Sales slowdown prompts re-evaluation among PND players

EL SEGUNDO, USA: Recently one of the hottest products in the technology business, the Portable Navigation Device (PND) now has entered a period of slowing growth, spurring companies throughout the supply chain to re-evaluate their business models, according to iSuppli Corp.

After years of double- and triple-percentage expansions, global PND shipments in 2009 are set to experience a decline of 0.7 percent compared to 2008. During the next four years, global sales are expected to remain flat, settling at 41.2 million units in 2013, virtually unchanged from 2008.

iSuppli Fig. 1: Worldwide PND Shipment Forecast, 2008-2013 (Thousands of Units)Source: iSuppli, Oct. 2009.

The slowdown in PND growth is due to the rise of in-dash car navigation systems and GPS-equipped cell phones. This phenomenon is impacting the strategies of key industry players from high-profile PND pioneer TomTom, to behind-the-scenes contract manufacturers such as Compal Communications Inc.

The beat goes on for TomTom
“Dutch startup TomTom back in 2004 transformed automotive navigation from a high-margin feature for luxury cars into the mass-market, commodity product we see today,” said Richard Robinson, principal analyst for automotive electronics at iSuppli. “It took just three years before the name TomTom was elevated in Europe to the hallowed status of companies that are synonymous with their products, such as Hoover in the ‘60s and ’70s.”

However, TomTom’s heavy reliance on the PND platform now represents a significant
weakness for the company amid the growth slowdown and the costs and risks of producing PND hardware. Because of this, TomTom has formulated new strategies for competition in non-PND navigation segments.

“TomTom plans to play to its strengths, leveraging its excellent brand image to further its opportunities in the growing mobile handset and car in-dash markets, with an agreement with Renault & Fiat to embed its navigation technology in cars,”
Robinson said.

“The company is also the highest profile entrant into the ‘apps and maps’ market, selling its software on Apple’s iTunes store. By moving away from PND hardware and toward navigation content and software, TomTom also is offloading its biggest weakness: the messy process of PND manufacturing, testing, shipping and marketing. This area is fraught with challenges, such as inventory holds and low margins.”

The upside for TomTom could be significant, with the company expected to win as much as 25 percent of the high-margin smart-phone navigation market, according to iSuppli.

Contract manufacturing opportunities decline
In the long run, as PNDs show limited growth potential and lose their appeal to OEMs, smaller manufacturers will either choose to exit the declining market or get pushed out of business by the leading suppliers.

“The meager growth prospects and the high level of industry concentration means reduced opportunities for both smaller OEMs and contract manufacturers operating in the PND supply chain,” said Jeffrey Wu, senior analyst for Electronic Manufacturing Services (EMS) and Original Design Manufacturing (ODM) at iSuppli.

“The latest developments in the PND market suggest flat growth for contract manufacturers. The few PND OEMs that maintain internal production are gaining market share faster than those that outsource. This is further eroding opportunities for smaller manufacturers.”

A few Taiwanese ODMs, including Compal Communications Inc., indentified the GPS PND as a growth driver in 2007. However, even these companies since have scaled back their investments.

Only 0.5 percent of PNDs were outsourced to EMS providers in 2008, down from 1 percent in 2007. Flextronics was the only EMS provider conducting PND manufacturing in 2008, thanks to its previously established relationship with Navman, before its acquisition by PND maker Mio. However, iSuppli predicts that EMS providers will be absent from the PND manufacturing industry when Mio further consolidates its outsourcing.

iSuppli Fig. 2: In-house and Outsourced PND Manufacturing Forecast by Percentage of Unit ShipmentsSource: iSuppli, Oct. 2009

“Smaller PND OEMs will either fall out of the market or get acquired by other OEMs,” Wu said. “In the contract manufacturing market, seeing little growth potential in the PND industry, second-tier ODMs may decide to withdraw from the PND industry, spurring consolidation at the ODM node.”