Keeping track

For many years, Radio Frequency Identification Device technology (RFID) – which uses embedded radio chips to track the movement of goods – has been heralded as the future for supply chain logistics. However, its lack of support in China has left many observers wondering whether the RFID show is ever going to start here.

The technology’s expensive price tag has left companies unsure whether the cost is justified by the supply chain efficiencies it affords. Consequently, many anticipate that government support of RFID will be the turning point towards its widespread adoption in mainland China. "We still see that RFID can take an exponential trajectory, but we think it requires governmental drive," said Patrick Henzen, marketing director of NXP Semiconductors.

Friend or foe?

RFID is not as young as its untapped potential might suggest, and has a wide range of uses. In World War II,  for example, fighter planes were equipped with RFID "friend or foe" target recognition devices.

The real jump for RFID into global logistics occurred years later, however, when Sam Walton announced the "Wal-Mart Mandate." Walton declared that retail giant Wal-Mart’s top 100 suppliers must have RFID tags on all shipping crates and pallets by 2005. The enormity of Wal-Mart’s supply chain meant this decree forced the world to take RFID seriously, or risk being left behind.

The technology is no newcomer to logistics in China. In 1999, RFID manufacturer Invengo installed devices on cargo wagons owned by the Chinese Ministry of Railways in order to facilitate tracking from loading to unloading. In doing so, railroad authorities were able to obtain previously unavailable information, which could be used to discover supply chain inefficiencies. In China today, RFID is used for transactions such as swiping transportation cards to enter a train station, or using a passport chip to get the jump on an airport customs queue.

Given China’s particular dependence on manufacturing and exports, RFID continues to get attention. In 2006, 15 separate governmental bodies commissioned an investigation of its future. "RFID technology will become an emerging high-tech industry group as well as a new growth point of the national economy," the resulting white paper concluded.

But at present the technology has seen limited deployment. "A few years back there was an expectation that there would be major usage, but actually what we see is quite limited implementation [in areas such as] anti-counterfeiting and animal transportation," said Henzen. "The main reason is the very high investment needed for the technology and infrastructure, and the relatively low savings and benefits."

As a result, RFID’s use is limited to a small group of very large companies and there is doubt over the benefit it can provide to the smaller fish. This is due to the economies of scale and the effectiveness of existing supply chains required to realize RFID cost benefits. "Locally, the leap from where a domestic company is at in terms of data management and analysis is too great," said Bradley Feuling, CEO of Kong and Allan Consulting. "The process of taking that data and turning it into decision-making is complex, and for that reason adoption is likely to be very slow."

Kick start

For RFID to take off in China, analysts believe the technology requires a kick-start from Beijing. Pressure from above must be placed on smaller companies to enforce implementation, and systems must be developed for re-use, ensuring research costs are not imposed upon smaller businesses. In addition, implementation must be standardized to prevent dead-end development.

"We have encountered over the last couple of years business models for RFID which are very limited in their applications," said NXP’s Henzen. "The big breakthrough in China for RFID will be the government implementation of standards."

Although some doubts remain, market participants are generally confident that Beijing will take the necessary steps to ensure RFID has a promising future. RFID-related revenues in the Asia Pacific for 2008 were US$569.7 million, and business research firm Frost & Sullivan predicts this figure will reach US$2.17 billion in 2015, a compound annual growth rate of 21.1%.

In the long run, Zhong Shuhua, marketing director for Invengo, is optimistic. He likens RFID to bar code technology, which had similar high sunk costs and uncertain benefits. "At the time, bar codes were very difficult to implement in China, but today their importance is very clear."