TomTom and Garmin lose their way

Arik Hesseldahl and Jennifer L. Schenker
15 Apr 2008

Makers of navigation devices like to joke that their products can save marriages. Buyers need never fight with a spouse over whether to stop and ask for directions.

The navigation-device industry could use a little saving of its own.

Companies like TomTom and Garmin that build navigation devices are facing a barrage of competition from cell-phone makers and slumping demand from consumers who are putting off purchases as the economy falters. For some, weakness in the U.S. dollar is adding to pressure that's curbing sales and eroding profit margins.

TomTom domino effect

The latest evidence of trouble came on Apr. 8 when Amsterdam-based TomTom trimmed its sales outlook for the first quarter, citing competition and falling prices. 'Nervousness"&brkbar;due to the global economic slowdown and the growing availability of personal navigation on mobile phones have conspired to make things more difficult for TomTom,' says analyst Ben Wood at CCS Insight.

TomTom expects sales of €260 million to €270 million ($408 million), a decline from a year earlier. Full-year sales will be €1.8 billion to €2 billion, a slight improvement from 2007. TomTom said it was forced to reduce retail prices earlier than originally planned, and that retailers slashed inventories more than expected amid declining consumer spending. Shares plummeted almost 14% in Amsterdam.

Competing device makers fell in tandem. Shares of TomTom's main U.S.-based rival, Garmin (GRMN), tumbled more than 8%, to close at 48.47, a 52-week low. The stock is off 61% from its record 125.68, reached mid-2007. SIRF Technology (SIRF), a supplier of the global positioning system chips used in navigation devices, fell about 7.5% to close at 5.16, more than 83% lower than its 52-week high set last year.

Shriveling margins

Personal navigation device (PND) sales surged in recent years as consumers snapped up these compact, mobile gadgets that use mapping technology and GPS signals to help users find their way around. But cell-phone makers such as market leader Nokia (NOK) are incorporating navigation technology directly into handsets, rendering some PNDs obsolete (BusinessWeek, 11/26/07).

It doesn't help that handset makers can offer big subsidies, adding to price pressure. 'Nokia's ultimate goal is to make navigation in mobile phones as ubiquitous as cameras,' Wood says. 'The challenge for TomTom is they sell into the standard retail channel where subsidies are not available.'

Nokia plans to include navigation features in roughly half of its phones in the next two to four years, Wood says. And while TomTom will sell 14 million to 15 million devices this year, Nokia will sell some 400 million phones this year, roughly half of which will be navigation-ready.

Consumers bought more than 22 million PNDs in 2007 and are expected to buy more than 32 million this year, says Richard Robinson, an analyst at market research firm iSuppli. But the average selling price on a PND in 2007 was $249, less than half the 2004 average of $505. Margins are slipping, too. 'These companies got used to making profit margins of 45% to 60% during the 2004 to 2005 time frame,' Robinson says. 'Now they're having to contend with margins that are closer to 18% to 20%. That's not ringing well with the financial guys. The problem is you can only make so much on each unit you sell.'

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