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Finding RFID's Business Case in China

Right now, Chinese companies don't have a solid reason to invest in the technology.
By Steven H.T. Wong
Dec 19, 2005Radio 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.

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