Setting a New Course

It is precisely 3,068 miles from the North Pole to the giant warehouse at the intersection of South Ridgeview and 151st Street in Olathe, Kansas. Inside, workers are betting that a gift-carrying sleigh will be making many stops in the town next month en route to millions of American chimneys. Stacked to its 30-foot ceiling with shrink-wrapped pallets of consumer electronics, the warehouse belongs to Garmin Ltd., the country's leading seller of devices that use global positioning satellite (GPS) technology. GPS was once an obscure niche appealing to the military, boaters and pilots, but lately GPS devices have begun migrating onto millions of dashboards. And lest there be any doubt Garmin believes this journey is just beginning, look next door. There, cranes are constructing a new warehouse that's even bigger.

It's a sign of a technology that's approaching a tipping point. Fewer than 1 in 10 American drivers currently use satellite navigation systems, but that ratio is set to rise sharply. Last year, unit sales of GPS devices grew by 235 percent, according to NPD Group. The growth is fueled by sharp price declines. A year ago, a decent handheld GPS device cost $500; today a similar unit costs $300. By Christmas some analysts expect to see cut-rate models as low as $99. For Garmin, the growth has created a gusher of cash. Its 2007 revenue is expected to surpass $2.9 billion, up 64 percent from last year. Its stock has doubled in 12 months, giving Garmin a bigger market capitalization than General Motors. If you've watched CNBC recently, there's good chance that you've heard Jim Cramer screaming praise for Garmin stock.

But even as Garmin's wares head toward iPod-like ubiquity, the company faces challenges. As Garmin cuts prices to match competitors, its profit margin will shrink. Competitors are rolling out cheaper devices that offer the same basic functionality—displaying your location on a map and offering spoken directions ("Turn left on Jones Road"). Cell-phone manufacturers are adding GPS to handsets, and consumers may detour around Garmin in favor of carrying one lower-cost gadget. Garmin also faces tough choices as competitors buy up the map suppliers that are critical to GPS devices. The company's executives insist they're not worried. They say their engineering teams are constantly devising features that help justify Garmin's higher prices, and that the odds of consumers shifting to GPS cell phones are overstated. Still, Garmin recognizes the uncertainty. "That's a key question for us," says Chief Financial Officer Kevin Rauckman. "Can we continue to be a premium brand?"

Garmin has come a long way in its 18-year history. The company was founded in Kansas in 1989 by two engineers, Min Kao and Gary Burrell. They sought to capitalize on the network of satellites the U.S. government had just launched to make GPS—which had previously been used only by NASA, the military and aviation industries—available for civilian use. The satellites beam location signals around the Earth; by locking in on signals from any three satellites, land-based devices could triangulate to pinpoint a location. Garmin spent the 1990s selling GPS devices to boaters, pilots and hikers. Back then, however, GPS faced a big limitation: the U.S. government, worried that enemies might use GPS for weapons guidance, limited the precision of the devices, leaving most with a margin of error of 300 feet—too far to allow a unit to tell a driver to take the next left. But in 2000, the government lifted that restriction, and today's devices can map a location to within 10 feet.

As accuracy increased, more high-end automakers began installing "nav" systems into dashboards. But in-dash systems typically add $1,500 to a car's sticker price. As a cheaper alternative, companies like Garmin focused on selling handheld "personal navigation devices," or PNDs, which can be attached to windshields, switched between vehicles or used by pedestrians. Early PNDs faced serious constraints. Their limited memory required users to manually download maps via PC, and inputting addresses was clunky. By 2004, however, Garmin's StreetPilot series offered touch-screen controls and preloaded maps. Reviewers loved it, and the market took off.

Today if you walk into the Best Buy near Garmin headquarters, you'll find its PNDs alongside models from TomTom, Magellan, Mio and a handful of other players. Garmin's U.S. market share is around 50 percent, TomTom holds roughly 25 percent, with the remainder splintered. (In Europe, Netherlands-based TomTom dominates.) While older, lower-priced PNDs are the size of a softball, the latest versions—including Garmin's hot-selling n?vi line—aren't much bigger than a deck of cards. Garmin's lowest-priced models start around $200. Anne Mitchell, a Colorado lawyer, received her first Garmin last Christmas. "I was blown away by the ease of use," she says. During cross-country drives, her family relies on their PND not just for directions but for "points of interest" data that help them locate pet-friendly motels. Like Mitchell, many GPS newbies first encounter the device when renting a car. "We don't make a lot of money on [rental-car] sales, but we reach a lot of people," says Jon Cassat, Garmin's marketing-communications chief. "As soon as people experience this technology, they're hooked."