Company News

Jan 1, 2006

ARTICLES: Finding RFID's Business Case in China

Right now, Chinese companies don't have a solid reason to invest in the technology.

Note: This article was originally published as a Guest Column in RFIDJournal Online in Dec 2005

Dec. 19, 2005. Radio frequency identification makes supply chains visible. But does it see into the Chinese factories that make everything? It should, but so far, RFID vendors haven't given Chinese companies a good reason to invest in the technology.

In America, retailers have created compelling business cases for deploying RFID in their supply chains, from reducing out-of-stocks at Wal-Mart to upselling shoppers in Prada. The technology reduces labor costs by automating the process of tracking goods. 

But the prevailing argument for RFID doesn't work in China. Manufacturers here have a different set of requirements, so to catch on, RFID will have to offer them different benefits. In China, labor is cheap and widespread. Contract manufacturers utilize low-tech, mass-production techniques. With their big-brand customers squeezing them for profits, the manufacturers operate on paper-thin margins. They don't have the luxury to experiment with new technologies.

Many Chinese manufacturers don't have a sophisticated IT environment in place, so setting up an RFID system isn't as simple as just buying interrogators (readers) and tags. To them, the costs of implementing expensive technology infrastructure far exceed the costs of hiring extra labor.

RFID costs can be justified in America because applications that automate taking inventory, tracking goods or coordinating marketing efforts will deliver benefits to players at the end of the retail supply chain. But these benefits do not concern manufacturers at the front end. Remember, the product on a store shelf is worth considerably more than one on a production line. To reach the consumer, that product incurs shipping, warehousing and distribution costs; marketing, advertising and branding expenses; and taxes, tariffs and stocking charges not to mention middlemen markups. While RFID helps get the most value out of inventory, many manufacturers find it simpler to make up for shrinkage (or lost goods) by overproducing.

The argument that RFID can better track goods doesn't sell to Chinese manufacturers. They retort that RFID tags add to their costs and eat into their profits. They don't think it is necessary to use RFID if it only tells them that goods have left their warehouse they already know that much! Manufacturers in China, therefore, wonder why they should have to pay for source tagging that only benefits someone else. They think retailers should pay for RFID tags. Could they be right?

These manufacturers might concede to using RFID if that were the cost of meeting customer requirements, such as the Wal-Mart mandate. But even then, they'd be forced to think: Will I make enough money from Wal-Mart over the next five years to cover lost profits from installing an RFID infrastructure? They might as well continue using third-party slap-and-ship services, just for the sake of compliance bypassing entirely the infrastructure required for an RFID system. However, this doesn't truly integrate factories into an RFID-visible supply chain.

Nonetheless, RFID's promise of better visibility is still useful for manufacturers here. Increasingly, they ask us about RFID-enabled shop floor systems for work-in-progress (WIP). They need to compare raw materials with finished goods to figure out what they're losing on the production line. They want to locate bottlenecks and identify workers who are slowing down production or creating goods that don't pass quality control. And, most important, they need to know how many units will be completed on time.

The greatest flaw with traditional shop floor systems is that the data capture is largely done by hand, which tends to be an inaccurate, inefficient process. Automatic data capture for WIP systems is a compelling RFID business case, but we do not yet have enough solutions to offer.

WIP environments, for example, use many more interrogators than a dock door environment, so the readers must be less expensive and small enough to fit on the assembly line. Instead of RFID labels that leave with the product, we in China have to design reusable RFID trays and boxes and come up with a way to associate and disassociate them with their contents efficiently. This means producing desktop interrogators designed specifically to register reusable tags. Read ranges must also be shorter because tags will be small, clipped on and removed from one product to the next.

Other frequently requested solutions in China include tracking systems for exhibitions, real-time location systems for expensive equipment and low-cost handheld readers for small warehouses. And of course, everyone wants the holy grail of an RFID-based anticounterfeiting system.

While not all of these potential uses may turn out to be lucrative businesses, clearly the Chinese market has unique needs that bear further exploration. Equipment manufacturers need to work with Chinese RFID vendors and manufacturers to develop their product roadmap. Standards bodies need to expand their scope to include guidelines for a wider range of applications. Systems integrators need to let their customers understand that they are early adopters of this technology and must commit significant resources if they are to get any real benefits.

If RFID is to succeed at all in China, we can't be blind to the world's factory floor. The time to begin developing this market is now.

©RFID Journal