Ter lering & vermaak
Recently, I received an update to Garmin's annual report. "What's up with
this?" I thought. Then I set it aside until I got a SECOND annual report and
update. There was no detailed explanation of the changes and no explanation of
the duplicate copy. Does Garmin not care enough to tell folks why they've
undergone the time and expense to send this addendum? And the duplicate
copies?? It was presented as "printing errors", but all I found during a quick
review of both documents was an errant space within "December" on one page.
Come on, Garmin…can't you simply let folks know what changed so we can make
appropriate notes in the annual report and toss the addendum??? What are you
hiding? If it was a simple typo or page formatting, why waste the time and
expense to print and mail addendums?
Yes, Garmin's actions of late are concerning me. Garmin is an incredible
business success story. In 15 years of operation this group of King Radio
engineers has created a mighty consumer electronics enterprise. But, as an
early investor I've made considerable efforts to keep track of the history and
business decisions of this company. If I'm going to invest my hard-earned
dollars in a company, I want to know both the good and bad about it. From
there, I can make my own determinations of share value and ignore the slanted
recommendations of brokers/underwriters.
Below are my findings and accumulated history of NASDAQ: GRMN.
1) Garmin is frequently late to market with technologies. One example is the
recent introduction of a Compact Flash GPS. This is a case of too little, too
late. I can hear the marketplace yawning now. Garmin, some of your
marketing/engineering folks there were promising this to the dealers over 18
months ago. What happened? Back then CF was a viable product. Today, PDA
markets have moved on to Bluetooth and SDIO connectivity. If you can't deliver
current technologies to this marketplace, save the R&D resources and focus
where you're knowledge base is best!
Another case in point was their ANALOG cell phone introduction several years
ago. When the analog market was dying and someone was looking for an
appropriate coffin to bury it in, Garmin introduced the NavTalk phone with
integrated GPS. And, they tried to sell it through their marine products
dealers! Worse yet, this thing weighed a couple pounds and was only slightly
smaller than a brick. RESULT: Garmin got it's butt kicked in the marketplace
and ate the R&D losses. Last word I've heard in this arena was that Garmin has
let go or lost through attrition all but one or two of the old King Land Mobile
Radio engineers it hired about 10 years ago. A 5-6 yr investment in mobile
technology/personnel produced lackluster results, but at least this expense
appears to be behind them now.
IQUE PDA. Neat product, Garmin. And, sales seem to be good on this product too.
But it's hard to pick from the background noise whether this product is a true
success or just get's a lot of techie magazine hype. Traveling around the
country, I've seen references to this product in just about every type of
travel and technology magazine. But, I've only encountered five other users of
the product besides myself. That doesn't look like substantial PDA market
penetration! I was intrigued several years ago when Garmin announced its
partnership with Palm. It was during the same time period when PDA writers
where talking about the renewed vigor and market growth of Pocket PC. Garmin
seemed to miss a big portion of what was going on in the marketplace. And, that
hurts them too! Pocket PC price points are more in line with what Garmin wants
for their IQUE: $549. Palm buyers are expecting to pay closer to $100-$300 for
their organizers. The NavMan PiN Pocket PC/GPS now on the market will likely
doom IQUE sales for all but the wealthiest diehard Palm users. Pocket PC sales
continue to be more brisk than Palm, and the PiN is priced LOWER than the IQUE.
Automotive navigation products. Garmin is loosing substantial ground here too.
Although an early entrant into this marketplace, they failed to gain an
automotive OEM partner. They tried years ago, with Chrysler. But, couldn't
convince them they had a serious product for OEM-level installations. The, then
current, StreetPilot portable wasn't an appropriate fit for dash installations.
And, Garmin was years away from an in-dash equivalent in a time frame when
Clarion and Alpine were already on the market. Garmin saw a modest success by
partnering with BMW to produce a StreetPilot III knockoff for motorcycle use.
Sales numbers haven't been impressive in such a narrow niche. More recently,
Garmin produced a new generation of portables with touch screen and remote
control. I fail to see why in the world you'd need a remote control for a touch
screen PORTABLE car navigator, but there it is. Garmin hasn't recognized market
resistance to "unlock codes" and cumbersome online registration requirements.
They got a good early lesson with the StreetPilot III and GPS V products. When
first offered, customers where required to purchase "unlock codes" and use
online procedures to unlock each of about ten North American regions to make
the units fully functional. The customer calls and dealer feedback swamped
Garmin and resulted in improved Deluxe versions which allowed a single unlock
to cover the entire U.S. However, NavMan, Magellan and other competitors
learned from Garmin's mistakes and have produced solid contenders for the
marketplace. Magellan seemed to closely follow Garmin's woes and produced a
RoadMate 700 with the entire U.S. pre-loaded, eliminating the ugly computer
download process required when first purchased AND the unlock procedures. There
are too many players now in the automotive navigation portable market and
Garmin's products are no longer the feature leaders. It will be interesting to
watch the changes in this market over the next few years.
Masters of Repackaging. Give Garmin bonus points for learning lessons in
"economies of scale". Since their earliest days they've found new marketplace
life by creating derivative products: GPS100, GPS100 MRN, GPS100STD, GPS100AVD,
GPS100MIL, GPS100SRVY. Garmin made tons 'o cash off the GPS 45 platform with
many variants including GPS 38, GPS 12, GPS 90, and on and on. Their latest
round of repackaging is the GPS 60 and GPSMAP 296. More on the GPSMAP 296
later, but the GPS 60 is based on the RINO form factor. Nice color displays and
a rugged look. But, ouch, that price! A base GPS 60C runs $450 and derivatives
go up in price from there! Like the PDA discussion above, Garmin runs
headstrong into the marketplace with its own ideas of what a GPS-only handheld
should be worth in today's market. After Garmin, Magellan and Lowrance fought
it out to drive prices as low at sub-$100, Garmin now appears to think buyer
expectations on a color handheld will support $400-$500. That's gotta be a
tough sell. It is a nicely featured product, but the marketplace now expects
$100-$150 on a black and white unit and $200-$300 on a color version.
2) Testing the legal environment. I'll save the best for last in this category,
but give you a hint. Garmin has gotten big enough, and hired enough lawyers,
that it feels comfortable testing the legal restrictions on vertical price
restraints.
Garmin has a long and colorful legal history. It's seed capital and name can be
traced to a legal dispute with Magellan. Fifteen years ago, Garmin was known as
ProNav and produced a ProNav 100 model. Magellan was producing a NavPro 1000,
and an obvious product name dispute resulted. In case you're wondering, the
NavPro 1000 was first to market and had the legal upper hand. However, rather
than face a long, costly, drawn-out legal dispute, both sides reached an
agreement where Garmin would vacate the ProNav company name and Magellan would
compensate Garmin for the associated expenses of doing so. Magellan apparently
didn't realize they were providing the necessary operating funds for a company
that was just beginning to bring its first product to market!
Garmin's "Made in USA" fiasco is a case study in business ethics and seldom
discussed in polite GPS circles anymore. Dating back about 10 years, the
dispute has it's roots in a taxpayer-funded program where foreign militaries
were able to purchase U.S. made goods at a subsidized (again, taxpayer-funded)
rates. Garmin's problems where two-fold: (1) Their GPS 100 MIL product was
produced in Taiwan, not the U.S., and (2) ALL their competitors knew this. So
when Garmin secured a contract under this program with a Middle Eastern
country's army, a competitor balked and an investigation ensued. Garmin tried
to claim that a 10-minute final assembly process they farmed out to a U.S.
sub-contractor, called Blairden, fit the 51% Made in USA rule. Details are
sketchy after that, since many of the folks involved have since left Garmin.
Rumors are that there was a settlement between Garmin and federal
investigators. Those involved in the investigation that are still at Garmin are
senior managers, and of course they're not talking.
Partners and vendors. Garmin has a colorful history of disagreements and
contract disputes with vendors and quasi-competitors. One story related by a
Garmin manager I found particularly illustrative and encompassing of problems
that were described with other vendors. This one relates to a U.S. manufacturer
of mounting brackets, for GPS and many other items. Garmin's mechanical
engineering staff made a direct copy of this company's patented mounting
bracket design, which utilized a rubberized ball over metal pin and a
corresponding female socket and friction-adjusting knob, down to the exact
mechanical dimensions of the mounting ball. Ouch! Obviously, the patent owner
sued and challenged the design. Like other instances, Garmin settled with
patent owner. As related by the Garmin manager, the settlement included a
period of time where Garmin would offer the patent owner's products to Garmin
customers and would stock this item for direct delivery. Problem was, the
details of how the product would be offered to customers was intentionally
vague, so no insert ever accompanied products and is was never referenced in
product documentation. After the agreed upon time period passed, the patent
owner was dismayed to learn from another Garmin employee that the mounting
brackets stocked at Garmin were simply thrown away.
Many readers here are probably familiar in part with MAP pricing arrangements.
MAP, or Minimum Advertised Pricing, agreements have been used by Garmin for a
decade to prevent distributors from advertising their products for sale below a
certain price. This does NOT prevent the dealer from selling at a lower price,
they just cannot ADVERTISE the lower price. That's why you always see these
silly "Call for Price" statements or, in the case of online sellers, they use a
"Request Pricing" email autoresponder system. It's a goofy game, but intended
to prevent rapid price depreciation in a highly competitive marketplace. Some
consumers are surprised to learn that the margin on GPS products at MAP price
is only 25-30%, and they usually sell for even less producing margins of
10-20%! At those levels you begin to wonder why some distributors even bother.
So, with the concern over price depreciation of its products and the rising
volume of online sales of its products, Garmin decided this year to ramp up its
policing and enforcement efforts in the form of a full-blown Vertical Price
Arrangement. Rather than describe this one to you, I offer a copy of the
following memo sent from Garmin to its dealers:
*****
GARMIN marketing memo
GARMIN USA, Inc. 1200 East 151st Street, Olathe, KS 66062 PH: 913/397 8200 FAX:
913/397 8282
To: GARMIN Aviation Distributors
From: Tim Casey, Aviation Marketing Manager
Date: March 24, 2004
In an effort to protect the long-term interest of not only Garmin, but all of
our distributors and customers, we have unilaterally adopted a Resale Price
Policy for the GPSMAP 296. Garmin believes that this Policy is necessary to
ensure the preservation of the superior image of our brand, the value of the
GPSMAP 296, and to properly establish the image and reputation of the GPSMAP
296 in the appropriate market segment.
Effective March 24, 2004, the Minimum Resale Price for the GPSMAP 296 will be
$1695.00. Although resellers remain free to establish their own prices, Garmin
will, without assuming any liability, cancel all orders and refuse to accept
any new orders for the GPSMAP 296 from any distributor for a period of six (6)
months, immediately following Garmin's verification to its satisfaction that
such distributor has advertised, offered, or sold any GPSMAP 296 at a net
retail sales price less than the above Minimum Resale Price established and
announced by Garmin. At Garmin's election, a second violation of this Policy by
a reseller will result in the indefinite discontinuation of any further GPSMAP
296 transactions with the distributor.
Any discounting of the Minimum Resale Price for the GPSMAP 296, including,
without limitation advertising, offering or providing free shipping, coupons,
rebates, free accessories, or payment of sales tax for the customer, will be
regarded as a violation of this Resale Price Policy.
This Resale Price Policy does not currently apply to any of Garmin's other
products. However, please keep in mind that Garmin's unilateral Minimum
Advertised Price Policy is still applicable to those products designated by
Garmin in our aviation distributor marketing programs booklet, or by Marketing
memo.
Garmin will not discuss any conditions of acceptance related to this Policy, as
it is non-negotiable and will not be altered for any distributor. In addition,
Garmin neither solicits, nor will it accept, any assurance of compliance with
this Policy. Nothing in this Policy shall constitute an agreement between
Garmin and any distributor that the distributor will comply with this Policy.
For legal reasons, Garmin will not discuss the Minimum Resale Price Policy with
any distributors. Accordingly, all Garmin personnel and sales representatives
have been specifically instructed no to discuss the Policy beyond the contents
of this statement with anyone outside of Garmin. Please do not attempt to
discuss the Policy with Garmin personnel or sales representatives or
communicate complaints or advice to Garmin personnel or sales representatives.
Garmin will unilaterally determine whether GPSMAP 296 products are being
advertised, offered or sold at prices other than in compliance with the Garmin
Resale Price Policy.
Garmin sales personnel have no authority to modify or grant exceptions to this
Policy.
If you so choose, you may forward information about non-compliance with the
Minimum Resale Price Policy to a specially designated fax number established by
Garmin, (800-801-4670). However, please be advised that no Garmin personnel or
sales representatives will contact you to acknowledge, respond or follow-up on
what you report, nor will they discuss the enforcement of the Resale Price
Policy or pricing practices of other distributors with you.
*****
So, there it is. In all its ugly details. And, when I saw this, it caused me to
reevaluate my shareholder ownership in this company. My background includes
Business Law and Business Communications. In both regards I was taken aback
first by the ethical challenges that this represented. Clearly, Garmin has
gotten big enough that it thinks the "preservation of the superior image of our
brand" trumps the value perceptions of its customers and the marketing rights
of its distributors. As a consumer, my reaction is that Garmin's concern for
"image and reputation" is more important to it than the quality of its
products, the needs of its customers and the free-market principles American's
believe in. As a shareholder, my reaction was a more basic, "Oh, my God. Are
they trying to get their huge cash reserves tied up in court?"
From my business law experience, I recognized the ugly gray areas and errors of
interpretation that can cause future problems for this company. Garmin is
basing its interpretation of legal versus illegal pricing restraints on the
Colgate doctrine. (And I encourage readers to study the subject, if interested,
at ftc.gov.) But, their interpretation is flawed in a couple areas that could
cause significant problems.
First, by setting up a fax number and dancing around a solicitation to turn
policy violators in, Garmin violates Colgate doctrine prohibitions on
arrangements between supplier and distributor where distributors are asked to
police the marketplace. It matters not that Garmin states "If you so choose",
the implication that this is a request for distributors to police the actions
of competitors is clear. Simply setting up a fax number for this purpose makes
the intent clear.
Second, Garmin's statement that "Nothing in this Policy shall constitute an
agreement between Garmin and any distributor" is flawed. An
agree-to-this-or-else-we-cancel-you vertical price arrangement is inherently an
agreement between supplier and distributor. It specifically states the nature
of agreement, the terms of agreement and the results of non-compliance. Here,
it matters not whether there is a signature line for the distributor to sign
consent. They've already done so when they signed an initial Distributor
Agreement with Garmin that included some open statement such as "the terms of
this agreement may be revised, as deemed appropriate by Garmin, in the future".
Such revision clauses do NOT require future consent signatures by the
distributor, do take effect unless the dealer cancels the Distributor
Agreement, and do ALL become part of an all encompassing agreement between
supplier and distributor.
3) I first learned about Garmin's resale price policy from a person attending
the Sun-n-Fun airshow in Florida earlier this year. Apparently, he was told of
the policy from several of Garmin's distributors. These same distributors had
to, over and over again, explain to their customers that "Yes. We have free
shipping on all our products---except the Garmin 296." Customer: "Why".
Distributor: "Garmin won't allow it." Nice move Garmin. You're building a
positive relationship with your market!
This same person spent some time observing discussions in the Garmin booth and
reported the same two issues came up again and again:
(a) Customer: "Why is the price so high on the GPSMAP 296, versus all your
other products?"
(b) Customer: "Why do the screen examples in your ads and brochures look
nothing like the screen images on the actual GPSMAP 296?"
Doctoring the images to make the product look better? Apparently. And, again
Garmin---if you're listening---nice job building a positive relationship with
your market!
4) Effective tax rate. Garmin has a huge competitive advantage in two areas:
taxation and labor cost. Those have always been critical keys to their success.
Of course, easy-to-use products are what won many folks over to their side over
the years, but ease-of-use is not consistently their strength these days.
Garmin's tax expense relating to plant and property is much lower than
competitors'. Take some time prying information from civic leaders in Garmin's
communities and you'll find a long list of long-term tax abatements and tax
deferments. Garmin isn't alone in this regard, as the precedent for these
arrangements was set by companies like Wal-Mart years ago. I personally don't
care either way on this issue, but if I lived in Olathe, Kansas or Tsin Tien,
Taiwan, I would be mad as hell that I have to make up the lost revenues from
companies that find ways to avoid taxation. Especially if I lived in the shadow
of the 10-story Sprint-like building I here is now under construction on
Garmin's property in Olathe.
On the federal front, Garmin's complex structure gives it an effective income
tax rate (21%) that is one-half to two-thirds the size of any of its
competitors. How? As a multinational, Garmin is able to enjoy the accounting
benefits of transfer pricing. Transfer pricing is an accounting requirement
that allows multinationals to exchange finished goods and work-in-progess
between divisions or between facilities in different countries. For finished
goods, the transfer price should normally be the exchange rate equivalent of
the value of goods in the source country. However, work-in-progress provides
unique opportunities for transfer of costs or profits to "right size" your tax
obligations. They lose a little of this advantage from time-to-time through
currency fluctuations. It's not illegal, but can be unethical when abused.
5) Company organization. Garmin is not a US company. Back in 2000 when Garmin
went public we were told that the Cayman Islands reorganization was due to
Taiwan national law restrictions that prohibited the company from issuing stock
in the U.S. We all took that at face value and made jokes about the company
P.O. box in the Caymans and whether there was anyone actually there.
Turns out that Garmin wasn't being entirely upfront about the rationale behind
their corporate structure. Apparently the financial folks at Garmin either (a)
have never heard of ADRs, which many Taiwan companies use for investor market
presence in the U.S., or (b) knew there was more investor money to be had, and
that they could perpetuate the misperception that Garmin is a U.S. company, by
reorganizing with a new Cayman Islands parent company and issuing direct stock.
You see, most folks apparently aren't aware that Garmin is a Taiwan-based
company. Folks throughout the country express surprise to learn that their
precious new toy was made overseas. And, they assume that the Olathe-based
entity that is routinely referenced is the headquarters of operations. In
practice, Olathe IS were Garmin's senior managers reside. But, the whole thing
was set up to minimize their U.S. tax burden, take advantage of low-cost
overseas labor, and provide local support structure for many of Garmin's
initial investors. The first two are obvious. The latter requires you go back
to Garmin's IPO filing and review the list of original owners. There is a short
list of U.S. citizens that initially invested in the upstart Garmin in 1989.
There is a long list of Taiwan citizens that did the same. These folks
certainly expected to have local opportunities for employment and some degree
of involvement in the operations of the upstart company.
To clear any confusion, here's how Garmin was and is organized:
Prior to the IPO, Garmin was a Taiwan-based company under the name Garmin Corp.
It's U.S. subsidiary was Garmin International.
After the IPO, Garmin is structured as a Cayman Islands based company named
Garmin Ltd. Garmin Corp is a subsidiary of Garmin Ltd. And, as before, Garmin
International (in the U.S.) is a subsidiary of Garmin Corp.
For all their restructuring, I began to doubt their sincerity even more after
poring over historical documents. In the two years immediately before the IPO,
Garmin owners extracted nearly $40 million cash out of the company in
preparation for public listing. While that didn't seriously damage this
company, with cash reserves at the time over $200 million, it is instructive in
what their plans were with the IPO. What also escapes some investors is the
huge stock dividends paid to owners before the IPO. Why? To ensure that a
target number of shares could be offered at IPO, yet keep public ownership of
the company below 20%? Or, to ensure that any future dividend payments heavily
favored these majority owners? Or, to so dilute public ownership as to ensure
there are no possible challenges to management structure? Don't know, but the
three years prior to IPO show some unusual financial activity.
6) R&D expenditures. Over the last few years Garmin has touted extensive
investment in engineering resources. Where's the $$$? And, where's the product?
'03 resulted in only 16 new products, and many of those were early '03 releases
that were originally intended to be late '02 products. Is productivity
declining? Or, has Garmin shifted so much of it's R&D resources to the G1000
project that it doesn't have time and manpower to develop other products?
Speaking of the G1000, is this the best bang for Garmin's buck? Don't get me
wrong, this is one impressive aircraft instrumentation system. But, any savvy
investor knows that aviation and money don't mix…except when the money is in
the form of outflows. The U.S. general aviation manufacturers are collectively
producing about 2500 aircraft per year (source: u.s. census data abstract).
That's it. And, Garmin's G1000 is an OEM-only product. They're not tapping into
the limited existing aircraft market of 211,000 aircraft (of all sizes and
types, including a large number of inactive "hanger queens"; source: AOPA).
That market is reserved for their GNS 430 and GNS 530 offerings, where they've
done steady business now for the last four years. How in the world do they plan
to take this huge R&D expense and show a profit in such a limited market???
---Bill Hicks
