Passive RFID Label Prices and Volumes Seen in "Vicious Circle" Slowing Growth

Production costs still holding back high-volume deployments that could provide economies of scale, ABI reports

New York — December 19, 2006 — The market for passive radio frequency identification (RFID) labels — particularly UHF labels — has not yet grown as stakeholders in the industry had hoped, and the reason these core components of RFID tags have failed to achieve their expected potential is the relationship between prices, volumes and the business case for RFID, according to a new study from ABI Research.

In a classic "vicious circle" dynamic, production costs for UHF labels (and therefore for Gen 2 passive labels) are still at levels tending to inhibit the high-volume deployments that would provide economies of scale, ABI reports in its new "RFID Passive Label Markets"study.

Research analyst Robert Foppiani said that, at current prices, many end-user companies in the retail/CPG supply chain are struggling to determine a compelling business case for RFID.

"Those companies that have high-value, high-risk goods are often able to find a business case to justify the investment in RFID passive labels at current prices," Foppiani said. "But many members of the value chain are operating on thin margins, and most are unwilling to drop prices any further until there is much greater volume."

So label vendors are trying a variety of tactics to wring every last cent out of the cost of their products. Alien, Avery Dennison, Texas Instruments and NXP hope that their strap technologies will do the trick; multiple vendors are hoping to shrink the size of an integrated circuit to obtain more units from a single wafer, ABI said.

A number of EPC Gen 2 RFID vendors are engaged in "loss-leader" activities, offering labels at unsustainable prices in an effort to gain market share. Eventually, some will drop out of the running or will find niche markets where their products can find a role, according to the analyst firm.

ABI believes that cost reduction tactics will not have a short-term effect on market volumes. The substantial price cuts seen in the past year were necessary to attract end users complying with mandates. Looking forward, future vendor attempts at lowering production costs will make more sense as higher volumes are reached. Users will proceed cautiously on a case-by-case basis, and volumes will rise slowly and steadily rather than dramatically, the analyst firm predicts.

ABI Research's new "RFID Passive Label Markets" examines the role that each member plays in the RFID passive label value chain and the relationships that have developed among them. It explains what is being done to drive the market to higher volumes and includes an analysis of the different approaches or business models that vendors are taking.