RFID Technology Rollout Strained by Chip Shortage

By Claire Swedberg

With the double-whammy of demand growth and supply delays, the RFID industry may see challenges extend through the year, while the long-term outlook appears promising for the technology.

Radio frequency identification technology buying is up, as chip shortages continue to impact hardware production. Few in the RFID industry miss the irony here: the very technology required to alleviate supply chain delays is being delayed by the supply chain. While the sources of the challenges are complex, the result can be summarized simply: demand is outweighing supply.

The RFID industry is not facing the chip shortage alone. A global shortage of microchips affects all kinds of electronics, from smartphones to electric toothbrushes, as well as the automotive, aircraft and gaming industries. The causes range from COVID-19-based factory shutdowns to poor supply chain planning (exacerbated by the lack of RFID to track goods from factory to store) to a low number of players in the wafer fab industry. Add to that a series of factory fires, record-breaking consumer demands and, most recently, a war in Europe and skyrocketing energy prices.

Bindiya Vakil

"Now we see businesses fighting to secure the limited number of chips and rushing to build new fabs," says Bindiya Vakil, the CEO at supply chain solutions company Resilinc. At the same time, the demand for RFID technology, including both UHF and HF RFID tags and readers, is growing. That isn't expected to stop, so the RFID industry is seeing delays increase. In its first-quarter 2022 results, for example, RFID technology company Impinj warned that it would be impacted significantly by wafer shortages, and that it would be unable to meet demand.

"We're starting to hear more and more about potential impacts of chip shortages on RFID, whether it be orders not being able to be met, or deployment lead times being affected," says Sandeep Unni, a senior director analyst at Gartner's retail industry research practice. "If the current climate persists, where supply is constrained and demand remains high, I suspect it could lead to widespread impact on new projects or ongoing deployments later in the year."

The brighter side of the challenge is the fact that this shortage is largely demand-driven. Companies which are now struggling to cope with supply chain disruption have, in fact, been turning to RFID for visibility, according to Bill Ray, Gartner's research VP, to identify bottlenecks and understand where goods are in the transportation process. That includes the retail market, as well as numerous other industries, such as tolling, supply chain and logistics, and government projects. "It takes semiconductors to make semiconductor chips," says Vakil. "Ironic, isn't it?"

Sandeep Unni

During the fourth quarter of 2021, IC demand exceeded shipments by more than 50 percent, according to an earnings report from Chris Diorio, Impinj's cofounder and CEO. That may have meant slowdowns on the part of inlay makers who have been periodically shutting down their production lines. "We continue to believe they would increase their bookings if we had more supply," Diorio said in the quarterly report. "Unfortunately, as of today, we don't."

For the first half of this year, Impinj has found that the wafer supply remains about the same, with 200-millimeter and 300-millimeter (8-inch and 12-inch) wafer supply commitments that the company expects to equal or exceed its fourth-quarter shipment levels through the middle of this year. "But those shipment levels fall far short of our rapidly growing demand," Diorio added in the report. "And although our foundry partner continues to prioritize us for upside wafers, with both [of us] hopeful for relief in the process nodes we use, to date that relief has not come—at least, not sized to our needs."

Despite that fact, Impinj reports that it will continue to expand its 300-millimeter post-processing capacity so that it will be ready when the wafers return to their normal volumes. In the meantime, the company indicates it has received record bookings, with retail demand remaining strong. According to a report from IDTechEx, the largest suppliers of wafers predict supply will be limited for the next few years, and that new wafer production facilities will not be in operation until 2024 at the earliest.

Bill Ray

Most RFID manufacturers rely on chip suppliers and production capacity from Asia, and thus share the challenge with other sectors. What varies is the demand side of the equation. RFID growth is, at least in part, driven by the urgency for more item-level inventory accuracy. That has continued this year, with new pending mandates from the likes of Walmart (see Walmart Re-Commits to RFID) and Nordstrom (see Nordstrom Issues Supplier Mandate for RFID Tags). This supply and demand imbalance could thus make the supply shortage more acute for RFID compared to other sectors, Unni states (see Retailer Mandates Are Like Dominoes).

Some chips used for RFID hardware are having a more immediate impact than others. Integrated supply-management software provider LevaData finds a growing lead time for microchips related to clock timers and oscillators, says Brian York, LevaData's VP of content and user experience, though the data points specific to RFID are limited. The supply issues have been particularly bad in power management ICs and related chips, Ray notes, which have had more of an impact on readers and supporting technologies than on RFID tags, but the result has been delayed projects and partial deployments. Semiconductor company NXP, for instance, has a lead time of 50.9 weeks, while STMicroelectronics is indicating wait times of 47.4 weeks, according to LevaData.

Toward the end of 2021, York says, the climate looked more promising. "It looked like maybe we were reaching lead times that were going or leveling off," he recalls. "Then it just skyrocketed back up after December." In some cases, chip vendors are managing the shortage by only supplying customers that agree to long-term commitments. Those customers may be obliged to buy chips for next year at the same price, in order to secure supplies this year. This favors the larger companies that can make such a commitment, Ray says, adding, "However, we expect the price of semiconductors to drop next year, so it remains to be seen if the customers honor those commitments when it comes to the crunch."

Brian York

Ahead of these challenges, a number of RFID companies, particularly larger ones, stockpiled inventory early in anticipation of the supply shortages. However, analysists agree, as those supplies are sold, the long lead time, as well as potential price increases, bear watching. "All that said," Unni adds, "most RFID vendors I speak with remain optimistic about the industry growth prospects and expect overall demand to be robust." All RFID tag and chip vendors that were contacted for this story declined to comment.

The chip shortage has also encouraged development from technology providers into new RFID chipsets that are better-performing and more readily available for RFID tags. Whether or not chips are available only with very long lead times, Vakil says, there will be little impact on the demand or advancements in this technology. But in the coming months and even years, she predicts, "It may slow down the ability to actually produce mass quantities." The good news, Vakil notes, is that the discussion has begun to center around how industries can create a supply chain ecosystem for the critical sectors that rely on the products made from semiconductors.

The answer will, in part, center on better transportation: building railways, roadways and infrastructure, as well as visibility with Internet of Things (IoT) technologies such as RFID for true supply chain self-reliance and resilience. "The focus should be on the ecosystem we create to build around manufacturing," Vakil states. For example, she adds, semiconductors are not sold to people—they are put into products, many of which are produced in Asia. So, for instance, by producing them in the United States and sending them to Asia to be placed in products, then having those products shipped back to the United States, users have created an even more complicated supply chain.

Ron Giles

"We need to explore a more regionalized supply chain," Vakil says, in which goods are manufactured closer to the market where they are sold. It takes an entire ecosystem to run a factory," she explains, and not just anyone can come in and operate such a facility. Supply chains rely on qualified, specialized talent to produce, create and transport goods. "We need to be planning capacity today on what we anticipate demand to be three to five years down the road. It's a big opportunity for supply chain experts to design what the supply chain should look like."

In the meantime, RFID companies are looking for solutions that can solve problems taking place in 2022. Some hardware providers have begun re-engineering products to accommodate the chips available, which is an expensive and risky proposition. "It's really challenging from the engineering side," York says. Previously, many considered redesigning products to meet supply availability as a nuclear option, according to Ron Giles, LevaData's advisory services director. More recently, he says, "Redesign has become Plan B," and it has been fraught with its own challenges if there are further supply issues even for the alternate chips selected.

Reality Behind Lead Times
The Omicron variant led to more shutdowns of numerous factories throughout Southeast Asia that provide semiconductor packaging. Those facilities have since reopened, but as production ramps up, the lead times might not adjust at the same rate. "To some degree," Giles says, "there's not a huge amount of incentive for [manufacturers] to lower their lead times" and deliver earlier than the initial projection, "because they'd rather drive order visibility as far out as they can." This provides a sense of security that the orders are in place for the production underway, he explains.

Uncertainly drives that kind of conservative planning, analysts suggest. "Everybody is kind of on edge right now," Giles states, "and so I think the likelihood of manufacturers lowering lead times is less likely to immediately impact [RFID product manufacturers]. They don't want to get caught off-guard." Due to that caution, it can be difficult to know if the existing lead times are entirely accurate. "I think a lot of them right now are just saying, 'We don't have visibility of new capacity today,' and so they are going to continue to have those longer lead times for new orders."

There is also some question regarding what amount of inventory is still in transit, invisible somewhere in the supply chain—a problem RFID is designed to address. Additionally, some companies have been placing multiple orders with different suppliers, meaning some orders may not actually be active. During the past two years, RFID companies and other manufacturers have tended to transition from a lean-inventory model to placing large orders, and that may have exacerbated over-ordering.

The light at the end of the tunnel is still elusive, York reports, but the industry is hoping it will come from increased supply rather than decrease in demand. "If something happens where interest rates go up and the economy drops and demand slows down, then you could see a shift," he states, adding that there is little sign of such a downward turn.

According to Giles, the RFID industry still must strive to compete for the limited supply with industries such as gaming and automotive. "It's a matter of how much leverage you have to put yourself in front of the line," he explains. With all these considerations, most indications are that capacity will not significantly improve until the end of this year or the beginning of 2023.

While nearly all parties predict the rest of the year will be difficult from a supply standpoint, the role the RFID industry will play in solving these challenges may be significant. Already, the technology is helping companies overcome supply chain challenges with automated information about goods. Such IoT solutions, Vakil says, "are helping businesses to drive improved efficiency, transparency and sustainability."

Claire Swedberg has been covering RFID technology for RFID Journal since 2005. She also contributes to magazines on subjects such as electrical installations and alternative energy. She is the author of five historical nonfiction books, and teaches an adult writing class.

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