Smart phones are the GPS killer. That’s a problem for industry leader Garmin Ltd. (NASDAQ:GRMN) and auto companies like General Motors Company (NYSE:GM) that sell in-dashboard systems build around GPS. Phones, however, won’t replace Trimble Navigation Limited (NASDAQ:TRMB)’s GPS products.
Why Pay Extra
Bloomberg quotes J.D. Power as stating that “46 percent of car owners with a factory-installed navigation system said they wouldn’t buy one again if their smartphone app could play on their dashboard screen.” That’s a problem for auto maker margins, since the in-dash GPS is a core function of the high-priced technology being put into cars today.
General Motors Company (NYSE:GM) is particularly susceptible to the in-dash push back because of its OnStar service. It costs about $29 a month for OnStar with directions, with discounts for year-based plans. While this is more than just a GPS service, if directions are all you really use, why spend the monthly fee?
OnStar has over six million subscribers. Automotive News suggests that the division makes around $1.5 billion a year with margins as high as 30%. That’s well in excess of the company’s gross margin of around 7% in 2012. It’s also a nice recurring revenue stream in a business known for economically sensitive and lumpy sales.
While $1.5 billion is a rounding error compared to General Motors Company (NYSE:GM)’s over $150 billion top-line, highly regarded OnStar is also a differentiated selling point. If customers stop caring and spending for the service, the automaker risks losing both a reliable revenue stream and customers. That said, the company is trying to co-op smart phones by selling applications that tie into the car and provide directions. It’s far from clear that these efforts will keep OnStar on target.
General Motors Company (NYSE:GM) shares are up some 80% since hitting lows in the 20’s in late 2012. That’s a pretty solid run considering that General Motors Company (NYSE:GM)’s 6.5% sales growth in June lagged both Ford Motor Company (NYSE:F) and Chrysler. GM’s price to earnings ratio of around 10 is about 1.5 percentage points lower than Ford Motor Company (NYSE:F)’s PE even though Ford Motor Company (NYSE:F)’s June sales growth was roughly twice that of GM’s.
General Motors Company (NYSE:GM) appears to be the laggard in a recovering market. Aggressive investors might want to put their money there, but more conservative types shouldn’t. Longer term, the GPS issue is one to watch if the trend toward avoiding the extra costs of in-dash upgrades shrinks margins.
As far as GPS systems go, the company with the biggest problem is Garmin Ltd. (NASDAQ:GRMN). Its sales peaked in 2008 at around $3.5 billion as GPS was gaining in popularity and have headed lower since. That said, it earned about $2.75 a share in 2012, so it makes plenty of money. However, that’s more than a dollar a share below the nearly $3.90 it earned in 2007.
Free directions from smartphones are the basic reason for the company’s struggles since on-dash auto systems account for about half of its business. And one of the company’s big pushes is to try to break into the in-dashboard systems business. If that business moves away from GPS, the Garmin Ltd. (NASDAQ:GRMN) brand isn’t going to hold much value.