The Professional GNSS Supply Chain
May 18, 2009 By: Rob LorimerProfessional OEM Newsletter, May 2009
The recent announcement of a joint venture (JV) between Trimble and the China Aerospace Science & Industry Academy of Information Technology (CASIC-IT) to develop GNSS products based on Compass has re-ignited debate about the future of the professional GNSS supply chain. Ultimately, just how many professional OEM GNSS suppliers will the market be able to sustain?
There is a wide divergence of opinion on potential outcomes, but most agree that the future will be shaped by the evolution of three competing OEM business models that are in evidence today.
One. The first model posits that core OEM GNSS technology (at board or chip level) is designed in-house and released to market-focused internal divisions and JV’s at undisclosed transfer pricing. The same products (or variants of it) are also released via an OEM business unit for external customers. Examples of this model are Trimble (who market their professional OEM GNSS boards via Pacific Crest) and Topcon.
Two. The second model resembles the first, but the supplier and customer are slightly more at arm’s length, such as the cases of NovAtel supplying Leica (both companies belonging to the Hexagon group) and Navcom supplying Deere (Navcom now a Deere company).
Inter-company transfer pricing is seldom (if ever) disclosed, although it is generally assumed to be akin to commercial rates. The customer can in theory chose an alternative supplier, but one surmises this would not be a quick or easy decision. The supplier gets the advantage of substantial captive volumes and is free to market the OEM product to third parties (although in the case of Navcom, there appears to be no appetite for other customers in the agriculture market).
From a purely OEM GNSS perspective, these models have limitations, as third-party integrators can be reluctant to buy product directly from a perceived competitor or from a supplier with obvious financial links to a perceived competitor. Having said that, Novatel does provide the OEM engine for the Spectra Precision Epoch 35 RTK System (as reported in February's Survey and Construction Newsletter), Spectra being a Trimble brand and Novatel being part of the Hexagon group that includes Leica Geosystems.
Three. In contrast to the first two models, the third model is based on relationships between unrelated parties. This allows for a wide range of commercial terms and conditions covering length of contract, sole/multiple supplier status, exclusivity, and so on. Examples of existing open market arrangements include Septentrio supplying Veripos and Hemisphere GPS supplying Farmscan.
Now some would say that the first model is not really an OEM business model at all, but I would argue that’s a moot point. Let’s take Trimble as an example. Having a joint venture with Caterpillar and an OEM deal with CNH means Trimble already supplies two of the world’s top four machinery manufacturers. As machine control inexorably grows to dominate professional GNSS, so the importance of these customers will become more and more apparent. Throw in the CASIC-IT deal, and it is difficult to imagine who will match Trimble’s potential internal and JV volumes.
Similarly, if Topcon can maintain and build secure long-term relationships with Komatsu and AGCO, they will also lock down a strong volume position. Factor in Deere’s captive supply by Navcom, and now the top five global machinery manufacturers are taken. With as much as 70 percent of the global machinery market accounted for by just three professional OEM GNSS suppliers, where does that leave the other companies?
One scenario calls for companies such as the Trimble/CAT JV, Topcon/Sauer Danfoss (TSD) JV, and Navcom to evolve into fully fledged Tier 1 system integrators. In this scenario, as volumes grow, the Tier-1 may relinquish what are considered today as core competencies (for example, RTK GNSS) in favor of focusing their resources on system integration. Tier 2 companies concentrate on specific technologies and technology integration such as deeply integrated inertial measurment/GNSS/laser positioning modules that provide ubiquitous centimeter positioning. As the market matures, Tier 1 companies support several competing Tier 2 suppliers, perhaps companies like Novatel, Septentrio, Javad, and Magellan.
Another distinct possibility is that aftermarket systems survive-and-thrive in the mining, agriculture, and construction marketplaces. In this scenario, market-focused system integrators (candidates include Novariant, Leica, Modular Mining, and Hemisphere GPS) successfully compete with the factory-or dealer-fitted offerings by machinery manufactures like CNH and CAT. The market ends up supporting a greater number and variety of players; there are also plenty of smaller machinery OEM opportunities such as Volvo, Atlas Copco, and Class for which to compete as well.
These scenarios are neither exhaustive nor mutually exclusive. It is also highly plausible we end up with a mix of strong Tier 1 and Tier 2 suppliers to the large machinery manufactures and a vibrant group of specialized system integrators supplying the aftermarket and smaller OEM opportunities.
A couple of additional disruptive scenarios to consider are for terrestrial (that is, non-GNSS) centimeter positioning services to become widely available (conceivably as part of wireless communications), or for GNSS precise positioning to take-off in consumer mobile devices, automotives, or some as-yet-unforeseen volume application. In these projections, mainstream global electronics companies make a few strategic acquisitions, and the supply chain changes forever. Another potentially disruptive scenario arises from the growth of software receivers — but therein lies a whole article by itself.
In reality, the market for precision OEM GNSS still goes about in its infancy, business models continue to evolve, and most of the current players cannot be pigeonholed into any one category. It would be premature to declare winners (or losers) at this stage, the history of business being littered with the corpses of companies who started with seemingly impregnable market advantage and either tripped up or got sideswiped by disruptive technologies.
Having said that, announcements over the last 18 months such as Hexagon’s acquisition of NovAtel, the Trimble/CASIC-IT JV, Navcom’s deal with Astrium, and TSD’s deal with AGCO all signal the unfolding of corporate strategies. Powerful but as yet untested young gorillas stretch their arms and beat their chests. To survive and prosper in this jungle, others will need to be smart, nimble, and fleet-of-foot.
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