Over the past couple of weeks, we’ve been receiving wave after wave of business plans for Global Positioning System (GPS) related ventures – not entirely sure what is driving this sudden surge in cases but there you have it. Indeed, the odds-on favourite for the number one reoccurring business theme is:

“We’re China’s leading GPS software application vendor developing navigation and Web2.0 compliant applications and in search of US$2 to $5 million”.

Coupled with each offering is a competitive analysis whereby software ventures are championed and hardware ventures trashed. Not surprising – hey man, big upside over here, give us some cash – their motivation is obvious. Frankly, it ain’t that simple of an argument– the GPS industry is evolving rapidly, outside of China, and for once, we sense that China’s GPS industry will not adopt Chinese characteristic (the way Baidu and Tencent have) – um, go back, of course there will be some localization but this will happen to the extend that Chinese characters replace English, French, etc (and the minor bells and whistles) but by and large we don’t see much room for this to happen. In its place we see vertical integration theming its way nationwide.

A casual observation of China’s GPS universe reveals definitive gaps in the pro-software argument (“hey man, big upside over here, give us some cash!”) – the “hugest” being that fact that the H.M.S. GPS has already set sail – at least, for this cycle. Quite frankly, Chinese and foreign GSP ISVs, both large and small, too numerous to count, have built (circa 1997) substantial beachheads on China’s shores – the most successful Chinese ventures (just a handful) partnered, early on, with major technology companies and telco providers, such as IBM and China Unicom which helped them go to the head of the venture funding line whereby millions of dollars have been doled out by international and local vc funds, such as SAIF, Gobi and Oak Investment Partners (sadly, Ymer was not one of them).

With fresh funding and strategic partnerships these first movers have quickly moved up the value chain, offering sophisticated navigation engines and tools, nationwide map databases, and proprietary value-add networks (e.g. highway sensors and tags relaying traffic information). Given the fact that the demand side of the curve has only started inching up the scale, it reasons that a young enterprising start-up will find it extremely challenging to increase its footprint until such a time that demand outstrips supply. If you consider that there is only one dominate (virtual monopoly) mapping company in the US (Navteq) and one in Europe (Tele Atlas) it become clear the difficult new entrants face in light of China’s well funded incumbents (Lingtu, Careland).

Those in the pro-software camp fade GPS hardware investments largely because they claim the industry is over saturated, highly fragmented and competitive environment. However, I’m a bit uncomfortable drawing such definitive conclusions when the industry in its infancy (i.e. China accounted for about 3.5 – 4% of total global unit sales in 2006) and positioned to benefit from the convergence of mobile device market, rising in-car GPS penetration, and heightened recreational use.

On the contrary, highly fragmented and competitive industries tend to be fantastic opportunities for existing players with means to control their own destiny – the idea being to identify and then inject sufficient capital in a market leader, structure a well articulated and thought-out business strategy, look to roll-up (consolidate) smaller (synergistic) competitors, build strategic partnerships with other industry leaders (vertical integration), and then throttle up your execution machine (experienced management team).

However, how many GPS hardware players are out there suitable for venture funding – the equivalent of a handful, at the most.

Even so to suggest that an investment in a GPS ISV vendor trumps a similar investment in a GPS hardware vendor (largely because of the operating environment) may be off-center and is slightly ignorant of the dominant trend playing out in the industry.

Convergence – that’s the ticket. The GPS value chain is melting and evolving – the top 5 GPS vendors (accounting for 70% of global market share) now have capabilities in software development, chipset design (e.g. Garmin) and module/end-product production/design. And therefore, it becomes rather clear that as the industry matures in China, the leaders will be GPS vendors with vertical integration know-how and capabilities (either in upstream chipset design or software navigation engines) will lead their peers in terms of both technology innovation and product positioning.

To the point, some of the most innovative GPS software solutions are developed by leading vertically integrated GPS vendors, such as TomTom’s Map Share technology. This unique mapping technology allows users to easily and instantly improve existing maps as soon as they identify changes in the road network, for example a smart interface allows users to change street names, unblock or block-off streets, identify one way streets, etc. Furthermore, as TomTom’s mapping system is dynamic, all updates are shared with TomTom’s 10 million users (i.e. community).

This is exciting stuff – the next step in further developing this community is to overlay additional information, similar to what US based community site Outside.in does with localized information generated by users.