Year-End Review
The RFID Financial Shakeup
By Dr. Peter Harrop
2006 was the year in which the RFID financial shakeout began in earnest. The largest RFID company in the world, Assa Abloy, reached the magic 10 acquisitions in its profitable portfolio. It continues to focus on security, one of the largest and most prosperous RFID markets.
Several Chinese companies entered the RFID top 10 on the back of the world's largest RFID project—the $6 billion China National ID card. Chinese cities adopted the Yikatong and other cash replacement cards with up to 14 million issued per city at several dollars each and large systems requirements on the back of them.
Gemplus, the largest smart card company, merged with the number two company. That meant that the resulting French company Gemalto is world number one in RFID for passports and one of the leaders in RFID smart cards. However, at least 30% of the smart cards sold in Japan, Korea, and China are the modern contactless (i.e. RFID) versions; whereas in the rest of the world, only 5% to 10% are RFID.
Since the East Asians tend to make their own cards and associated systems, the league table of RFID card suppliers does not give Gemalto a commanding lead. It had earlier made the mistake of selling its two RFID activities—Gemplus Tag and Ski Data. Gemplus Tag became independent company Tagsys, which has recently raised $35 million from the mighty JP Morgan and Cazenove and moved its headquarters to the U.S., the world's largest RFID market. Still, Gemplus can tackle the progress towards replacing 3.5 billion Visa, MasterCard, American Express, JCB, and other financial cards with RFID versions—something that started in a big way in 2006—and we know it wants to do more in security.
Going against the tide, Philips Semiconductors, now spun off as NXP, sold more and more chips for RFID cards and tickets (including in East Asia) and actually widened its lead as the world's largest maker of RFID chips. It ended the year having made about 1.7 billion such chips cumulatively. Number two is EM Microelectronics, which has made one billion RFID chips cumulatively, though the Chinese are at their heels. EM is part of SMH, the Swatch watch people.
Big businesses getting bigger
Giants entered the RFID business or boosted their presence. It was well reported that Lockheed Martin bought RFID system supplier Savi Technology (one of the top 10 in RFID in the world) shortly after it landed the largest order in the history of RFID: $425 million for the U.S. Military. Like the other companies, it is nicely profitable and growing.
On the other hand, in the early stage/new technology/new application side of the RFID business (such as Real Time Locating Systems, or RTLS, for asset and patient tracking in hospitals), the giant Cisco was strongly supporting its investments in AeroScout and PanGo networks. Motorola, having left the RFID hardware business many years earlier but continuing in the systems aspect, bought Symbol Technology, which fits into its mobile systems business like a hand in a glove and gets it back into RFID hardware and full system supply. This time, it is not with cards and their readers (Assa Abloy ended up with that former activity of Motorola), but with systems for supply chains, baggage, and the like.
The giant Siemens steadily grew its major system integration business in automotive, manufacturing, and other sectors in Germany and the U.S. in particular. It also hung onto its 49% of PolyIC, the spin-off with the printed transistor circuits that can potentially replace the silicon chip in an RFID label.
So, what was an international forest products company producing softwood lumber, pulp, paper, and packaging products doing in RFID? No, not UPM this time, although that giant continued to grow its Raflatac RFID subsidiary now on both sides of the Atlantic. We speak of Weyerhauser, newly entering the business by buying Organic ID, which is another developer of the fully printed chipless RFID tag.
Smaller players finding gains
Small companies prospered too when they found their niches. Cattle tagging became law in Australia and pet tagging became law in New Zealand. Animal RFID system supplier Allflex in distant Queensland, Australia, quietly developed more gross sales value and profits than those well-reported companies supplying RFID labels and readers to giant retailers and their consumer goods suppliers in the West.
Indeed, the pallet/case market for RFID hardware became the nearest thing to a black hole in the RFID universe, thanks to reluctant mandated customers, technical problems, and pricing for volumes that never came. Alien Technology lost $53 million in 2005, then promoted an IPO and withdrew it. Its competitors serving the retail/CPG sector also licked their wounds. Most CPG companies saw the retail mandates as a cost to be delayed, which was a shame because certain retailers were benefiting hugely.
Even Altria Group (Miller, Kraft, Philip Morris) said: "Pallet/case tagging is a pain barrier—item-level tagging is our utopia." Hardware suppliers that had prioritized this sector started to look elsewhere, though none left the sector altogether because they know there will be a winner one day and most have strong backing. Symbol Technology and Alien Technology moved rapidly into airport baggage tagging across the world. Alien and San Francisco International Airport were pleased with the implementation of its Quatrotec focused beam readers. The San Francisco airport believes these readers are solving the UHF problems of poor reads and ghost reads in hostile environments. Symbol took the most orders in airport RFID systems, however.
Investing in the future
2006 was a year in which RFID acquisitions and fundraising increased at least five times over the prior year. Big league companies were more often seen investing in RFID players. They included UPS, the world's largest courier company; Intel, the world's largest chip company; Pfizer, the world's largest drug company; Unilever; Dow Chemical; and, yes, Siemens, a German company using an American tactic of gaining a strategic stake in toddlers starting in key RFID technologies that the press has scarcely noticed.
The investment emphasis was also different beyond the potentially disruptive technologies such as WiFi RTLS. Investors saw that system suppliers and system integrators (SSSIs) currently make money more frequently than, say, tag and reader suppliers. There is therefore a feeding frenzy in buying SSSIs and in investing in their fund raising rounds.
Fortunately, there are some new and very large potential customers lining up to give orders to this muscular industry. For example, the China Monopoly Tobacco Administration is keenly interested in RFID for anticounterfeiting. It makes 37.5 billion cigarette packs annually.
However, nothing is a dead certainty. ERG, the RFID card system integrator with over $200 million sales and a place in the top five RFID companies, reported a drop below that figure. In addition, an accounting adjustment for revaluing contracts meant a one-off trading loss of around $50 million. The prior year, its loss was only a few million dollars.
People ask: "Are there patterns in all this?" There certainly are, and much of it could have been foreseen. IDTechEx, an RFID company that has never made a loss, researched the subject thoroughly and issued a report, "RFID Profit, Acquisitions and Investments," that analyzes all the data, providing tools for profit optimization, and understanding what comes next. It added Masterclasses on "How to make Money out of RFID" to its conferences. It was all a sign that the RFID business has moved forward into a new and very different phase. Hold onto your seats. For more, see www.idtechex.com.
Dr. Peter Harrop PhD, FIEE, FCIM is Chairman of IDTechEx Ltd. He was previously Chief Executive of Mars Electronics, Chairman of Pinacl plc, and Chairman of Flying Null, the chipless tag company. He has carried out RFID consultancy for Kodak, GEC, Manchester Airport, Diageo, among others, and he lectures and consults internationally on low-cost RFID. He can be reached at p.harrop@idtechex.com.
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