mutually beneficial relationships where suppliers and customers work together to achieve efficiencies and lower costs by exchanging information and integrating systems and processes. As this mentality of collective operational excellence takes hold, the linear supply chain is morphing into an integrated, multi-tier supply network, facilitating systems innovation and breaking down traditional barriers.

Technology is at the heart of this new era of collaboration. At a high level, the convergence of the cyber and physical worlds—a trend often referred to as “Industry 4.0” or the “Industrial Internet of Things”—is enabling the realization of the intelligent supply chain for the extended enterprise. Industry 4.0 is most often used to refer to the “smart factory.” But “smart logistics,” such as automated warehousing, cargo tracking and remote fleet management, can be just as transformative. The result—when done right—is increased visibility, responsiveness and resilience across the entire supply chain ecosystem.

Traceability has always been a critical element of inventory transparency, but recent advancements in technology give hardware companies real-time insights to status and location. Cloud-based GPS and Radio Frequency Identification (RFID) technologies can provide instant updates on geography, including when cargo is in transit. Real-time tracking can be used to gauge transportation performance and delivery route inefficiencies. Going a step further, sensors embedded into manufacturing infrastructure can communicate disruptions up and down the supply network. 

True supply chain collaboration requires a new level of transparency and information sharing, including constant, bidirectional communication and inter-company visibility into everything from inventory challenges and shipping delays to shifts in demand. Best practices are shared with internal and external stakeholders to increase efficiencies and improve interoperability. And end-to-end visibility is largely a function of being able to access data across business networks—what some are calling a “network of networks.” The idea behind the network of networks is the synthesis of data from all supply chain entities is more valuable than data input from a single network. 

That’s where Business Process Management (BPM) software comes in. BPM software, such as Enterprise Resource Planning (ERP), Product Lifecycle Management (PLM) and Manufacturing Resource Planning (MRP) integrate SCM data into a single application. Both PLM and MRP can be incorporated into a broader ERP system, which is largely used to track and report financial information. PLM systems track information at every stage of the manufacturing cycle, from the product’s initial design to its completion. MRP systems track the cost and location of material at any point in time during the supply chain, from when the product is still in the warehouse and throughout the shipping process. To securely store the vast amount of data these systems produce, companies use data warehouses, which are typically housed in the cloud.

The “network of networks” approach is also improving organizations’ ability to measure and respond to changes in demand. Demand-driven supply chain management isn’t new; what is new is the sheer amount of data available and our ability to draw insights from it. Traditional methods of demand forecasting are based on historical demand levels, but that single data point may not be reflective of the current demand environment. Embedded sensor technologies can monitor, collect and report information from the surrounding environment and respond to remote instruction. Smart analysis of that data can vastly improve the accuracy of demand forecasting and replenishment—a key challenge for hardware manufacturers, particularly given the sector’s cyclical nature. While still not a perfect science, predictive analytics and machine learning can account for these additional variables to more reliably predict demand, recognize patterns and anticipate changes.

It’s one thing to know about a disruption or a change in demand, and another to act on it. Supply chain flexibility and quick responsiveness are key. Automation and business intelligence technologies have been central to improving adaptability and optimizing the supply chain for variable customer demand. Internet-connected sensors can detect supply chain disruptions or quality issues and address the issue or adapt production flows in real time with minimal human intervention.


Custom Hardware Manufacturing

The hardware supply chain model is also being disrupted by consumer demand for personalization. The software industry is already on board, with open-source software providing an inexpensive way to adapt applications to meet specific user needs. For the hardware sector, customization is a taller task that requires linking customer requirements directly to the supply chain.

A 2015 Fortune article hailed “DIY customization” as the next big trend in consumer tech, citing the example of Google’s modular smartphone project, Project Ara, where consumers would be able to select and easily swap in and out the components they want—including components from multiple hardware manufacturers. In theory, a “modular” approach to hardware should result in shorter product development cycles and more design flexibility. However, Google confirmed the suspension of Project Ara in September, as it proved too costly, though the technology may be licensed to third parties.

That doesn’t mean modular hardware is dead. Facebook’s Open Compute Project (OCP), launched in 2011, is attempting to replicate the open source software model in hardware, focusing on interoperable hardware standards. Intel, Dell, Hewlett Packard Enterprise, Microsoft and Apple are all OCP participants. The potential impact on the supply chain for original equipment manufacturers (OEMs) is twofold: 1) broadening the supply chain network to a larger pool of suppliers, thus lowering overhead costs and avoiding disruptions; and 2) enabling hyperscaling and customized product offerings.

Other emerging tools and techniques, such as additive manufacturing and rapid prototyping techniques, are enabling a “fail fast” mentality, more complex design, smaller parts and less waste.


The Future of Hardware Manufacturing

Hyper-customization is the future of hardware manufacturing, requiring much more agility and flexibility without sacrificing efficiency or quality. Companies that can figure out a cost-effective approach to customizing products and processes to meet customer demand will gain a significant advantage over their competitors.

Eskander Yavar is national leader of management advisory services at BDO. He can be reached at eyavar@bdo.com.
 


PErspective in Technology – Hardware

A feature examining the role of private equity in the hardware industry.

Technology is leading worldwide M&A activity for the second consecutive year—and the second time ever in recorded history. While overall global M&A value through the first half of 2016 was down 18 percent, the technology sector surpassed 2015’s highs. There were 4,158 technology-related deals worth $267.6 billion in the first half of this year, up 7 percent from the same period in 2015, according to Dealogic. This is the second-highest first-half performance since 2000, and comes on the heels of a record year for technology dealmaking in 2015. The U.S. is leading global tech M&A with $125.8 billion so far this year—47 percent of global deal volume.

Read More
 


Did you know...

While the global semiconductor market is forecast to decrease 3.2 percent to $325 billion in 2016, it’s projected to increase to $331 billion in 2017, according to World Semiconductor Trade Statistics.

In the first half of 2016, $1.7 billion was invested in hardware startups across 120 deals—the highest amount raised in a six-month period for the past 10 years, TechCrunch reported.

The wearables market exceeded $2 billion in 2015, will hit almost $3 billion this year and is expected to surpass $4 billion in 2017, according to Forbes.

The Federal Aviation Administration estimates that up to 600,000 drones will be active in U.S. commerce within the next year, and grow to 2.7 million by 2020.

The technology sector had 10 IPOs during Q3, raising $1.9 billion, compared to just one during the same period in 2015, according to a Renaissance Capital report.
 
 

For more information on BDO USA's service offerings to this industry, please contact one of the regional service leaders below:
 
Brian Berning
Cincinnati
  Hank Galligan
Boston

 

Tim Clackett
Los Angeles

 

Aftab Jamil
Silicon Valley


 
Slade Fester
Silicon Valley
  Anthony Reh
Atlanta

 
Demetrios Frangiskatos
New York
  David Yasukochi
Orange County