Expert Research By Frost & Sullivan with an Introduction by Louis Sirico

What's happening with RFID Technology in Asia?

Most everyone I talk to doesn't have a clue and truth be told: I don't really know either. The fact is, there's a lot going on and a lot to know. Just consider the Asia-Pacific Economic Cooperation (APEC) has 21 members which account for approximately 41% of the world's population, approximately 55% of world GDP and about 49% of world trade. To know what's going on you need to be located in the region and be involved on a day-to-day basis. That's why we have partnered with Frost & Sullivan to bring you industry insights on RFID in the Asia Pacific region.

This week, we're featuring the first of two in-depth articles; it's titled, "Market Insights: Asia Pacific RFID Supply Chain Market". This article is just an extract from Frost & Sullivan's full research service. If you do business in Asia, or are considering it, then I encourage you to take serious look at their service: detailed on their website. You can also contact Richard Sebastian, a Research Analyst with Frost & Sullivan based in Kuala Lumpur, Malaysia. Richard is one of our subject matter experts and trusted advisors.

Later this month, we'll publish a second expert article titled ?Market Insight: RFID Value Chain Analysis in APAC?. I hope that everyone finds these articles as valuable as I have when trying to understand RFID in the Asia Pacific region.

1 Market Overview

Introduction to RFID Technology

The Radio Frequency Identification (RFID) system comprises several components; hardware, middleware, and software.The primary RFID hardware consists mainly of three parts:

1. An RFID tag that can be as small as a grain of sand, which is placed onto an object intended to be tracked or traced.
2. An antenna or coil that can read/write data into the tag.
3. A reader that can read tags up to a distance of 30 meters.

An RFID tag is attached to an object intended to be tracked or traced, and an RFID reader is a device that is used to interrogate an RFID tag. The reader has an antenna that emits radio waves and the tag responds by sending back its data. The reader communicates with other devices or servers, usually through some sort of network interface. A reader must also have a microcontroller or a microcomputer, and some readers even have built-in Bluetooth or wireless Ethernet communications. The antenna and the reader are often integrated into one product enclosure.

This market insight focuses on the Asia Pacific RFID supply chain market, which includes the tags, readers, software (middleware and software integration), with a focus on market, technology, demand trends, and revenue forecasts.

Market Engineering Measurements

The RFID technology has been more apparent in the supply chain management function ever since Wal-Mart and the U.S. DOD first announced its mandate in 2003, requiring their key suppliers to be RFID-compliant by 2006. Thereafter, several other retail giants have issued similar mandates, which have seen a sudden rush toward the deployment of RFID in the supply chain. Besides the retail industry, RFID is currently being deployed in the supply chain of other industries such as electronics and manufacturing, aerospace, military, and others due to its benefits of providing a more efficient supply chain by having better visibility and traceability.

Chart 1.1 shows the market engineering measurements for the Asia Pacific RFID supply chain market in 2006.

Chart 1.1 - RFID Supply Chain Market: Market Engineering Measurements (Asia Pacific), 2006

2. RFID Dynamics

Industry Challenges

Although RFID shows great potential in the supply chain function, it still faces certain challenges at an industry level which could impede the growth of this technology. Chart 2.1 presents the impact of the top three challenges in the Asia Pacific RFID supply chain market from 2007 to 2013.

Chart 2.1 - RFID Supply Chain Market Insights: Impact of Top Three Industry Challenges (Asia Pacific), 2007-2013

Frost & Sullivan believes many end users are still unable to understand how RFID can bring a return on investment (ROI) to their supply chain.

Although, currently, many end users have a better understanding on the general overview of RFID compared to two years ago, many are still unable to quantify the exact benefits of RFID.

Furthermore, they lack understanding on how to use the data captured and reap the real benefits that RFID can offer to their company's supply chain rather than looking at it only from a mandate perspective.This is due to two factors; the first being the fact there was more hype than reality regarding the benefits of RFID to the supply chain when it was first introduced, thus creating a sense of confusion among end users on the real benefits of RFID, and the second is due to the end users themselves being ignorant to the obvious benefits.

This challenge is expected to take another two or three years to overcome and has a high impact in the short and medium term, and medium impact in the long term of the forecast period. As more RFID projects are likely to be deployed in the supply chain, end users will be better exposed to comprehend the ROI they stand to gain.

Tag Read Accuracy

Frost & Sullivan is of the opinion that another challenge faced by the RFID supply chain market in Asia Pacific is the tag read accuracy. Although tag read rate has improved significantly since the launch of the Gen 2 standards for tags and readers, tag read rate is still an issue. Achieving a 100 percent read rate is still a challenge where typical tag read rates average from 90 to 99 percent, although there are instances when a 100 percent is also possible.The environment plays a big role toward the accuracy of the read rates since the electromagnetic waves used for communication between the reader and the tags have limitations when in close proximity to metal or liquid materials.

Ultra high frequency (UHF) tags are more susceptible to metal or liquid materials, while high frequency (HF) tags generally have better read rates when close to these materials. Moreover, the type of tag used and the orientation of the tag is a factor that is needed to be taken into consideration for the tag read accuracy as it all falls under the laws of radio frequency (RF) physics. Tag design plays an important role in improving the read rates as sometimes simulation of the tag design differs from the way it operates in the environment. The type of tag selected will also improve on the read rates as most tags are designed for a specific application or function.

Dead tags directly shipped from the manufacturer will also affect the tag read rate accuracy as it will be impossible for these tags to be read. Another factor that can sometimes affect the read rate is the presence of many readers within a certain area, where data being read from the tag will conflict among the readers, thereby, reducing the accuracy of the read rates.This phenomenon is known as dense reader mode (DRM). While manufacturers of these hardware's will need to look at ways of improving the overall readability to achieve a 100 percent read accuracy, system integrators (SI) will need to devise ways of maximizing the tag capabilities for read rate accuracy versus the environment taking into account the RF physics.

This challenge is expected to have a high impact in the short term, and a medium impact in the medium and long terms of the forecast period. As more technological innovations take place and there is better understanding on RF physics of the tag versus the environment, the tag read accuracy is expected to improve, thus reducing this impact on RFID deployments in the supply chain.

Need for Centrifugal Figure in RFID Deployments

Currently, Frost & Sullivan opines there is a general lack of streamlining and overseeing of an RFID deployment within the supply chain. Although larger SIs usually take the role of overseeing and leading a project, there are still instances where a particular obstacle hinders an RFID deployment within the supply chain or there is an issue raised by end users. Moreover, there is a lack of ownership between the various parties involved in a project, which may include tag and reader manufacturers, middleware and software developers, and SIs. Taking these factors into consideration, it is opined that there is a need for a party that takes leadership of the overall project, and the SIs role is pivotal in ensuring the project runs smoothly according to plan.

Another area where a central role is needed is during the deployments of inter-country based projects. Due to the fact the current supply chain is distributed and may involve end users from many countries, it may be bound by different laws that can slow down a particular RFID deployment. Under these circumstances, the role of the government is pivotal to ensure that the bilateral talks can be done swiftly and smoothly without potentially delaying an RFID project.

This challenge is expected to be a high impact in the short term, and a medium impact in the medium and long terms of the forecast period. As some governments are already showing strong involvement in supporting RFID deployments in the supply chain, other governments will take notice of this and realize their huge role in pushing forward this initiative.

Market Drivers

Presently, RFID in Asia Pacific is continuing to see growth due to boost from several factors. Chart 2.2 represents the top three market drivers according to Frost & Sullivan ranked in order of impact for the Asia Pacific RFID supply chain market from 2007 to 2013.

Chart 2.2 - RFID Supply Chain Market: Market Drivers Ranked in Order of Impact (Asia Pacific), 2007-2013

Compliance to Mandates

The mandates issued by various parties have directly spurred the growth of RFID deployments within the supply chain of suppliers. It is expected to take another two to three years before more end users begin to prioritize deploying RFID over ROI gains rather than looking at it merely from a compliance perspective.

The impact of this driver is expected to be high in the short and medium term of the forecast period, and medium in the long term.

Government Support for Deployments

Frost & Sullivan is opinioned that the role of the government is seen as a major driver for the deployment of RFID within the supply chain of companies. Many end users in Asia Pacific are waiting to see how others are adapting to the implementation of RFID in the supply chain, and if this trend continues, the possibility of RFID initiatives in the supply chain will be extremely low. Countries such as South Korea, Japan, Australia, and Singapore see good progress in terms of RFID deployment within the supply chain, and this is largely due to the presence of their governments. Governments can use their influence in several ways to drive RFID adoption.The most obvious ways include directly funding initiatives or providing incentive schemes in proof of concepts and pilot projects among end users to drive the adoption of RFID for the supply implementation. By using proof of concept or pilot projects as samples, end users will be able to better understand the benefits of RFID in the supply chain.

They can also use their role in bringing together all the RFID technology market participants in heading toward the same vision of promoting the growth of RFID in the supply chain. Furthermore, as mentioned earlier, governments play a crucial role in acting as a mediator when it involves cross bilateral projects of two or more countries in order to ensure that deployments are not slowed down due to legal and trade-related issues. Additionally, governments can also speed up frequency allocation issues in certain countries.

For instance, although New Zealand already has its own frequency allocation for the UHF band, most RFID products coming into New Zealand currently do not specifically cater to this specified band since the RFID market on the whole is still small.Any products operating outside the permissible frequency set by New Zealand authorities currently need special clearance from the government for usage.The current frequency allocation in New Zealand is 864 MHz to 868 MHz, which is similar to the allocated European frequency standards, but most of the RFID products in the market are following the U.S. frequency standards.

Although market participants expect the government to slowly allow the usage of the 915 MHz to 921 MHz to accommodate both the European and U.S. frequency bands, the government's decision is expected to take another one to two years since they are concerned that it may conflict and cause interference with other radio devices. A swift decision in this scenario, favoring the adoption of U.S. frequency standards will further boost RFID growth in countries such as New Zealand.

The impact of this driver is expected to be medium in the short term, and high impact in the medium and long term of the forecast period.

Increasing Efforts toward Standardization

The impact of this driver is expected to be medium in the short term, and high impact in the medium and long term of the forecast period.

Market Restraints

While RFID is witnessing more projects being deployed across Asia Pacific, there are still some restraints affecting the market. Chart 2.3 represents the top three market restraints according to Frost & Sullivan ranked in order of impact for the Asia Pacific RFID supply chain market from 2007 to 2013.

Chart 2.3 - RFID Supply Chain Market: Market Restraints Ranked in Order of Impact (Asia Pacific), 2007-2013

Entry Cost for RFID Deployment

Although there are end users, especially from small and medium enterprise's (SME) that are planning to pursue RFID deployments to manage their supply chain, barrier to entry in terms of cost of the overall project is still an issue for them. Cost is currently a two-way factor. On one end, while there are those that can afford adopting RFID in their supply chain based on the current price of the overall project, there are others in the other end of the spectrum that are unable to afford initial costs, which impedes the growth of RFID adoption. More end users will be able to afford adopting RFID to manage their supply chain once the cost of deployment is at least reduced by half of the current cost.

The impact of this restraint is expected to be high in the short and medium term of the forecast period, and medium in the long term.

Lack of Mandates within Asia Pacific

The issue of mandates is currently being voiced only by retailers and organizations based in the United States and Europe, and has driven growth of RFID in the supply chain, especially in these regions. Although many major suppliers are based in Asia Pacific, the adoption level is not as high as observed in U.S. and Europe. Currently, many suppliers based in Asia Pacific, which are forced to be RFID-compliant due to these mandates by other regions, use the 'slap and ship' method of tagging, thus, not requiring their overall processes and back-end systems to be RFID compliant.The 'slap and ship' method requires minimal or no additional RFID-related infrastructure; readers and software's to be implemented in the end-user IT infrastructure. This means that many suppliers are not using the full potential of what RFID can offer to their supply chain; by optimizing and making it more efficient.

Issuance of more mandates such as from Yodobashi Camera - one of the largest electronic retailers in Japan will indirectly spur the growth of RFID adoption in the supply chain within this region.

Frost & Sullivan opines by seeing more mandates originating from within Asia Pacific itself, it will create a ripple effect among suppliers and vendors across this region, thereby, spurring the growth of RFID initiatives in the supply chain.

The impact of this restraint is expected to be high impact in the short and medium term of the forecast period, and medium in the long term.

Integration of RFID Systems With the Backend Systems

Although the Gen 2 standards have been released, there are still issues to be addressed with regards to the interoperability of RFID middleware and software with the back-end systems.

The impact of this restraint is expected to be high in the short term of the forecast period, and medium in the medium and long terms.

3. Market Forecasts

Revenue Forecasts

The RFID supply chain market in Asia Pacific was worth $170.3 million in 2006, and is expected to experience a CAGR of 21.0 percent from 2006 to 2013, and reach $196.5 million in 2007. Market revenue is expected to continue to grow and reach $646.3 million in 2013. Chart 3.1 represents the revenue forecasts for the RFID supply chain market in Asia Pacific from 2006 to 2013.

Chart 3.1 - RFID Supply Chain Market: Revenue Forecasts (Asia Pacific), 2006-2013

The overall RFID supply chain market is difficult to be quantified in quantity as it takes into account the software market and associated services, which includes middleware and SI revenues.The period from end of 2007 to early 2009 shows a potential decrease in revenue growth rate compared to the year before. This is due to the expected significant price reductions for the UHF passive reader market with the emergence of the reader chipset recently launched by Intel.Tag prices are based on shipment quantity of 10,000 pieces, and can drop as much as 50 percent when volume is above 100,000 pieces. Price of tags typically drop significantly when demand quantity increases as it depends on the economics of scale, taking the factors of price versus demand into consideration. Cost of readers follow similar trends but price drops are not as high as the tags because the purchase of readers is not on the same scale as tags.

Another factor taken into consideration is the price of tags and readers on whole in Asia Pacific. Prices can vary from country to country depending on the volume of use. For instance, price of tags and readers in countries where there are more RFID deployments such as Japan and South Korea is generally lower than in countries with a lower deployment rate such as New Zealand or India. The average price for tags and readers in each country is
taken into consideration before the price of each segment is tallied.

Percent of Revenue by Product Type

Chart 3.2 represents the percent by revenues by product type in the Asia Pacific RFID supply chain market from 2006 to 2013.

Chart 3.2 - RFID Supply Chain Market: Percent of Revenues by Product Type (Asia Pacific), 2006-2013

Presently, the trend for the software section, which includes middleware and SI revenue takes the biggest portion of revenues as compared to the tags and readers revenue as can be seen for the year 2006 and 2007. In 2006, the software market (middleware and SI) consist of over 55 percent of the RFID supply chain market, while the tag market was approximately 15 percent and the reader market with slightly over 27 percent.

However, the tag market is expected to overtake the reader and the software market by 2013 as demand for tags is expected to increase over time compared to the readers and software market. The tag market is a consumable market where tags will be constantly needed to tag new goods while the reader and software market can be considered a one-time investment unless the project scale is expanded where software licensing fees will increase and the amount of readers deployed could increase.

By 2013, the tag market is expected to consist of over 49 percent while the software market is expected to be approximately 35 percent while the rest is made up of the reader market.

Adoption Level

Based on the RFID supply chain adoption in Asia Pacific, the adoption level can be broadly categorized as; early adopters, promising followers, and aspirants.

Early adopters can be categorized as countries that have already begun deploying RFID in the supply chain and are also seeing increase in pilot and proof of concept activities.

Promising followers are countries that have seen some level of RFID deployments in the supply chain, although it is still mostly in the assessment and feasibility stage.

Aspirants can be considered as countries that have not seen many deployments or no deployments of RFID in the supply chain, at present. These countries are still in the stage of doing feasibility studies or assessing the potential of RFID use in their supply chain.

Chart 3.3 illustrates the adoption level for the Asia Pacific RFID supply chain market.

Chart 3.3

Market Trends

Chart 4.1 represents the revenue growth trend of the RFID supply chain market in Asia Pacific from 2003 to 2013.

Chart 4.1 - RFID Supply Chain Market: Revenue Growth Trend (Asia Pacific), 2003-2013

The revenue growth trend in the RFID supply chain market in Asia Pacific can be analyzed in five phases. The first phase was from 2003 to 2006, where growth was driven mainly by complying to mandates set by major retailers in the United States and Europe. Countries affected by this mandate are China, primarily, and to a certain extent, Hong Kong, where a big portion of the suppliers to the retail giants such as Wal-Mart are based. Annual market growth rate is between 4 and 7 percent. Majority of the RFID initiatives in the supply chain are propriety based and closed loop applications.

The second phase starts from the end of 2006 to mid 2008.This phase is expected to witness more government participation making efforts toward promoting the growth of RFID in the supply chain by funding certain proof of concepts. Japan and South Korea can be grouped under this phase where they will experience stronger growth compared to China, due to strong government initiatives. Furthermore, end users are beginning to realize the benefits of RFID adoption in the supply chain.

Moreover, mergers and acquisitions (M&As) are beginning to occur across the RFID industry where several mergers and acquisitions have taken place, bringing together bigger pool of resources and innovations among the market participants.

Among the notable M&As in recent times is acquisition of Symbol Technologies by Motorola and Savi Technology by Lockheed Martin Corporation. It is expected that more M&As to occur within the next two or three years as other large scale companies show interest in RFID.

Another significant factor in this period is the launch of the chip that integrates 90 percent of discrete components of UHF passive readers, which is expected to drive reader prices down from 25 to 50 percent in late 2007 and early 2008. This phase also marks the period where more proof of concept RFID projects are taking place in the supply chain, and the annual market growth rate is from 8 to 15 percent. The supply chain of this phase is also mostly closed loop systems for the internal use of the end-user.

The third phase will overlap with the second phase of the revenue growth trend to a certain degree, where more proof of concepts and pilot activities begin in the supply chain.The third phase occurs between early 2008 and mid 2009. As cost begins to drop, especially for UHF passive readers, and the realization of the RFID benefits to a supply chain, more end users are keen to embark on an RFID initiative. These end users start with pilot-based projects and slowly move to small and medium-scale deployments.Annual market growth rate for this period is from 10 to 18 percent. Although most supply chain systems are predominantly closed loop systems, the industry is beginning to see some projects having an open loop system in their supply chain.

The fourth phase is from 2009 to 2010, where the market begins to see accelerated growth. Growth rate between 20 and 25 percent annually can be seen during this period.This is the phase where higher RFID adoption by the end-user is likely to be witnessed, thus, boosting the efficiency of their supply chain rather than being driven mostly by the mandates. More large-scale deployments are set to happen in this phase.A market growth rate of 20 to 25 percent, annually, is expected, and the existence of a combination of both closed loop and open loop systems in the supply chain is likely to be seen.

By mid 2010 onwards, which is the final phase analyzed for this study, the RFID supply chain market in Asia Pacific is expected to continue witnessing accelerated growth of at least 25 to 30 percent, annually. By this time, the end users will have had several years of knowledge of adopting RFID in their supply chain, and will be more open to an open loop or collaborative supply chain, trusting the EPCglobal network to share their data with partners, vendors, and suppliers.

There has been a lot of technology advancement since 2006.

With regards to tag technology, the Gen 2 tags released by EPCglobal and ISO were an important milestone in the ratification of standards.

It enables total interoperability of the passive UHF band of 860 MHz to 960 MHz in terms of area of use. It is also vendor compliant, meaning tags and readers can be mixed among different vendors. Furthermore, it provides better read rates and is more robust than the Gen 1 tag. Gen 2 tags are also at least 20 percent smaller in size compared to Gen 1 tags, have enhanced security features and can provide extra functionality. Most tag manufacturers have ceased production of Gen 1 tags; except for a few that still supply these tags to end users that have not upgraded their system to support Gen 2 tags. The industry is also beginning to see reusable tags that are used in certain applications or industries, within the supply chain.

In terms of reader technology, several advancements in technology have been observed since 2006. Most industrial based readers come with features such as dense reader mode (DRM), which improves the overall read rate accuracy when many readers are situated in a particular place. Furthermore, price of readers has been constantly dropping and is expected to drop as much as 25 to 50 percent by 2008 with the launch of the Intel chip that integrates 90 percent of the discrete components found in a typical UHF RFID passive reader presently.This chip is also expected to bring about different form factors since size reductions to approximately half can be expected. Another significant milestone in the reader market will be the introduction of the intelligent readers, where parts of middleware components will be added into the reader; indirectly reducing the role of the middleware in the central location.

EPCglobal has also recently ratified the EPCIS in April 2007. It is a significant milestone for the RFID supply chain market on the whole because it is designed to help companies securely exchange RFID and related product data in real time with their business partners, and is the platform toward an open loop system for the supply chain as well.With the EPCIS, end users across the supply chain will have a more secured network to share data between their partners, which will encourage more end users to embark on an open loop system.

There is also advancement in the regulatory status of the UHF frequency allocation by EPCglobal and the respective regulatory bodies with most countries within the Asia Pacific region allocated specified frequency range.

5. Conclusion

Future of RFID Supply Chain Market in Asia Pacific

The growth of the RFID supply chain market in Asia Pacific has been relatively slow when compared to the U.S. or Europe.

• However, with the ratification of the UHF frequency allocation already taken place for all the major countries in Asia Pacific, continuous drop in overall prices of RFID technology and stronger support from the government will ensure the significant increase in the growth rate of RFID adoption in the Asia Pacific RFID supply chain market in the coming years.
• As RFID technology is still in the development stage, it is expected to see a continuous evolution of standards, and emphasize on standards will drive RFID adoption to an open loop globalized supply chain.
• As cost of deploying RFID technology continues to drop, it will also make it feasible and economical for SMEs to embark in RFID initiatives in the supply chain within Asia Pacific.
• The Asia Pacific region is also expected to see strong growth in niche areas of the supply chain. Industries such as the chemical and petroleum industry and defense forces will be looking at RFID as a form towards better manageability of its supply chain within the next decade due to its features of enabling better visibility.

Additionally, end-user demand for a more efficiently run supply chain will result in considering RFID as a means of achieving 6 Sigma efficiency in their supply chain. End users are beginning to realize the significant supply chain efficiency benefits, improvements in business processes, and value propositions that are possible with high-performance RFID solutions at the pallet, case, and item levels.

To ensure no obstacles during the deployment process, RFID manufacturers and vendors, governments, and end users themselves will need to look at the challenges and restraints currently faced by the industry and the market on the whole, in an effort to overcome the same. This is crucial in ensuring the seamless deployment of RFID technology in the supply chain. Once some of the limitations currently faced in the Asia Pacific region are overcome, the growth of RFID in the supply chain in Asia Pacific can possibly be on par or exceed the RFID supply chain market size in the U.S. and Europe within the next decade.

"Market Insights: Asia Pacific RFID Supply Chain Market" is extracted from the full research service titled "Asia Pacific RFID Supply Chain Market". This study is available through the Automatic Identification and Security Subscription & Growth Partnership Service, which includes research services in the following markets: RFID, Security, and Biometrics. All research services included in subscriptions provide detailed market opportunities and industry trends evaluated following extensive interviews with market participants.

Frost & Sullivan

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