The Road to Riches
Garmin's GPS systems get drivers, pilots-and investors-where they want to go
OLATHE, KAN.—Rob Brown smiles as he looks up at the Garmin warehouse, stacked to the ceiling with boxes. This, after all, is success. Two miles of conveyor belts wind through row after row of neatly packaged global positioning system equipment. All 150,000 square feet of this sprawling facility seems to be stocked to the rafters. Walking into a new wing of the building, Brown, Garmin's distribution manager, weaves through a small city of crates and cardboard: "When I got here two years ago, this was empty," he says. "I thought we had plenty of room. Not anymore."
Not anymore, indeed. It is expansion time at Garmin Ltd., the largest GPS device maker in the world-and one of the quietest tech success stories of the past few years. Headquartered in this windswept suburb outside Kansas City, the company produces navigation devices for every conceivable market: GPS units for cars, high-tech instrumentation for light airplanes, weather-tracking devices for boaters, and even superlight gadgets that joggers and cyclists can use to chart their speed and distance. Though it's not yet a household name, Garmin sold around 5 million units last year, capturing more than 60 percent of the U.S. market for personal navigation equipment. In December, the company was on pace to do $1.68 billion in sales, 64 percent more than in 2005.
The best may be yet to come for Garmin, though, analysts say. Making a major push into holiday marketing for the first time (its TV ads have appeared on football broadcasts for the past several months), the company is boldly taking on all challengers, from Sony to Nike to Honeywell. In November, Garmin opened its first retail store, on Chicago's Michigan Avenue. And as navigation gear continues to evolve into a mainstream consumer product-U.S. sales of plug-and-play devices for cars alone are expected to quadruple in the next three years-outside experts are increasingly bullish on the company's prospects. Like the iPod and BlackBerry before them, Garmin's gadgets seem poised to tap into the main vein of the American consumer electronics market.
Garmin's execs, though, are determined to hit the big time the old-fashioned way. In a consumer electronics industry that has widely embraced outsourcing and downsizing, Garmin has done the opposite, keeping a tight rein on every step of its product cycle: It does its own design and manufacturing and its own inventory, distribution, and customer service. Apart from avionics, all its manufacturing is done in its factories in Taiwan, but the rest of its business is centered here. "We get challenged all the time on whether it's cost effective," says Kevin Rauckman, the company's chief financial officer. "I think the results speak for themselves." Since shipping its first product, Garmin has enjoyed 16 consecutive years of revenue growth.
So how is it that this obscure midwestern tech company manages to have its cake and eat it, too? Analysts rave about Garmin's airtight finances (nearly $900 million in cash and securities, with no long-term debt), its sturdy business model (operating margins are over 30 percent), and its single-minded engineering focus. But the real source of Garmin's success lies elsewhere. "We make products people want," says Cliff Pemble, Garmin's vice president of engineering. "If you just make widgets that become stale and commoditized and don't do anything new, eventually you can't afford to do all that we have done."
What Garmin has done is nothing short of invent an entirely new consumer electronics segment. The company was founded in 1989 by Gary Burrell and Min Kao, two engineers who quit their jobs at Allied Signal when the aerospace engineering giant decided not to invest in hand-held GPS technology. Combining their first names, Gary and Min, to form "Garmin," they rolled out the first civilian portable navigation unit, the GPS100, in 1991. By triangulating the signals from a network of 24 satellites orbiting Earth, the device could pinpoint its location within a matter of feet. The idea was immediately popular: Some U.S. military forces took Garmin hand-helds with them into combat in the Gulf War. (Troops in Iraq and Afghanistan today continue to do the same.) "Some people act as if these two guys had an idea and just got lucky," says John Bucher, a research analyst at BMO Capital Markets. "But this was a world-class organization from the beginning-competent at building products with very complex radio systems inside them."
No frills. After a decade of growth, Garmin went public in December 2000-not exactly a boom time for tech-but its stock has still shot up an average of nearly 40 percent a year since, making Kao and Burrell two of the richest men in the country. Kao's $2.2 billion net worth places him 140th on the Forbes 400. Burrell's $1.5 billion isn't far behind. Between the two of them, Kao and Burrell are worth more than Donald Trump. Kao is now Garmin's CEO; Burrell is retired.
While its early success made it a leader of the GPS pack, Garmin, with nearly 3,500 employees, still has the no-frills feel of a much smaller company. One entire floor of its recently constructed eight-story office building is unfurnished, filled instead with Ping-Pong tables. On business trips, Garmin execs fly Southwest. Rauckman recently sold 4,000 of his Garmin shares not through a broker but on E*Trade. Kao, the company's top earner, pays himself a salary of $250,000; he gave himself a $203 bonus last year. "They don't waste money," says J. B. Groh, a senior research analyst at D.A. Davidson & Co.
Instead, Garmin pours all its considerable resources back into its products. Last year, the company rolled out over 70 new devices, and in several of its markets Garmin's gadgets are rewriting the rules of the industry. Take aviation, where Garmin engineers have created the first glass-paneled instrument system for small planes-meaning pilots of the 60,000-odd general aviation aircraft in the United States will no longer have to rely on old-school dials and gauges. With Garmin's new gear, they can retrofit their planes with high-definition, interactive flat screens. It's the kind of technology usually reserved for airliners, all for only about $30,000, a relative pittance in aviation circles. Where technology meets demand, there is money to be made: According to some estimates, the retrofit market might be as large as $1.8 billion. "It allows old aircraft to use 21st-century technology," says Jonathan Braatz, a partner at Kansas City Capital Associates. "And there's a gazillion planes out there."
As rosy as the horizon is in aviation, it is Garmin's push into auto navigation devices that most excites investors. Many more people drive cars than fly planes, and Garmin's technology can get them where they want to go. Still, as recently as three years ago, it wasn't clear where this market was headed. Customers seemed to like the idea of driving with the help of a computerized mapping system, and carmakers had already begun building them into their vehicles. But when the technology started evolving faster than cars could be assembled, Garmin sprang into action.
Enter the StreetPilot and Nuvi, Garmin's two auto navigation systems. Both are small, hand-size units that plug into a car's lighter port and snap onto the dashboard. The Nuvi 660, which was released in the fall, features colorized, touch-screen maps of every road in North America, offering turn-by-turn directions, an MP3 player, wireless mobile phone access, and a traffic receiver that allows drivers to steer away from congested areas. The newest model, the Nuvi 680, introduced this month, even offers local information on weather and gas prices. Garmin's auto-nav sales are climbing at a rate of more than 140 percent annually. The devices are bringing in more than half of the company's revenue. "The market for them has just exploded," says Rich Valera, an analyst at Needham & Co. With good reason: While it takes carmakers around a year and a half to produce a new vehicle, Garmin's in-house operation produced the new line of Nuvis in a matter of months. This allows the devices to have not only more up-to-date technology but lower price tags, too: The Nuvi 660 sells for $899, while a factory-installed navigation system adds over $1,500 to the cost of a vehicle.
Retailers certainly seem to be enjoying the fruit of Garmin's labors. More than 90 percent of REI's sales of navigation equipment for cars are Garmin products. The same goes for fitness and outdoor recreation. "They're way better than anyone else we work with in that GPS world," says Mike McCarty, REI's product manager for navigation and communication. "If you're at all familiar with sitting in front of a computer, you can master these things in about five minutes."
Sony steps in. There are still obstacles ahead for the reigning king of GPS. Garmin's huge margins and big sales numbers have attracted powerful competitors. TomTom, a Dutch company that rules the navigation device market in Europe, has made a substantial push into the United States in the past few years. It now ships as many GPS products worldwide as Garmin-and, in the third quarter, reported higher revenue, too. Well over a dozen other companies, including Sony, have also started selling GPS devices of their own. Competition is having its usual effect on prices: Garmin's StreetPilot c330, which cost $599 at this time last year, is now on sale at Wal-Mart for $329.
Garmin execs don't seem worried. Margins will eventually come down, they say, but they will more than make up for it on volume. Only 2.5 million navigation units for cars were sold in the United States last year, but by 2008 outside experts expect that number to reach 9 million. In Europe, where 9.5 million devices were sold last year, Garmin is on track to capture 20 percent of the market. "People assume that once a big-name player comes in, because of the power of their name, they would immediately take market share," says Pemble. "But we've worked hard to promote Garmin's products and our brand, and, as a result, we're perceived as a leader in this space."
There is also the danger that a next-generation mobile device like the Motorola Q or Apple's new iPhone-loaded with Google Maps and a GPS chip-could threaten Garmin in the future. The company has taken a few pre-emptive steps in this direction, signing a licensing agreement to put Garmin's navigation software on the Sprint network and selling a card that slides into the Motorola Q, converting it into a nav unit.
"The big picture is we're surrounded by competition and always have been," says Rauckman. For now, at least, Garmin's hard-earned, in-house expertise, its diverse offerings, and its engineering mojo seem to have given it a head start on its competitors. And the company certainly shows no signs of resting on its laurels. "In the long run," Rauckman says confidently, "the best products and features will win out." If history is any guide, they're likely to be shipped from Kansas City.
Navigating the Product Line
Garmin's high-tech gear serves a variety of uses. Some hot products:
Nuvi 660
What it does: A next-generation navigation device that clips onto the dashboard of a car, the $899 Nuvi has a wide, ultrabright screen that features colored maps of every road in North America, complete with spoken-word directions. Its Bluetooth wireless technology allows drivers to make hands-free mobile phone calls, and a built-in MP3 player with FM transmitter lets users play digital music through a car stereo. The Nuvi's most original feature is a traffic monitor that receives real-time traffic alerts, then adjusts the route accordingly.
What it means for Garmin: Unveiled in the fall, the Nuvi adds to Garmin's red-hot auto-navigation product line. While it takes auto manufacturers at least 18 months to roll out a new vehicle, Garmin designed the Nuvi in a fraction of that time-which means it features more cutting-edge technology than a factory-installed unit. It's also cheaper: Nav units tend to add more than $1,500 to the cost of a vehicle. Sales of Garmin's auto-navigation products are growing at over 140 percent a year.
Zumo 550
What it does: With many of the same features as the Nuvi, the Zumo ($999) is the first GPS device made specifically for motorcycles. Its sturdy design is water- and fuel-resistant, and it features left-handed buttons (so riders don't have to take their right hand off the throttle) and a touch-screen that works even with gloves. The Zumo's Bluetooth technology allows riders to hear road directions-and listen to its MP3 player-wirelessly inside their helmets.
What it means for Garmin: Launched in October, the Zumo is one of the most recent examples of Garmin expanding its product line into new markets. Motorcyclists are a gadget-hungry bunch, and the combination of GPS technology with an MP3 player and route-sharing software has made the Zumo hugely popular.
Forerunner 305
What it does: A personal training wristwatch designed to be worn while walking or jogging, the Forerunner wirelessly monitors heart rate, speed, distance, pace, and calories burned-while also providing sensitive GPS technology that tracks a user's every move, even on a tree-covered trail. The $349 Forerunner comes with software that allows users to create their own workouts and set speed goals at various points along their runs. Afterward, performance data can be downloaded onto a PC and overlaid onto a Google Earth map of the route.
What it means for Garmin: Garmin's new Forerunner-the latest in its long line of personal training devices-certainly isn't alone in the sports gadgetry market. Nike and Apple introduced a sport kit last summer that also tracks a runner's speed, distance, heart rate, and calories burned-for only $29 (plus the cost of an iPod and a pair of Nike shoes). Still, the Forerunner seems to be keeping pace. It may not have an MP3 player yet, but the Nike-Apple entry doesn't have GPS. The race is on to see which company comes out with the missing link first.
This story appears in the January 22, 2007 print edition of U.S. News & World Report.