UPDATE: Concern Grows Over RFID Tag Production

Alien Technology says it's sold out of one type of RFID tag and expects a three-month order delay.

InformationWeek Staff, Contributor

October 5, 2004

7 Min Read

It's likely there won't be enough radio-frequency identification tags to meet demand in the coming months.

The shortage couldn't be more ill-timed. In 12 weeks, Wal-Mart Stores Inc.'s top suppliers are expected to put RFID tags on at least some of the products they ship to three of the retailer's distribution centers in the Dallas area. The U.S. Department of Defense's deadline for its top suppliers also is January. Others, including Target Corp., want their suppliers to begin tagging shipments next year.

Alien Technology Corp. said Oct. 7 it is temporarily sold out of RFID tags based on the industry-standard Class 1 specification. Alien is one of only two primary suppliers of RFID tags that meet requirements set in most supply-chain mandates. It's telling customers it can't fill orders and to expect a three-month delay.

Alien executives say businesses waited too long to submit their orders. Unlike bar-code labels widely used today that can be turned around in a few days, it takes two to three months to produce the more complex, semiconductor-based RFID tags, says Tom Pounds, VP of corporate development for Alien. "People have known for a long time the Wal-Mart mandate was coming," Pounds says. "But we're moving into a new realm that is unfamiliar with customers and I think they hadn't really believed RFID vendors when we told them earlier in the year that now was the time to order their product."

Pounds says that Alien anticipated the problem during the summer and ramped up production, but orders have been beyond even its most aggressive forecasts.

Zebra Technologies Corp., which integrates tags into labels, also says it has an order backlog. Matt Ream, senior manager of RFID systems, declined to specify just how many tags were on back order, but echoes Alien's assertion that the problem is that businesses haven't properly planned deployment and are waiting until the last minute to order tags. "The industry can work through the backlog, but if you get everyone placing orders simultaneously I can see potential bottlenecks," Ream says. "Companies want to place orders for 200,000 tags two weeks before deployment. Demand may be outstripping supply a bit these days, because there is a mad scramble at the end of the year as companies rush to comply."

Symbol Technologies Inc., the other main supplier of RFID tags, says it has no backlog but is still asking customers to place orders three months in advance.

X-Ident USA LLC is asking customers to order finished RFID labels between 12 and 16 weeks in advance. But X-Ident president Pete Kuzma says most companies have expected to get them within six weeks.

It's unclear just how far-reaching the shortage could be. "We expect this shortage to continue for another six to 12 months," says Bruce Hudson, an analyst with the Meta Group. Current demand for standards-compliant chips is well below 50 million, but that figure is expected to escalate quickly. Consulting and incubation firm Incucomm Inc. estimates that shipments of RFID chips for EPC-compliant devices will grow from about 100 million in 2005 to 20 billion by 2008.

Equally unclear is just how much the shortage will affect Wal-Mart's and other companies' mandates. But the shortage has caught some IT executives off guard. ''I had no idea it could take more than 90 days to get tags, and thought it was more like 45 or 60 days,'' says Richard Siegfried, manager of global UCCnet overseeing data synchronization and RFID projects at Binney & Smith Inc. "You could be working on a certain time line and not know there are longer ordering lead times to consider."

Binney & Smith, the Hallmark Cards Inc. subsidiary that makes crayons and other products, has to meet Target's June 2005 mandate and the second phase of Wal-Mart's mandate in 2006. The company will begin testing RFID in January and plans to put tags on shipments of as many as five products by June that are sent weekly to a Target distribution center in Texas.

The lengthy production cycle is the probably the biggest culprit in the current shortage. "Currently there are too many players to get from point A, which is the [integrated circuit], to point B, which is the finished transponder or smart label," says Mike Liard, an analyst with Venture Development Corp. A chipmaker processes the raw silicon, which typically takes 12 weeks, and then sells it to another company that'll adhere an antenna, which can take another four weeks. From there, the device might be sent on to another company that will place it in a plastic sleeve or label. Each party handling the device adds in costs -- and the potential for a production bottleneck.

But there are other factors at play. Larger manufacturers such as EM Microelectronic, Philips Semiconductor, and Texas Instruments are delaying their entry into the standards-compliant RFID market. These chipmakers say they're waiting until EPCglobal Inc., the organization steering RFID standards development, finalizes the next-generation RFID chip specification.

Texas Instruments expects to deliver chips that meet that standard within six months of its ratification and is now ramping up capacity to meet growing demand for those and other RFID chips, such as 13-megahertz high-frequency circuitry, according to Bill Allen, director of communications and marketing, who heads up Texas Instrument's RFID efforts.

Philips will be able to churn out large volumes of RFID tags in less than two quarters once the new spec is final, according to Manuel Albers, director of business development for identification products at Philips. The chipmaker has already developed samples that incorporate the preliminary specification, and once it is finalized, it will take about a month to tweak the chip and test it out. Full-scale production should follow three months later. "We manufacture in excess of 60 billion [integrated circuits] a day," Albers says. "We can easily accommodate the type of capacity that is anticipated."

Chips aren't the only things affected by the standards delay. "To not be done and it's October is absolutely late," says Kara Romanow, an analyst with AMR Research. ``The problem isn't just the tags, but the readers, and everything else that goes with it. The whole ecosystem is kind of backed up until that protocol is standardized worldwide.''

Another problem that can cause delivery crunches is the fact that in many shipments of RFID tags there are defective labels--in some cases as many as 20%. "Quality control is lacking. It's typically done offline," says X-Ident's Kuzma.

Supply issues could drive tag prices up in the short-term. Today, tags cost anywhere from 20 cents to 45 cents or more--a long way off from the 5-cent tag many say is needed before RFID is widely adopted. "There is some indication that vendors may raise prices in the short-term as demand outstrips supply," says Bruce Hudson, an analyst at the Meta Group. It will take volume orders in the billions for semiconductor manufacturers to drop prices of the RFID tags to as low as 10 cents, five cents, or even a penny, says Matthew Bowers, chief development officer of Incucomm. According to the firm's research, silicon manufacturers could profitably produce 5-cent RFID tags once volumes reach in the tens of billions, and a penny tag with volumes approaching a trillion.

The manufacture of RFID chips can also be as profitable or more profitable than other types of semiconductor devices because the RFID chips are generally a tenth or less the size of other devices, allowing for much higher density yields per silicon wafer, Bowers says.

Semiconductor manufacturers already produce devices such as transistors that sell in the 5-cent range, says Stan Bruederle, an analyst with Gartner. "The RFID chips are clearly more sophisticated, but I don't see why once the technology is mastered that they would not be able to produce those kinds of volumes" needed to dramatically drive down prices, he says.

Most industry observers agree that -- just like every other supply and demand dilemma -- the RFID shortage will work itself out. "I do think this is temporary because some of the larger players are moving in," says Vijay Sarathy, group marketing manager for Sun RFID Business Unit at Sun Microsystems. "These companies know how to manufacture in volumes so I don't think we'll see this as a glitch in the long term."

Even Alien, where the RFID tag shortage is most acute, expects supply to even out. It'd be just to embarrassing, after all, for a supply chain problem to get in the way of a technology touted as transforming supply chains.

-- with additional reporting by Elena Malykhina

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