Business Analysis: Why satellite navigation systems are this year's must-have present

Halfords finds its way to growing profits thanks to sales of the latest in-car accessory

Getting lost in the car while trying to find somewhere you've never been before must be one of the more common causes of marital and professional stress. Which is perhaps why Halfords claims that in-car satellite navigation technology is the must-have Christmas gift for 2004.

Getting lost in the car while trying to find somewhere you've never been before must be one of the more common causes of marital and professional stress. Which is perhaps why Halfords claims that in-car satellite navigation technology is the must-have Christmas gift for 2004.

Provided, of course, you are lucky enough to know someone prepared to spend between £130 and £1,600 on filling your Christmas stocking.

Car satnav equipment is the fastest-growing sector of Halfords' business, according to Ian McLeod, its chief operating officer. Halfords, which announced maiden interim profits yesterday of £26.5m, sees further scope for growth as the technology becomes more affordable and effective.

Until recently, too little was known about the technology and consumers were sceptical as to its benefits. But much like swapping old vinyl for CDs or finally buying a dishwasher, many people who now have satnav are wondering how they survived without it.

The motor industry has taken a long time to offer satnav technology and even now it is not particularly cheap if fitted as an optional extra. Adding state-of-the-art satnav to a new Mercedes will set you back £1,950. Add a less advanced system to a bottom-of-the-range Ford Fiesta and it will still cost £1,000.

Halfords says this situation is unlikely to change much in the short term, hence the increase in sales of stand-alone satnav equipment.

Andy Pringle, the managing editor of What Car? magazine, said: "In the past this technology has been too expensive for retailers like Halfords. Customers may have been interested in spending a few hundred pounds on a car stereo, but not a few thousand on satellite navigation. Now there is some fantastic kit available at prices that will tempt more than just car enhancement enthusiasts."

Most, but not necessarily all, satnav systems use Navstar, a global positioning system of satellites originally launched by the US Department of Defence. It links three location indicators - longitude, latitude and altitude - with a map stored in the system's hard drive.

Areas covered and detail given on maps generally depends on the type of system in which the map is stored. CDs are cheaper but do not hold as much information as DVDs; consequently a system based on DVD information is more expensive than one based on a CD. Many DVD-based systems cover the whole of Europe, including farm tracks, petrol stations, hotels and restaurants.

Satnav undoubtedly makes finding your way easier, but you get what you pay for. Search online and you will find PDA (personal digital assistant)-based systems for about £130. But if you want something comparable to what your neighbour in his Mercedes uses, be prepared to spend £1,500, and maybe £500 on fitting costs. Unless, of course, you don't mind your dashboard looking like Spaghetti Junction.

Most of the hardware is generic and produced by the big names in car stereos and PDAs: Blaupunkt, HP, Pioneer and Alpine, to name a few. Two British companies, Trafficmaster and Itis Group, have been at the forefront of developing the technology and are well-known names for those with an interest in satnav.

Trafficmaster sells its branded hardware, made in Spain, through car dealerships, with 22 manufacturers offering its technology as an optional extra. Three car manufacturers - Rover, Mitsubishi and Hyundai - add Trafficmaster equipment in their factories. Most satnav systems have no ongoing costs apart from occasionally updating CDs or DVDs to take account of road changes, but Trafficmaster does that for you, for a £150 annual subscription on top of the £499 it charges for the hardware.

Itisis quoted on AIM, leaving Trafficmaster as the only fully quoted UK company whose sole business is in-car satnav. Trafficmaster was a high-flyer in the technology boom of 1999-2000, with shares trading as high as 1127p, valuing it at £1.52bn. In today's market it has a valuation of £105m.

The key for companies such as Trafficmaster and Itis is beating competition from the PDA market. PDAs are cheaper and have taken a big bite out of the market for complete systems over the past couple of years.

David McClure, of SBD, the automotive technology consultants, said: "Adding traffic information radically changed the perceived value of the industry. Portable devices [PDAs] have captured the imagination of consumers but remain slightly user-unfriendly with very little integration with the rest of the car. They also require extras for traffic information. The high-end, luxury market will probably remain expensive, but the mass market is where price and cost competition will be fiercest."

Mr McClure estimates that 10 per cent of new cars sold in Europe are fitted with satnav, and about the same amount of PDA-based systems are sold yearly - a total of 4 million systems. He believes that the outlook for the market remains favourable, especially in the UK where toll roads are being introduced and congestion zones in cities outside London are a distinct possibility. More drivers, it is predicted, will be looking for alternative routes.

Car enhancements used to mean spoilers and go-faster stripes, which do not sell so well nowadays. Car enhancements that sell well, add value to a vehicle and cost a lot, are presumably the sort of things Halfords have been dreaming of...