I'm putting my head on a block here but I'd have to say that a dedicated GPS unit such as Garmin, Tom Tom or Magellan will always outsmart an iPhone-enable GPS. iPhone is a Swiss army Knife in comparison, useful in tight conditions but not quite having the industrial-strength necessary.
But you bought an iPhone to make phone calls, right?
I think you overestimate what is required to have a "industrial-strength" navigation system. The bottom line is going to mostly come down to the software. There do not appear to be any major hinderances in the iPhone that would somehow keep it from being incapable of delivering a top-notch navigation experience.
I agree with your point about it being a swiss army knife, but at the core of it, if the GPS chip itself is capable of doing the job, then there is no doubt the software will ultimately be developed to match it. You can't say the same thing about the camera for instance. The camera is not up to the task of competing with a full-fledged camera. If the hardware camera in the iPhone were on par then there would be no reason why it could not be as good as any other stand-alone camera. In the case of a camera though the hardware part is significantly more important to the overall application than it is with the GPS. So like I said, if the GPS is capable of getting the data accurately and in a timely manner, there is really no reason why an iPhone application can not be every bit as robust as standalone units, at least in regards to the core functionality.
To take it further, if every aspect of the iPhone was forced to suffer because of its jack-of-all-trades status, then the iPhone would also suffer as a mobile wifi web browsing device. Yet there is no standalone device or any kind of device that comes anywhere close to matching it. This is because the hardware is fairly simply and affordable to implement and the software pushes it over the top and beyond.
On the scale of how the jack-of-all-trades/swiss army knife effect impacts features, I would say something like WiFi browsing is on the easiest end of the spectrum, the camera is on the hardest end of the spectrum, and the GPS would fall somewhere in the middle, probably closer to the easier side.
With the App store allowing a consolidated and focused access to what is ultimately going to be an extremely large customer base, and I think you will see the iPhone gets more out of its hardware, in the long run, compared to other devices, simply because of the profit motive.
Maybe the GPS chip in the Instinct is better, but ultimately I would bank on the iPhone software offerings to be better because there is more money to be made there, not only because units sold, that is not even the key, the key is accessibility. It is all great if you write an app for 200 million razr users, but what are the odds that 1% of them ever even know about the application?