SCDigest editorial staff

In the last few weeks, we’ve seen a flurry of announcements from RFID “inlay” vendors proclaiming lower prices. While it may be some good news to the market, there is some question as to whether the industry is really coming down the cost curve or this is just a ploy for grabbing market share now.

Some of the recent announcements have included:

• Alien Technology announcing new pricing for its class 1 Squiggle tag-labels of 12.9 cents for orders over 1 million. The tags come with an adhesive backing in a 4 by one-half inch size.
  
  
• Avery Dennison announced it was selling class 1 and Gen 2 inlays – which must be converted into a label construction – for 7.9 cents for quantities greater than 1 million.
  
  
• A label maker named RSI ID Technologies announced a finished label with embedded Gen 2 tag for 14.9 cents for the same type of large orders.
  
  
• A company called UPF Rafsec announced 10 cent inlays for class 1 or Gen 2 for orders of 50,00 units or more.

To clarify terms, an inlay is the basic tag itself, consisting of the circuit (memory) and antenna structure. A stream of these are affixed to some substrate, which, as in the Alien example, may have their own adhesive to use in applying the inlay directly to goods. In the Avery Dennison case, the inlays are geared for downstream label converters to embed in a full label construction, rather than to be applied directly to a product. The extra production handling and cost of the adhesive means inlays which can be directly applied will be higher priced than those manufactured for label conversion.

Are these announcements signs that we are marching steadily towards the mythical 5 cent tag (which actually doesn’t mean much, as we’ve noted before, but nonetheless…)? Bear Sterns noted in a recent report that it believes “the price cutting that inlay manufacturers have undertaken is not driven by business efficiency in the near term but by expected manufacturing costs with broader RFID adoption… We believe that inlay manufacturers are trying to secure their market positions and may be hoping to “starve” out weaker vendors that may not be able to fund negative operating or even gross margins for an extended period off time.”

Translation: at the new lower prices, these vendors may actually be selling inlays at or below current production costs. Yet production capacity continues to increase: Bear Stearns also estimates current EPC production capacity of 2-3 billion tags currently, with an expected 2006 demand of maybe 500 million units. There are a lot of big companies investing in what will ultimately be a commodity product with low margins, which almost guarantees industry turmoil down the road.

Meanwhile, sources tell SCDigest that at the EPC Global meeting last month in Atlanta, both Wal-Mart and Target were pushing hard for the organization to kill the standards for class 0 and class1 tags as soon as possible, with the advent of Gen 2. Why? In part, perceived performance issues with so-called multi-protocol readers that can operate across standards. There would also be even more complexity and cost for consumer goods and other manufacturers if they had to apply different tag classes to products depending on the downstream customer.