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Asia Business Development – Asia Business Consulting » RFID: China’s Next Supply Chain Revolution

SpirE-Journal 2006 Q2

RFID: China’s Next Supply Chain Revolution

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RFID: China’s Next Supply Chain Revolution

RFID, or Radio Frequency Identification, has quietly been a part of our daily lives for a long time. Advancements in this technology, however, are set to unleash its true potential and bring its benefits to many more components of the industrial value chain. This article looks at the rise of RFID usage and China’s growing role in its developments.

What is RFID and what are its uses?

RFID is the term used to describe Radio Frequency Identification. According to Accuracy Book, RFID “refers to the technology that uses devices attached to objects that transmit data to an RFID receiver. These devices can be large pieces of hardware the size of a small book (like those attached to ocean containers) or very small devices inserted into a label on a package.”

The RFID arena is typically broken down into three major sections: hardware, software, and service.

Hardware consists of the physical items in the process such as the tags, readers, antennae, host computers, and network equipment. Zebra Technologies, which manufactures RFID printers, is an example of a hardware provider.

Software providers such as Oracle and SAP typically supply items such as the middleware and application software.

These companies can also be involved in the service aspect of the implementation of the system or the ongoing maintenance, which includes installation, tuning, integration, process reengineering, and support/maintenance.

For years, RFID technology has been a part of our daily lives. Typically, this technology has been used in Access control for when you enter or leave a gated community or a secured environment. Additionally, the tags used in automobiles to pass through tolls without having to pay with cash utilize RFID technology. Still, these applications of RFID represent only the tip of the iceberg in terms of future opportunities and benefits.

Passive and Active tags
Gated community tags and automobile toll tags are currently operating in a closed system environment which has no interaction with other systems or networks. Such devices are referred to as “passive” tags. These tags must pass through a specific point (i.e. a toll gate) in order to be read and acknowledged.

“Active” RFID tags, however, have the ability to transmit and receive data. Take for instance if motorists could use the same “toll tag” in Singapore for when they travel to Malaysia. This would be an example of an additional dynamic usage of the RFID tag that has yet to be implemented.

Active RFID is typically employed in the logistics industry for handling warehouse inventory, container security and position locating. It is also used to track maintenance requirements on equipment. When it is time to service the equipment, the active RFID tag will automatically send a signal to the maintenance operator that it needs servicing. Imagine your copy machine contacting your service center to inform them that you will be running out of toner without you having to make the call!

Warehousing and logistics
Of course, there are even more practical uses for RFID. By utilizing RFID technology, we can achieve minimized cost in the supply chain. The technology allows for higher automation, reducing the need for manual intervention. This can increase the speed at which a product flows through the supply chain, thereby lowering the need for safety stock. Additionally, it reduces the amount of labor required at the distribution center level, for example that needed for manual bar code scanning. Such labor typically accounts for almost 90 per cent of distribution center costs.

Another practical feature with respect to RFID includes the minimization of theft. A product can be tracked throughout the supply chain and it emits a signal if it is taken away from a designated area. Supply chain theft currently accounts for about 1% of total sales costs. Theft can also be reduced with the minimization of counterfeit goods. The RFID tag enables tracking from the manufacturing level all the way through to the point of sale. Once the original product is sold, any duplicate would be noticed.This is especially useful in the pharmaceutical and tobacco sales environment.

Companies such as Philips are currently conducting pilot tests in order to implement RFID. According to Philips, initial benefits observed included:

Improvement in customer service by linking the supply chain. This reduces cycle time and adds true visibility in the supply chain with real time track and trace.
Higher working efficiency due to reduced manual intervention, such as manual barcode scanning services. Products can also be logged in and out without slowing down the movement process.
Improved stock space utilization.
What is the size and projected growth of the market?

According to secondary data obtained from ABI, the current global market value for RFID software, hardware and services is estimated to be between USD 5 billion and USD 6 billion. This is expected to more than double to USD 14 Billion by 2009. Sectors that will see the most growth in RFID usage will be electronic consumables, wine, tobacco, pharmaceutical, and IT products.

What role does China play in RFID?

China is already well engaged in the use of RFID technology. The RFID Journal states that China currently has about 200 million “Smart Cards” in circulation within about 12 cities. At least a quarter of these are in the transportation network.

The growth in the next few years will be primarily in China’s logistics sector, where international players like Walmart, with its gradual implementation of RFID plans, will presumably lead the way. In two to three years, we will start to see more usage by China’s progressive retailers and manufacturers, such as Haier.

The growth of RFID acceptance in China will encounter inhibiting factors, not unlike those faced globally:

The cost of RFID tags has historically been about USD 0.25 versus the cost of bar codes, which are about USD 0.02. For China to justify a changeover to this technology, the cost should be about USD 0.10 for packages and USD 0.03 for individual products. However, EPC Global has reportedly developed a super-high frequency standard that will lower the cost to USD 0.08.
The frequency and technology standards for use in RFID have yet to be internationally agreed upon. The current leader appears to be the American firm EPC Global Technology, although other standards include ISO/IEC 18000, and the Japanese UbiquitousID. China is holding out in an attempt to produce its own unique standard. According to the Ministry of Information Industry (MII), China is targeting to release its standard in 2006. The key value to having China’s own standard is to avoid having to pay royalty fees to other standard developers. China is no stranger to such royalty issues, having last wrestled with similar concerns relating to DVD technology.
An inhibitor for RFID manufacturing taking off in China is the fact that the hardware currently has very low labor content. Additionally, China faces increasing competition from other low cost countries.
Other issues include privacy/confidentiality, unemployment caused by increased efficiency, as well as health issues.

The RFID market is currently dominated by Western manufacturers at the moment but China is primed to change this. The nation is keenly focused on the manufacturing of hardware for RFID technology, boasting Volkswagen’s Audi production line in Shanghai as well as local chipmakers Tongfang, Zhongdian, Datang and Huahong as current RFID technology users. This list should become extensive by 2008 when mass production will begin to materialize.

China’s RFID ambitions: the example of the Shanghai RFID Center

China has ambitions to become the technology leader in the RFID industry and set the standards for manufacturing of hardware as well as the development of new intellectual property. For this reason, they have established various R&D locations, such as the Shanghai RFID center. This center contains a virtual warehouse and a grocery store. The objective is to create a network whereby a product can be manufactured and tracked all the way through to the point of sale.

Spire put the virtual grocery store to a test and we were pleased with the results. A product that was taken from the shelf was instantly credited to our ongoing bill. It also sent a message to the warehouse to indicate the reduction in stock on the shelf. When we arrived at the checkout counter, all goods were scanned instantly. We then paid, not with cash, but with a small RFID device in the form of a key chain.

It is little wonder that China is eager to leverage new technologies such as RFID. Given its ever-increasing role in global supply chains, the adoption of RFID in China will drive supply chain efficiency, visibility and flexibility for not only local businesses but also for companies worldwide.

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