Indirect Channel Distribution on the Rise for RFID Transponders

Increasing need for "solution providers" will drive greater sales through VARs, system integrators, VDC predicts

Natick, MA — August 18, 2006 — The global market for radio frequency identification (RFID) transponders is on the rise, with a projected compound annual growth rate (CAGR) of nearly 26 percent through 2010, with revenue shipments projected to exceed $2.3 billion within five years, according to new research published by Venture Development Corporation.

In the recently released "RFID Transponders" volume of its annual "RFID Business Planning Service" report, VDC reports that the RFID transponder market reached an estimated $750 million in 2005. VDC's breakout of current and future global shipments of RFID transponders, segmented by distribution channel, is as follows:

2005
Direct: $371.4 million
Indirect: $375.7 million

2010
Direct: $1.09 billion
Indirect: $1.25 billion

In 2005, the distribution of RFID transponder revenues was roughly equally split between the direct and indirect channels, with the greatest concentration of revenues being derived from direct-to-end-user (32 percent) and value-added reseller/system integrator (VAR/SI, 36 percent) sales. Many vendors continue to employ direct-to-end-user strategies for system implementation.

Influx of Solution Providers

However, the proliferation of RFID in the retail and pharmaceutical supply chains is leading an influx of "solution" providers. In addition, increasing educational efforts, training programs and partnership programs have shifted the market toward VAR/SI channels, which are expected to grow more rapidly than other distribution channels and hold an increasing percentage of revenue and unit shipments across all regions over the next five years.

Important considerations for the distribution of RFID transponders include:

• OEM/private label channels are more widely used for shipments across regional markets, with larger RFID manufacturers shipping their products to partners for further packaging and customization; however, shipments through VAR/SI channels are expected to seize the largest share of the market over the long term due to software and services revenues;



• Dealer/distributor channels account for the smallest share of hardware revenues, largely due to the low value-add offerings of dealer/distributors and their interest in moving boxes (which is difficult with non-standardized, non-off-the-shelf products). Dealer/distributor channels are widely being used for transponder shipments to support applications such as animal identification, security/access control cards and automobile immobilization; and,



• A primary issue currently facing the RFID industry is a general lack of qualified RFID resellers and integrators that can effectively market, sell and implement EPC supply chain solutions; however, vast channels exist for closed-loop, traditional application markets such as security/access control, contactless smartcards, library systems, fixed-asset tracking in specialized sectors (i.e., health care), etc.

According to Shan shan Chu, an analyst in VDC's RFID Practice: "In order to succeed with regional and vertical markets, suppliers, regardless of their size, must continue to make strides in building their distribution channel networks. After all, total solutions and prompt customer service are among end-user top selection requirements. The development of competent and effective distribution channels for RFID systems has been, and should continue to be, a major strategic initiative for suppliers of RFID technology and solutions."

The RFID transponder market discussed here by VDC is part of the research firm's 2005-2006 RFID Business Planning Service. See http://www.vdc-corp.com/aidc/rfid.asp for more information.

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Additional Articles of Interest

— America's aging transportation infrastructure can't keep up with relentless world trade growth, and if it isn't overhauled, consumers and the U.S. economy will pay a steep price, warns APL President John Bowe. Read more in this SDCExec.com story.

— Read about one high-tech manufacturer's quest to deliver near-perfect fill rates across its global service organization in "Managing a Global Supply Chain in a 'Flat' World," from the June/July 2006 issue of Supply & Demand Chain Executive.

• More research from VDC.

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