What's more, very little about the core technology is proprietary. Signals from the 27 U.S. Department of Defense satellites are free and available to anyone. From that standpoint, GPS receivers should be a commodity product like AM/FM radios. And the leading companies should follow conventional wisdom and outsource everything to achieve the lowest possible cost.

And yet they're not commodity products. And no, the No. 1 company in the business does not believe in extreme outsourcing. Rather, top-ranked Garmin International Inc. regards its ability to bring its own manufacturing and engineering resources to bear on the production process as a strategic advantage, violating nearly every seemingly obvious rule in the book of cost control.

Just ask Min Kao, co-founder and CEO of Garmin, and he'll tell you how owning the manufacturing plants has helped Garmin capture a commanding market share in nearly every GPS product segment. The strategy has paid off with a gross margin above 50 percent and growing, Kao said.

Garmin makes GPS receivers that tell motorists, civil aviation pilots, hikers and boaters, where they are, and how far they are from where they're going. Last year, Garmin sold more than 2 million units, up half a million from 2002. Likewise, its revenue in 2003 was up 23 percent over 2002 while profits grew 25 percent.

Ron Stearns, an analyst with Frost & Sullivan, pegged the North American market for GPS products at $3.15 billion in 2003, and predicts it will more than triple to $9.5 billion by 2010.

Splitting the GPS equipment business into segments helps to demonstrate Garmin's dominant position. In the recreational handheld business-those GPS receivers aimed at hikers and hunters-Garmin enjoys a 70 percent market share, said analyst Peter Friedland of Fulcrum Global Partners.

Garmin also holds a 60 percent share in aftermarket automotive receivers, where it competes with Magellan, a unit of French Aerospace giant Thales, Netherlands-based Tom-Tom and Cobra Electronics of Chicago. In the marine business-GPS receivers used by boaters-it competes with Lowrance Electronics (Tulsa, Okla.) and New Zealand's Navman. Garmin's share for the sector hovers between 30 and 40 percent, said Fulcrum's Friedland.

But Garmin truly shines in civil aviation, where the "Garmin stack"-a combination of GPS navigation and communications equipment-is the gold standard among pilots and plane manufacturers. Its market share there is about 90 percent, with Honeywell its only real competitor, Friedland reckons. Garmin's latest aviation product, the G1000, combines location, navigation, communication and identification data into large flat-panel displays.

Unique strategy
While most of its competitors have their products built by contract manufacturers, Garmin is notable for vertically integrated manufacturing. No manufacturing is outsourced. Its main competitor, Magellan, outsources manufacturing to Kinpo Electronics Inc., a contract manufacturer in Taiwan.

"People often ask [Garmin] when they're going to outsource," said John Braatz, an analyst with Kansas City Capital. "But at the end of the day, the company doesn't have the volume per SKU [stock-keeping unit] that other companies that typically use a contract manufacturer have."

Fulcrum's Friedland said Garmin's high margins and cash holdings give it the ability to pour large amounts of cash into research and development, which helps it develop innovative new products. R&D expenditures in 2003 were $43.7 million, or about 7 percent of sales. By contrast, rival Lowrance spent only $5.2 million, or less than 5 percent of sales on R&D.

Covering the globe
Garmin's manufacturing strategy is truly global. Its consumer-oriented products like the Streetpilot 2620 dashboard receiver for cars and the Etrex line of handheld receivers for hikers are assembled at a 249,000-square-foot facility in Shijr, Taiwan. By the end of last year, Garmin employed 975 people at this facility.

Garmin's avionics gear, used in the cockpits of private planes, is manufactured at a 240,000-square-foot facility employing 997 and sitting on a 41-acre site in Olathe, Kan., a suburb of Kansas City. The company is adding more than 500,000 square feet of capacity at this site. Avionics products made in the United States have an easier time getting certified by the Federal Aviation Administration, Garmin executives said.

Other facilities include a 25,000-square-foot aircraft hangar in Gardner, Kan., situated on a 148,000-square-foot site used to develop and test avionics products. Another part of the avionics business is housed at a 52,000-square-foot facility plus a 6,000-square-foot aircraft hangar area in Salem, Ore. The company operates a 28,000-square-foot distribution warehouse in Romsey, England.

The split between facilities in Taiwan and the United States presents some logistics and planning challenges, not the least of which is communication. CEO Kao, himself a native of Taiwan, spends much of his mornings in Kansas these days answering e-mail from managers in Taiwan.

"Our Taiwan facility has its own complement of talented engineers, purchasing and materials staff that are capable of partnering with their colleagues in the U.S. to work toward the same goal," he said.

But owning a manufacturing plant, regardless of location, has one significant advantage: You never have to compete for attention. "The benefit of having our own factory is that it is accountable to no one else but Garmin, and has the company's best interests at heart," Kao said.

Benefits of insourcingM
And therein lies Garmin's secret: The very idea of outsourcing is anathema for Garmin. Indeed, director of operations Brian Pokorny likes to call the company's manufacturing policy "strategic insourcing."

"If you're not willing to invest in the factory and the technologies that are required to keep your facilities up to date," Pokorny said, "then your factories finally start to degrade to the point where it is more efficient for contract manufacturers to build your product."

"But when you hire a contract manufacturer you're dealing with another company that's out to make a profit," Pokorny said. "We think it's better to have whatever money might go to making their profit stay within Garmin."

Displays are a good example of Garmin's strategic-insourcing philosophy. Garmin buys displays, then modifies them to meet the specific needs of its various products. But Garmin had had trouble finding displays that met its exacting standards.

"In the early days we used to buy finished display modules," Pokorny said. "But we decided to take that technology in-house." Taiwan is now Garmin's center for display enhancement.

But to keep costs under control, Garmin builds many products using modular designs. "We try to reuse designs throughout our product lines as much as possible," Pokorny said.

This helps with forecasting, should demand for finished products shift unexpectedly. "It's a lot easier to change a production schedule when you're using a supply of common parts [at your own plants.] When you use a contract manufacturer, that change becomes more difficult," Pokorny said.

Design-manufacturing connection

Within that practice of modular designs lie chances to reduce costs. Pokorny said Garmin would often redesign a product over its lifetime to save on component cost and count.

"Most people won't notice a difference, but the GPS 12 has been redesigned six or seven times," he said, referring to an older but still- popular handheld GPS receiver. "We're constantly re-evaluating pro-cessors and other products that we use, and we're quick to redesign to reduce cost."

And that redesign and other production changes tend to happen easily at Garmin because manufacturing and engineering all work together at the same facilities.

"If we have yield problems with one of the units, our manufacturing people have only to walk 20 feet, and they can talk to an engineer," Pokorny said. "If there is a problem on the line, you might run into an engineer in the hallway. They're there in minutes. That's not something you get with an outside supplier."

When Garmin launches a new consumer product, engineers from its Olathe plant typically go to Taiwan and spend two weeks overseeing a pilot run of the product. Garmin finds this close interaction between engineering and manufacturing goes a long way toward cutting the length of time between a product's design and its deployment.

On its manufacturing lines, Garmin follows a continuous-flow methodology. Employees are cross-trained to perform several production jobs as needed.

"If we get an order for 500 GPS 12s, which is one of our oldest products, an outsourced manufacturer would laugh and say come back when you get an order for 10,000," said Garmin spokesman Pete Brumbaugh. "But we can build that. You're always in that battle of profit and efficiency. The contract manufacturers say they want to have a certain lot size and can't just build 50 or 100 units. In our environment we can build that lot."

Pokorny just saw Garmin through a migration from its old manufacturing resource-planning system-it had used business planning and control systems (BPCS) from SSA Global since 1995-to a new installation of Oracle's E-Business Suite that went live this year.

"We had BPCS in Olathe and in Taiwan, but our operation in the U.K. was on Sage, and none of those systems talked to each other," Pokorny said. "Now when we make a change in Olathe, they see it in Taiwan the next day."

"It's really about efficiency," Pokorny said.

Arik Hesseldahl is a senior editor at Forbes.com. He can be reached at arik@arik.org.

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