GPS device manufacturers, mapping the way for a healthy market share

The GPS (Global Positioning System) industry has grown in the civil market over the years, whereas initially it was only used for military purposes. In today’s world, various industries around the globe have broadened the use of GPS. The GPS market generated $9.1 billion in 2011 and is expected to generate $26.36 billion by the end of 2016, registering a growth at a CAGR of 23.7%. The demand is increasing for more accurate devices to deliver the high-quality mapping solutions.

The automotive sector accounts for c. 40% of total revenue for the GPS segment. The automotive sales have grown at an average rate of 8% p.a. over the past three-year period, the year-to-date (2016) growth stands at 6%. The market for automotive navigation systems is expected to grow at a pace of CAGR 11.1% with the dynamic change in the lifestyle and spending capacity of the consumers in the APAC region. In contrast, lower volume sales were recorded in the United States and other developed nations. Additionally, the availability of 3G and 4G networks in the APAC region has further driven the field of GPS applications and as such has created a feasible infrastructure that allows industry players to provide effective navigation services. The top player in the sector, Garmin international enjoys a 20 percent point lead in the market share over that of its primary competitors, TomTom followed by Magellan. Garmin has been able to maintain its high market share by being cognizant towards the R&D requirements in the GPS industry. Further, it has always stressed on its capability to provide efficient warranty and after sales services, with superior technical repairs and customer support. Similarly, TomTom has increased its R&D services and cross-sales through a bundle of offers in order to improve its market share. The same is evident from an analysis of the cost structure.

Source: gpsreview.net

Source: Televisory’s Research

Note: As TomTom predominately deals in the PND, the revenue of automotive and consumer segment is taken into consideration for comparison of both

The cost of sales, R&D and employee expenses are the major cost drivers for the GPS manufacturers. The cost of sales in 2015 for Garmin accounted for 51.4% of the revenue per unit, while R&D expense accounted for 14.6%. The cost of sales accounted for 48.5% of the revenue per unit for TomTom, while R&D expense and employee expense accounted for 18.4% and 20.6% respectively. Moreover, TomTom has shown a marginal increase of 0.7% in the revenue which can be attributed to an improvement in the sales of sports segment (included in the consumer segment), this strategy partly helped in the revenue growth despite a fall in the volume of sales. Furthermore, TomTom strengthened its Average Selling Price (ASP) by bringing a product mix of higher price models and offering service bundle in each of its purchased products. However, in 2015 the EBITDA per unit sold declined by 75% (74% in EUR terms). The EBITDA declined by 14% and the EBITDA margin declined by 6.3 percentage point owing to the strengthening of the USD, which created a downward pressure on revenue. 

Source: Televisory’s Research

TomTom’s ROE (Return on Equity) was 2%, which was relatively low as compared to that of Garmin. The ROE of TomTom was primarily driven by its equity multiplier, which was greater due to a higher proportion of intangible assets to the total assets (c.72.3% of total assets). In 2015, the depreciation and amortisation were 12.23% of total revenue out of which 62.36% was of amortisation of technology and databases. This primarily led to a net profit margin of 2%. On the other side, Garmin's ROE was majorly driven by its net profit margin. This was because of the high EBIDTA margin. Further, the total tangible and intangible assets were 15% of the total assets, because of which the depreciation and amortisation were 2.78% of the total revenue. Therefore, Garmin's ROE was 7.24 times higher that of the TomTom.

Garmin and TomTom, along with other players have initiated various strategy plays to either improve the top line or operating margins. The sector has been unfavourably impacted by the advent of smartphone technology. The consumer base for PNDs has been consistently shrinking by an average rate of 7% in the last three years, primarily for the B2C segment. Most of the big companies have tried to establish alternate revenue streams and focused more on the commercial fleet management, navigation and tracking services (space where TomTom has a very limited presence). TomTom can hope to increase its market share because of its improved product offering within the consumer navigation segment, but, the size of the consumer navigation market is constantly shrinking.

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