RFID’s Silk Road

By Elizabeth Wasserman

Because of its growing importance as a manufacturing center, Asia will play a pivotal role in the global adoption of RFID technologies.

Asia is fast becoming the world's factory. Exports from Asia have grown over the past 50 years from 13 percent to more than a quarter of all worldwide trade today, or US$2.4 trillion, according to the World Trade Organization (WTO).

Fueling Asia's ascension is the fact that global companies—based in the United States, Europe and other parts of the world—have contracted with Asian manufacturers to make their products, because it's cheaper than maintaining their own factories in regions where worker salaries and overhead are costlier.

Asian companies are beginning to play a pivotal role in RFID's global adoption.

Now many of these global companies are faced with RFID tagging mandates from large retail chains in the United States and Europe. Most suppliers have taken the slap-and-ship route, tagging cases and pallets in their warehouses after goods have been imported from overseas.

Still, they believe that they can cut the cost of compliance by pushing RFID tagging back to the Asian factories where the goods are made. Not only would it save time and reduce labor costs, but the tracking of goods from manufacturing plants in Asia to store shelves in North America and Europe holds enormous potential for companies to realize a return on investment from RFID.

Ideally, Asian companies would manufacture cheap tags based on the standards embraced by EPCglobal, the international standards group backed by more than 800 companies, most of which are in North America and Europe. Those tags would be applied to goods made in the region, allowing tracking from source to transport overseas to eventual sale. Low-cost interrogators also could be made in Asia and sold to companies around the world.

That would put Asia in a unique position to drive the adoption of EPCglobal standards and facilitate the much-anticipated global RFID-enabled supply chain. To that end, many Asian governments—including those in Hong Kong, Japan, Singapore, South Korea and Taiwan—are financing pilots of RFID technology in an attempt to carve out a role for their economies in the RFID industry. Governments and private industry in Hong Kong, Japan, Malaysia, Singapore and South Korea have been active in the development of international RFID standards.

But Chinese authorities have been reluctant to accept international standards for air-interface protocols—the way tags and interrogators communicate—and for encoding RFID tags with Electronic Product Codes, because they don't want to pay royalties to Western countries for RFID technology.

Analysts say China's Ministry of Information Industry (MII), which is developing China's RFID policies, is pushing China to create its own air-interface protocol and numbering system. Chinese companies would then own the intellectual property and profit from the manufacture and sale of tags and interrogators.

Companies under retail mandates may be able to achieve that elusive ROI by pushing tagging back to manufacturing plants in Asia.

The MII set up a working group in November and is supposed to make public its position at any time. If China uses its growing economic power to buck the adoption of international standards, it could potentially undermine the quick adoption of RFID in worldwide trade.

"The Chinese government has a choice: It can establish a national code system or use the EPC directly," says Junmei He, of ABI Research, author of a recent report on RFID in China. "To use the EPC code, significant registration fees and highly confidential information disclosures are required."

But even within China there are competing arguments on the standards issue. There is an economic concern that if China goes its own way, Chinese contract manufacturing firms may lose out on business because U.S. and European companies will go to another low-cost market—Vietnam, for example—to manufacture cheap goods. This may be one reason why China missed its own deadline—the end of 2005—for finalizing a national RFID standard.

"One of the biggest issues facing the RFID standard in China is that there does not seem to be clear direction within the Chinese government as to who has responsibility over RFID in general," says Anty Zheng, research director of In-Stat China, a research group that recently published the report "RFID in China—From Human ID to Product ID." "There are several competing interests at play, making the situation complicated for outsiders to fully understand."

What's At Stake?

Tech-savvy Asian countries have been at the forefront of many RFID applications. Hong Kong, Japan and Singapore, for instance, were the first countries to introduce contactless RFID cards for use in subways, as building passes and for retail payment systems. And South Korea's Asiana Airline is one of the first national carriers to tag and track passengers' luggage, which it plans to do at six of the country's airports.

But Asia's biggest impact on the RFID industry may stem from helping companies meet retail mandates on other continents, primarily North America and Europe. During the past two years, several chain stores, including Wal-Mart, Target and Best Buy in the United States, Tesco in the United Kingdom and Metro AG in Germany, have been urging—and in some cases requiring—suppliers to start applying RFID tags to goods. The quickest and easiest way for many suppliers to comply has been to deploy slap-and-ship solutions—that is, apply the RFID tag or label just prior to shipping the product to a customer. Goods imported from overseas that require RFID tags are hand sorted, pallets are disassembled, tags are applied to each case, and then pallets are reassembled and issued a separate pallet tag.

The slap-and-ship tagging operations have been costly with few, if any, benefits for the supplier. But some companies under retail mandates believe they can achieve that elusive ROI by pushing tagging back to manufacturing plants in Asia, where the labor costs are lower and goods would need to be palletized only once. Also, every time tags are read there is the potential to use the data gathered to gain visibility into the supply chain.

Hewlett-Packard (HP) is one of the largest suppliers of computers, printers, laptops and PDAs to Wal-Mart, Target and Best Buy. The company originally started applying RFID tags to shipments by hand in warehouses in the United States to comply with the mandates. But the company has since moved back the tagging of goods to 12 manufacturing plants and contract manufacturers throughout Asia, to automate manual processes, realize greater efficiencies and achieve ROI by being able to use the tracking data.

"Having full traceability from the manufacturing plant to the end customer is the end goal from our perspective," says Tim Wilkinson, HP's manager for the center of expertise for RFID and supply chain. "It's not something that happens overnight. There are many players involved between the plant and the customer, including third-party logistics providers. As we scale up and move the tagging back down the supply chain to the manufacturing plant, we hope to have greater visibility and accuracy of the data."

Logistics companies are carving out a niche for themselves in the RFID industry by offering to do tagging for companies impacted by retailer mandates. Neptune Orient Lines, a Singapore-based global transportation and logistics company, offers tagging services to several customers that are suppliers to Wal-Mart. NOL currently tags goods once they reach the United States, but that can be an expensive proposition, says Chng Ken-Wei, senior manager for NOL's RFID program in Asia. The suppliers have to pay for the tags and then they have to pay the logistics companies to break the pallet, tag the cases and then reassemble the pallet.

"Some of our customers are interested in exploring with us how we can bring this tagging to Asia, where they are currently already putting on a bar code," he says. "There's no cost difference to do that [with the exception of the cost of RFID tags]. In order to do that, they have to figure out whether it's volume that makes sense and, if you don't have the volume, how you divert some of the manufactured products to be RFID tagged."

Asian companies that supply U.S. and European retailers are also exploring RFID tagging at the source. Cordless telephone manufacturer VTech Holdings, founded by two engineers in Hong Kong in 1976, has expanded globally with annual revenues of more than US$1 billion—more than 90 percent of that from outside Asia.

Several years ago, VTech moved some of its manufacturing operations into China. Factory workers at a plant in Guangdong province in southern China have just started applying RFID tags to cases of cordless phones destined for Wal-Mart and cases and pallets of phones destined for Best Buy. Using RFID interrogators installed at key locations, the goods are tracked from the manufacturing plant through the border checkpoint between Shenzhen and Hong Kong, onto ships at the port of Hong Kong and finally to their destinations overseas.

"By tagging at the manufacturing level, retailers can visibly trace the order status and be more responsive," says Grace Pang, a VTech spokesperson. "We believe once the RFID system is linked with the Collaborative Planning Forecasting and Replenishment system, both supplier and retailer can enjoy a win-win benefit to improve forecast accuracy and reduce out-of-stocks and excessive inventory."

Governments Step Up

In the United States and Europe, the private sector has been primarily funding RFID pilots as a supply chain solution. But in many Asian countries, the government has been the main financier of RFID initiatives. Government involvement in driving Asian economies is more culturally accepted than in the United States and Europe, and Asian governments sometimes play a decisive role in jump-starting industries that could be important to their national economies.

The VTech pilot is one of four that the Hong Kong government is financing with HK$14 million (US$1.8 million) to develop the EPCglobal Network infrastructure needed to track goods from the time they are manufactured in China until they reach a retail store in Europe or the United States. The other pilots will involve lesser-known apparel and consumer electronics manufacturers. The pilots will help with the development of the technical design of the EPCglobal Network by outfitting products made in China with EPC tags, registering those serial numbers and tracking information about the movement of those products from manufacturing, through transportation between the border of China and Hong Kong, through the handoff to two logistics companies, Maersk and NYK, then onto ships and to their final destinations overseas. Each pilot is expected to be under way later this year and continue into 2007.

"This project is designed to create an end-to-end ability to provide visibility in tracking goods from the manufacturing sites," says Anna Lin, chief executive of EPCglobal Hong Kong, which was set up in 2004 under the auspices of GS1 Hong Kong. While the pilots may have been spurred by retailer mandates in the West, Lin says that Chinese companies are interested in realizing a value proposition from RFID tagging, such as improving customer service, order fulfillment and visibility in the production cycle, and tracking pieces used to make garments that are shipped back and forth between companies in Hong Kong and China to qualify the goods as being made in Hong Kong.

Hong Kong companies now have some 70,000 manufacturing plants and employ 10 million workers in southern China. The adoption of RFID along this supply route is important because about 80 percent of the goods made in the region are exported via Hong Kong, which is a special administration region of China, making it a services and logistics hub for China's manufacturing facilities.

In Japan, the government's Ministry of Economy, Trade and Industry (METI), which takes an active hand in helping guide the Japanese economy, has financed several RFID pilots in recent years. METI's RFID tests have run the gamut from tracking shipping containers of goods for export to tagging goods at the item level and smart-shelf initiatives. Peter Regen, vice president for Global Visible Commerce at Unisys, says his company worked with METI and a number of other Japanese agencies on a variety of RFID projects. "The Japanese government is looking to ensure that Japan is a leader in the development and application of RFID," says Regan, "and it's providing funding in a wide range of industries and applications in order to learn and gain an experience base in the country."

In February, METI announced an RFID project it was developing in conjunction with China and South Korea to use EPCglobal Network standards to track manufacturing arrangements that span international borders. Fuji Xerox volunteered to participate in the pilot to test the use of RFID tags in the procurement of copier parts from seven different factories and warehouses in Japan, China and South Korea. METI said in a news release that while overseas production has become standard in manufacturing, Japanese facilities could speed up production by improving their ability to get real-time information about stock on hand.

The Asian governments' interest in RFID applies not only to applications of the technology but also to determining whether Asian economies can manufacture RFID chips, tags and interrogators. In March 2004, the Taiwanese Ministry of Economic Affairs and the Industrial Technology Research Institute partnered with companies in Taiwan to form an alliance to develop RFID tags, interrogators and applications.

The Silk Road lies in the ocean-going cargo ship traffic leaving from bustling ports in Asia to the United States and Europe.

"In Asia, several countries—Korea, Malaysia and Taiwan—have a history of making different components, silicon chips or electronics components," says Josef Mueller, senior executive in the Greater China practice for Accenture. "RFID is something that some of them are looking at as a potential new revenue stream."

Several major U.S. companies have set up RFID facilities in Taiwan, including HP and Microsoft. At the same time, semiconductor giant Texas Instruments last June started producing EPC Generation 2 inlays and straps at its Malaysia plant. The Malaysian government has been encouraging foreign investment and the development of the country as an RFID hub.

RFID's Silk Road

The 21st-century version of the fabled Silk Road, which brought silk from China to Europe centuries ago, lies in the ocean-going cargo ship traffic leaving from bustling ports in Asia to the United States and Europe. That is why some Asian governments are vying to use RFID to strengthen their nations' positions as hubs for logistics and global trade.

The government of Singapore, the world's second largest port, announced in 2004 that it was putting up US$5.8 million to support the development of the RFID industry in the island republic. As part of this initiative, Singapore was the first country to start using RFID to electronically seal cargo containers destined for the United States, under the U.S. Container Security Initiative. This program prescreens maritime cargo to prevent terrorists from using shipping containers to send weapons to American ports. Government and business leaders in Singapore believe early adoption of RFID will bolster the country's bid to become the world's primary port for container shipping.

The South Korean government has pledged to invest US$18.6 billion over the next 10 years to modernize its country's ports, to enhance the efficiency and security of its global overseas shipping. Busan, its largest and busiest port, is deploying a trial RFID container-tracking system to investigate how the technology can help secure and speed containers that pass through its facilities. The project has been in development since December, and the port will start tracking containers this spring through the end of August.

The Final Link

Asian businesses and governments also believe that RFID could lower the cost of importing goods for U.S. and European companies by automating and speeding the capture of shipment data, and generating automatic advanced shipping notices and manifests. In addition, adopting RFID is a way to respond to Western concerns for improving security and cutting down on piracy and counterfeit goods. "These countries are not going in and investing in this to throw money at something," says Regen of Unisys. "They're trying to use it as a competitive differentiator for their countries in terms of providing better security and better visibility of goods."

While many countries in Asia are eagerly developing RFID solutions to promote global trade, the question remains about which way China will go. Perhaps the most likely answer to the role China will play in the adoption of RFID—champion or spoiler—lies somewhere in the middle. Hao Min, research director of the Auto-ID Lab at Fudan University in Shanghai, believes China will develop its own numbering system, instead of following the EPCglobal system. At the same time, Min says, China recognizes its role in the world economy and will likely encourage Chinese companies to follow standards endorsed by the International Organization for Standardization (ISO).

Right now, the Chinese market is not big enough or developed enough to dictate RFID standards for the rest of the world, says Zheng of In-Stat China. The Chinese government, she says, is interested in making its standards compatible for the purpose of global trade.

Some analysts believe that while a separate Chinese standard could slow down RFID adoption, it would not be the death knell of RFID-enabled world trade. "China's involvement in these standards is obviously very important, to move them forward," says Regen. "But significant chunks of the world with a large percentage of gross domestic product and consumption have moved along in working together to develop standards and the technologies. It's hard for me to imagine that a Chinese standard could really be a rival on a global basis."

Even if China develops its own numbering code, that impact may be muted by a couple of factors. Most export manufacturing in China is done under a contractual basis, which makes it easy for Western companies to contract with a factory in a different country. Also, some Western companies have started to contract with third-party ticketing agencies around the world—including in China—to buy EPC-encoded RFID tags for goods, such as clothing and shoes, which are applied during manufacturing. These third-party agencies already supply the hangtags, wash labels and bar codes for many goods made in Asia and sold elsewhere. RFID is a natural extension of this business.

"They don't even need to operate an RFID reader or printer inside that Chinese factory," says Mischa Reis, marketing director for Avery Dennison Retail Information Services, which operates 40 RFID-enabled ticketing centers around the world. "We preprint and pre-encode the RFID tickets in our service centers."

Asia is the final link in the RFID-enabled global supply chain. When it's in place and goods can be tracked from manufacture to sale, all parties in the supply chain will benefit from the increased visibility. And Asia will be able to shore up its position as the world's leading manufacturer.