Is RFID Taking Off?
The RFID opportunity is real. The value-add is proven. ROIs are being attained. The technology is increasingly affordable. So why isn't RFID taking off?
By Drew Nathanson
Well, it is. "Most attention continues to be on the big opportunity markets—high-volume, high value-add supply chain applications in verticals such as pharmaceuticals, consumer package goods, and healthcare, " cites Louis Bianchin, Senior RFID Analyst at Venture Development Corporation. "Although these markets represent significant opportunity, they have not lived up to their potential. The reality is that RFID adoption is exploding outside of the supply chain."
The disappointment of these high profile markets stems from unrealistic expectations of RFID's penetration into the supply chain, in particular item-level—where the potential for huge volumes is real. To date, activity has been limited. RFID activity within these "spotlight" verticals was low in 2006 and is not expected to be much better through 2008/2009. These three markets—pharmaceutical, consumer package goods, and healthcare—accounted for less than 14% of total RFID revenues in 2006, and although expected to undergo rapid growth, they will still only represent about 1/4 of the total market by 2011. Why are revenues not higher in these markets? The reason is because the potential for RFID within these verticals lies primarily within applications supporting their supply chains—an area in which RFID has merely "scratched the surface." RFID continues to expand within the upper supply chain tracking echelons—containers, pallets, and cases—but it has not been able to penetrate item level due to technical-, operational-, standard-, and cost-related issues. Item-level tracking is critical for the success of RFID in these verticals. Aside from the expected benefits resulting from the economies of scale associated with the high volumes, RFID's value proposition is enhanced as it is integrated further down the value chain. Item-level tracking is a longer-term opportunity. Even if the adoption curve is greater, just think about how long it took barcodes to penetrate the item-level echelon and how much supporting resources and infrastructure was required.
A variety of facts support the assertion that RFID's penetration into the supply chain is moving slowly and that item-level tracking is not the short term answer. Hardware sales (transponders, readers, printer/encoders) for EPC RFID products in 2006, the primary product type used for supply chain applications, was slightly more than $120 million and is expected to grow approximately 38% over the next five years. Less than 170 million EPC transponders were sold worldwide, of which the vast majority were used for higher tracking echelons.
A closer look at RFID in the pharmaceutical industry, a topic for every item-level discussion nowadays, will provide further evidence that high volume tag sales to this market are not just "over the horizon." In total, the pharmaceutical industry consumed nearly 7 million transponders in 2006, of which less than 4 million were used for supply chain applications. There were less than 10 prescription drugs being tracked via RFID in 2006, and based on the current and expected spending levels of the major pharmaceutical manufacturers, this value that is not expected to increase much over the next three years. And as for the FDA mandates for item-level labeling, well . . . 2D barcodes are sufficient. Actually, pharmaceutical efforts pertaining to RFID are based primarily on operational and cost efficiencies—not compliance. Meanwhile, healthcare providers, consumer packaged goods manufacturers, and retail pharmacies—all of which distribute pharmaceuticals—continue to take a "wait-and-see" approach, sitting idly by until a preferred solution is developed.
So, if not supply chain, where is the real near- and mid-term opportunity for RFID? "Look to pioneering verticals like government, automotive, and transportation," states Bianchin. "These markets have accounted for more than 70% of total RFID revenues every year for the past five years, primarily using the technology for more traditional applications such as security/access control, asset tracking, and toll collection." Although more mature than most other RFID markets, these applications are still expected to experience double-digit growth through 2011.
Lead-adopting industries that possess a demonstrated history of success are typically more apt to expand the role of RFID within their markets. For example, governments around the world are rapidly adopting RFID for their e-Government/e-Passport initiatives and the transportation industry is expected to see a near-to-mid-term boost from ticketing applications (public transportation, citations, etc.) and aviation baggage handling.
Overall, the RFID industry continues to pick up steam; however, it must further define its technical and commercial foundations before wide-scale adoption, and high volume deployments can occur. Until then, there will be no tag on your Tagamet.
Drew Nathanson is the Director – AIDC Technologies, VDC. Contact him at andrewn@vdc-corp.com.
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