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Slowing Sales Bring Change to RFID Smart Label Suppliers

Weaker-than-expected demand for RFID smart labels is causing changes in the supplier community, with Zebra Technologies exiting the market and Alien Technology scaling back. This article examines the implications of these and other developments.
Tags: Labeling
Jun 01, 2009This article was originally published by RFID Update.

June 1, 2009—RFID has not changed business operations as quickly or as widely as many expected, but the pace of adoption is causing significant high-profile changes to the supplier community from A to Z, both for companies that manufacture RFID inlays, and those who convert them into adhesive labels for use in smart label printer/encoders. Alien Technology, which was counting on the fluidic self assembly (FSA) RFID inlay production process it developed to spur RFID adoption by significantly lowering tag prices, recently suspended its FSA production in favor of traditional methods, which it says are more efficient for lower volumes. Zebra Technologies, the specialty printer maker with a multimillion dollar supplies business and the first company to commercialize an RFID printer/encoder, stopped producing smart label media at the end of April.

Other well-known suppliers are also undergoing change, though not as strongly tied to their smart label operations. Avery Dennison is executing a restructuring plan after its total sales fell 12 percent last year. Avery Dennison is a leading RFID label converter, though those product lines account for a small portion of the $6.7 billion company's revenues. Nashua, another longtime smart label converter, was acquired earlier this year by Cenveo (see RFID Implications Unclear from Nashua Acquisition).

Industry professionals say these actions by high-profile industry leaders (Alien was the most-recognized RFID company in the RFID Update 2009 RFID Brand Report and Avery Dennison and Zebra were also in the top ten) are tactical responses to market conditions. They point out that RFID use, including that of smart labels, continues to grow. However, the market hasn't grown as fast as expected, which has caused overcapacity. Competition is also growing, in the form of new suppliers and new tagging options, putting more margin pressure on product lines that were already a struggle to make profitable.

"Something is going to have to give in the fragmented RFID marketplace," Mike Liard, research director at industry analysis firm ABI Research told RFID Update. "Vendors are starting to make strategic decisions in response to the market not being what they thought it was."

Suppliers scaled for high-volume operations in the expectation that mandate-driven case and pallet tagging in the consumer goods industry would create strong demand. That market has been much smaller than once expected. RFID sales are increasing, but the highest-growth markets include asset tracking and industrial applications that often use more durable tags instead of smart labels.

"The tagging of pallets and cases remains to be a failure, with only 225 million passive UHF tags used for this application in 2009 -- a far cry from the 35 billion tags that one consumer goods company alone predicted that it would be buying in 2009, when they presented at an event in 2003," research firm IDTechEx, which tracks worldwide smart label sales, said in its latest report.

Enticed by these expected volumes, many RFID tag and label vendors developed high production capacity and low-margin, high-volume pricing models. The strategy and competition kept prices low, but the low volumes depressed profitability too. Now new competitors are putting further pressure on the market. Earlier this year Invengo Technology publicly promoted low-cost inlays (see Invengo Drops Gen2 Inlay Price to 5.8 Cents and Newcomer Brings New RFID Cost Model to North America), and more recently NEC has been rumored to be preparing even lower-priced products.

"You are seeing newcomers out there that are advertising lower prices. Once you do that, pretty much the whole market has to follow," Alien's Victor Vega told RFID Update. "If they're selling at a loss nobody wins."

The slow general economy isn't just depressing demand for RFID labels, it's also changing the business model, according to Vega. "Up until November, we were setting inlay production volume records every quarter, then the business really slowed down," he said. "Prior to November, our converter partners would keep inlay in stock, and would never deplete their inventory. Since then, they've converted to a just-in-time model to keep their inventories very lean."

Vega said Alien's patented FSA process provides a production cost advantage at high volumes, but not at the levels the market currently requires. As a result, the company stopped producing inlays at its Fargo, North Dakota plant, which was built for FSA, and consolidated production at facilities that use traditional flip-chip manufacturing techniques.

"The volatility in the market that we've seen is not conducive to FSA," Vega said. "We decided to go back to flip-chip, which is more forgiving [for volume fluctuations] so we can squeeze out more cost."

Printer/encoder maker Sato has also found a way to squeeze cost out of smart labeling. The company has developed a product that prints and encodes directly on adhesive inlays that have not been converted into labels. The company says by eliminating the label material, users can save about five cents per printed tag. Sato has released the product in Europe and plans to introduce it to the US market this month. Product manager Stephen Hull said the printer/encoder is best suited for use with an automatic applicator for high-speed operations, including item-level tagging.

"I would hope that it will be more than a niche product in the future," he said. "It's an option for anyone that needs to have a smaller label or faster throughput."

Sato will continue to convert inlays into smart labels to supply its printer/encoders, and, like other suppliers, will continue to find market conditions challenging. No major increases in case and pallet tagging are forecast, so competitive pressure for market share will remain strong.

"There's just not enough volume out there for all of us," Mark Davenport, president of label converter Mid South RFID told RFID Update in a recent interview (see Mid South RFID Converts for a Changing Market).

Low demand and strong competition could very well lead to more changes in the supplier community. Chris Rezendes, vice president at industry research firm VDC Research recently raised this possibility (see VDC: RFID Growth to Slow Sharply, But No Contraction). "We probably have some overcapacity from an RFID production standpoint, and from a technology development standpoint," he said. "Many companies are well positioned for this downturn, so they are also well positioned to make strategic acquisitions."
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