Analyst Q&A: RFID Industry Update

In the summer of 2004, both Wal-Mart and the DoD outlined their RFID initiatives. Immediately, this wireless ID technology was elevated from niche applications to the forefront of some of the largest supply chains. Of course, a lot has changed over the past few years. In addition to tremendous advances in RFID technology, the industry has also seen the RFID education level of end users rise exponentially during this time period. The RFID market — and RFID-enabled solutions — continues to be a dynamic space. Wal-Mart and the DoD continue to push onward with their smart label initiatives. However, end users are now starting to realize that RFID is an important technology in plenty of noncompliance applications. To get some insight and perspective, we turned to Michael Liard, director, RFID and Contactless Technologies, at ABI Research.

What is the state of the RFID market right now compared to the past 12 or 24 months?
Liard: That is a great question. The challenge is how to respond to it. The RFID market is like a giant 1,000-piece puzzle. About five years ago, it was maybe a 500-piece puzzle. (The number of pieces increases as you add more technologies, standards, regulations, players, applications, and potential users.) Sticking with this analogy, many people start out by finding the edge pieces and begin building the frame of the puzzle. The same is true in this industry. We have essentially built the framework in terms of the technology. The industry has been diligently putting the pieces together — but the speed at which these pieces are being assembled has been slower than some would have anticipated. This is particularly the case for the open-loop supply chain. I have been cautiously optimistic all along. And, the assembly rate of the puzzle is on a par with my personal expectations. There is a great deal of collaboration and coordination that continues to take place. We need to remember that RFID is a theme with 1,000 variations, and it will take some time for all the pieces to come together nicely.
  Oh, and what does the puzzle look like afterwards? What is the picture on the box we are trying to "create," so to speak? That's the Holy Grail. And, all industry participants seek it — from IC [integrated circuit] vendors to systems integrators to end users.

It's not inaccurate to say that mandates were driving the RFID industry a few years back. What's driving the RFID industry today?
Liard: Yes, mandates have been a driving force. However, there is a sharp difference between forcing adoption and enabling adoption. Minimal compliance has been the overarching tone among those impacted suppliers. Forcing adoption can certainly drive a market, but by enabling adoption via lower TCO (total cost of ownership), high ROI, strong business models and business cases, scalable/repeatable solutions, and the like, the market has the potential to explode. Adding new suppliers to the list of those that must comply with mandates will only drive market growth so much. Those that have already adopted/deployed RFID need to move beyond compliance and determine RFID's larger role in their operational, IT, and marketing strategies.

What else stands out as a driver?
Liard: (A) Strong ROI models are being demonstrated and proven within closed-loop applications. Key examples include returnable/reusable asset tracking, corporate IT asset tracking, WIP (work in process) tracking, and parts and tool tracking. And, many of these applications are being supported by passive UHF Gen 2/ISO 18000-6C products, affording passive UHF players opportunities outside of the retail CPG (consumer packaged goods) supply chain.
  (B) RFID in the pharmaceutical market marches on. Item-level tagging trials, pilots, and deployments continue to drive investments. However, the frequency debate lingers, as does the issue of the lack of more specific RFID direction from the FDA. The ROI and business case for RFID is very strong in this segment, and we have seen several product innovations in the last year around label form factors, near field antennas, encapsulation (from Owens-Illinois), and improved performance.
  (C) RFID application stalwarts continue to drive the market. Legacy applications such as auto-immobilization, ticketing (strong growth), access control, animal ID (strong growth due to country-specific mandates, initiatives, and laws), electronic toll collection, and container security (increasing international importance) continue to account for the majority of revenue today.
  (D) Safety and security are central themes. You just have to think about container security, animal ID (farm to fork), food safety, cold chain distribution, anti-counterfeiting for pharmaceuticals, parts tracking in aerospace and defense (for rogue/counterfeit parts), e-passports and border control applications, and others. These are markets that have attracted a great deal of interest.

What's the appeal of using RFID for closed-loop applications?
Liard: It largely comes down to control of the RFID system within your own four walls. The end user enterprise has 100% ownership, responsibility, and benefits. Open-loop apps are more complex in that partners are involved. As I mentioned earlier, closed-loop applications have strong ROI models.  There are a host of applications where these ROI models are being demonstrated. A few include asset tracking, WIP tracking, and parts and tool tracking.

How do advancements in UHF technology affect the RFID market? Will there be one dominant frequency over time?
Liard: There has been much progress in terms of passive UHF technology development — performance is increasing and prices are coming down for both tags and readers. Software and services are becoming more critical — as we try to effectively leverage the data being captured. Innovation remains critical, however; there is always room for improvement. This is especially the case in terms of read accuracy rates, number of unique tag reads per second, security, and memory for passive UHF labels. I also believe we need to watch the emerging semi-active/semi-passive technology space and what those solutions can bring to bear.
  The frequency debate will linger for some item-level apps, such as pharmaceutical. Security and memory on UHF tags needs to be addressed in the short term. That is where HF holds some leverage. Near-field antennas have addressed some of the range requirement issues whereas they enable 'UHF to behave like HF.' The price gap between HF and UHF will only grow larger with time, but the difference in price is due to antenna design and higher functionality associated with HF. It essentially comes down to performance, price, and preference. And, in regard to preference, the desire to support dual HF and UHF infrastructure is not attractive to distributors or pharmacies (and retailers). Both HF and UHF will be used in the pharmaceutical market in the short term, but I would have to give an edge to UHF at this time. It has the momentum. But, I would be remiss to not give HF credit where credit is due. It is a proven technology backed by standards, more functionality, and high performance. However, passive UHF has been gaining ground.
  If all RFID applications are to be considered, it must be stated that HF has held a dominant market share due to the legacy applications it supports such as ticketing, library, laundry, and contactless cards. Now you can add e-passports, which are expected to drive strong volume globally. These applications are not expected to migrate to UHF.

In the next 12 months, in what applications will we see RFID make its greatest strides?
Liard: If I were creating a short list of applications, it would certainly include:
n Asset management — most notably returnable and reusable asset tracking;
n ID Documents [e.g. e-passports, border control applications];
n Supply chain management — more Wal-Mart and DoD suppliers will come on board, new innovation will be seen among product and solution providers;
n Item level tagging;
n Promotions management;
n Application market segments where customers are (1) more forthcoming about sharing ROI and TCO information and (2) where vendor and partner solutions are being validated.