RFID is a good investment for technology investors, with many status lights now green for “go.” Users were disappointed after the circa-2005 RFID industry proved unable to deliver on hyped benefits. Founded mainly on a single application and driven by a small, Walmart-led coalition, the movement was left in disarray when Walmart retreated. The 2008 recession quashed attempts at a recovery, and disappointed investors went elsewhere.
But the last two years have been busy ones.In this article we discuss ‘green lights’ indicating a diverse revenue base, an exponentially growing killer app, a well-coordinated ecosystem, an active climate of innovation, and strong ties to the explosively growing Internet of Things.(See Figure 1.)We see mainly green, a few yellow and no red lights – most investors would be surprised at the changes since 2005, and those who know the status may find profit opportunities.
Yellow lights, explored in the sidebar, include RFID’s strong reliance on the retail apparel segment and the potential commoditization of hardware.On balance, we expect opportunities for thoughtful investors thanks to solid growth for the rest of the decade.
Green Light 1: A Solid, Diverse Base
First, RFID has established a solid and diverse base across multiple verticals. Retail drives headlines, but system integrators have their heads down installing RFID systems in healthcare, government, oil and gas, manufacturing and more.
Here are some examples:
- Last year Hewlett Packard landed a $543 million contract for real-time location systems for tracking assets across 152 Veterans Administration medical centers
- The United States Department of Defense tracks material through Afghanistan
- The Department of Homeland Security uses RFID travel documents to speed travelers through border crossings
- Volkswagen tracks cars through the manufacturing process in a Slovakian factory
- Boeing manages parts maintenance on passenger jets
- Cisco tracks equipment in data centers
- The Army Corps of Engineers tracks file folders containing project records
The RFID industry today is not dependent on one initiative nor one large company, but is growing from a diversified base.
Green Light 2: Exponentially Growing Killer App: Retail Inventory Management
Growing on top of this base is retail inventory management.One of many potential applications of RFID in retail, inventory management has the advantage of being straightforward to implement and packing a well-established financial punch.The most basic implementation simply involves substituting handheld RFID readers and tags for barcode in the counting process.Because employees can read RFID tags 25 times faster than barcodes, the labor savings alone is significant.However, the resulting improvement in inventory accuracy reduces lost sales due to stockouts, delivering a revenue increase of several percentage points, and an investment break-even of a few quarters (for more see “The Retail Revolution and Why Now for RFID”).RFID can help drive accuracy from the abysmal 60%-70% range that many retailers now live with to over 98%, making it a key asset in deploying omni-channel systems, brick-and-mortar’s answer to Amazon.Retail inventory management is the biggest driver of the 40% year-on-year growth we are predicting for the next two years, which lead to the first of our yellow lights (See Yellow Warning Light #1). Macys, Zara, Kohl’s and Marks and Spencer are among the retailers to have begun commercial roll-outs in the last 24 months.Marks and Spencer is the only large retailer that has gone significantly beyond apparel, having recently announced that it will tag all general merchandise, requiring 400 million tags per year.This lights up another yellow indicator (See Yellow Warning Light #2).
Green Light 3: An Unburdened Ecosystem
Like many promising technologies, RFID has had to work through intellectual property issues and standards battles.Most recently, in 2012 Round Rock Research filed claims against end users alleging patent infringement, dampening enthusiasm and momentum among end users.However, by the beginning of 2014, Round Rock Research had announced that 90% of tag vendors and 75% to 80% of reader vendors had signed licensing agreements, unburdening the industry and triggering a new round of deployment.
Standards issues are a distant memory as well, with the EPC Gen2 specification being mature, stable and now harmonized across standards bodies via ISO 18000-63.Readers and tags are highly interoperable, with incompatibility issues being virtually unheard of.Despite that, new products supporting the recently ratified version 2 of the specification, known as Gen2V2, could introduce interoperability challenges due to the large number of optional features.Fortunately, the industry stands ready to head off problems thanks to the recent formation of the RAIN Alliance (RAdio-frequency IdentificatioN), whose charter includes interoperability testing.
Green Light 4: A Climate of Innovation
Innovation in UHF RFID is accelerating in multiple areas, including: cost, performance, security, software and financing models.In this post we’ll cover cost and performance.
The total applied cost of an encoded tag is the benchmark for the cost of RFID. It’s not just the chip, but also the cost of attaching the chip to a substrate to create an inlay,1 the cost of encoding and printing the tag and, finally, the cost of applying the tag to a retail item.Chips cost perhaps 1¢ to make, and yet by the time an RFID-enabled swing-ticket hangs from a blouse in Kohls, the cost of tagging has swelled by more than 10X.There is opportunity for cost reduction at every stage.
An example is the recently released Impinj Monza R6 tag chip.The new chip eliminates metal “bumps” that other chips use to establish electrical contact with the antenna, replacing them with large metal pads. These pads have two beneficial impacts on the manufacturing process.First, they reduce the precision required in positioning the chip on the antenna, relaxing manufacturing tolerances and boosting yields. Secondly, chips without bumps are less likely to crack when processed in label-making equipment and printers, improving reliability and reducing rework all the way to the retail floor.
Another example improves in the state of the art for the manufacture of inlay antennas. Most inlays available today use antennas made from aluminum foil laminated to a flexible plastic2 substrate in a wasteful process that uses chemical etching to remove the excess aluminum.Market leader Avery Dennison and smaller innovators Tageos and Walki have deployed new methods that replace the plastic with paper and the etching process with laser die-cutting. Excess aluminum is rolled up and recycled.The process reduces costs associated with the bill of materials, process steps, the environment and manufacturing cycle time.
These and a variety of other cost reduction efforts have the potential to drive adoption while preserving margins, but to do so they have to outpace downward price pressure (see Yellow Warning Light #3).
Tag sensitivity has long been a key success factor for new RFID applications.The percentage of successful reads or, conversely, the range over which a tag could be read often determine whether an RFID application can deliver the necessary ROI.Chris Diorio, CTO of Impinj, recently made what he called a “risky prediction:” over the next decade, tag sensitivity could improve by as much as 8 decibels (dB), which, if readers keep up, could improve range by a factor of 2-1/2, or, alternatively, enable smaller, less expensive tags.This would enable many new applications, increasing volumes and further improving economies of scale.
Green Light: Strong Ties to the Internet of Things
As you may know, the term “Internet of Things” was originally coined by Kevin Ashton more than a decade ago in reference to RFID.But the term has been reapplied to describe something bigger:the 25-year convergence of technology innovation that now enables us to reliably and cheaply connect devices over the internet.These technologies include the Internet itself, cellular and other wireless communications, cheap processors, dense memory, lightweight communications protocols and a variety of sensors.RFID is one such sensor modality and among the many things that will have been connected to the IoT by the end of this decade will be 150 billion RFID tags accessible through RFID reader gateways.It’s no coincidence that industry titans Google and Intel, with significant investment interests in the IoT, are among the founders of the RFID RAIN Alliance. (See Figure 2.)
RFID is a good investment for technology investors, with many status lights now green for “go.”In the last few years the industry has built a diverse revenue base, fielded a killer app, created a healthy ecosystem and established strong links to the Internet of Things, a key nexus of technology innovation and investment. Investors would be surprised at the positive changes since the Walmart era, and those who pay attention should find profitable investment opportunities.
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