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Invest in the greatest thing since the bar code
A single global standard will trigger the purchase of trillions of devices that link a box of Tide on a store shelf with the home office. You can buy the device makers -- or the retailers who'll reap billions in savings.
By Jon D. Markman
Sometime this fall, an international standards body will sign off on a tracking technology that will launch one of the most massive purchases of a new electronics product by business in history. It is not too dramatic to suggest that this technology will lead major companies like Coca-Cola (KO, news, msgs) and Procter & Gamble (PG, news, msgs) to buy hundreds of billions more semiconductors per year than they obtain today and lead to an entirely new relationship between people and things.
This technology, called radio frequency identification, or RFID for short, has been around for a couple of decades in a variety of crude forms. But with the advent of a global standard, the prospect for radically lower-cost devices and increasing demands for a streamlined worldwide supply chain have led a vanguard of key Fortune 500 manufacturing and retailing companies to push RFID to the front of their spending plans for the next three years to 10 years.
In terms of chips sold, it will dwarf any other semiconductor application out there now, said Bill Allen, a spokesman for Texas Instruments.
An Internet of things
At its most basic, RFID simply enables businesses to identify and track their assets wirelessly. Slap a 50-cent signal-emitting transponder onto a case of Coke or a pallet of Cover Girl makeup, and a manufacturer can remotely monitor its progress from the manufacturing plant through the warehouse to the trucker to the distributor to the supermarket warehouse with diminished threat of human error. Slap a five-cent transmitter on the can of Coke itself, and the retailer knows immediately, via a reader and antenna on a smart shelf, when Aisle 7A needs replenishing.
Unlike a bar code, which identifies an aluminum cylinder filled with brown fizz simply as a can of Coca-Cola and must be read one-by-one via a line-of-sight wand, an RFID transmitter gives each can its own reprogrammable digital identity and can be read wirelessly at a 10,000-item-per-second clip. This electronic product code, or EPC, allows a retailer to know that a can -- or, more importantly, something dangerous or perishable such as a drug or a package of fish -- began life on the third conveyer belt of Building B of the manufacturers Sarasota plant on June 14.
That may sound prosaic, but it radically changes the relationship between giant manufacturing concerns and their products. Something like 15% of everything a large company makes is essentially unaccounted for at any given time -- as much as $2 billion worth of missing stuff for a company the size of P&G. Not lost. Not stolen. Just sitting around somewhere beyond the reach of inventory takers. As a result, manufacturers estimate they put about 15% more products in their supply chain at every level than they or their retailers really need, just in case they run out. Any technology that reduces that number to 10%, or 5% or even less, will lead to tens of billions of dollars in annual savings.
At a more ethereal level, however, RFID broadly enables an Internet of things rather than computers, drawing civilization closer to the day when computing devices connect every object to every other object in pervasive and ultimately unthinkable ways. We like to imagine a world where there are billions of small computers not on desktops, but embedded in the real world, says Ravi Pappu, co-founder of Boston-based computer engineering firm ThingMagic, which advises several RFID manufacturers.
Wal-Mart pressures RFID chip makers
The prospect of continuous monitoring of things disturbs privacy advocates, but consumers have already proved themselves willing to trade some confidentiality for convenience. An example is the one-click service at Amazon.com, in which shoppers allow the Web site to harbor their credit-card information in exchange for the ease and speed of single-click purchasing. In a fully RFID-powered world, a smart-card carrying consumer could conceivably roll her shopping cart directly out of a supermarket past a reader that would tote up her purchases, charge her credit line, deduct the items from inventory and hand her a receipt -- and then disable the tracking devices.
If you think thats a far-off concept, consider that Wal-Mart Stores (WMT, news, msgs) just last week said it plans to require its top 100 suppliers to put RFID tags on shipping crates and pallets by January 2005 -- a move widely seen to be pivotal in the broad adoption of the technology. Kevin Ashton, executive director of the Auto-ID Center at the Massachusetts Institute of Technology, told reporters that Wal-Marts adoption of electronic product code standards should give companies confidence that the day of a single, interoperable RFID system is close at hand.
The sticking point today is the price of RFID devices, which vary in range, frequency and power from passive reflectors that transmit a few inches, to ones that are battery-powered and transmit more than 100 yards. Currently the cheapest models run about 30 cents. Wal-Mart wants them to cost 5 cents in order to make a business case for its vision of a fully connected supply chain.
The differential explains why this is one of the rare technologies that is being pushed harder by the end users than by the electronics manufacturers. Texas Instruments (TXN, news, msgs) and Philips Electronics (PHG, news, msgs), who dominate RFID device manufacturing today, want to make increasingly elaborate, expensive and high-margin chips, not obnoxiously cheap commodity chips. But if they dont come through fast enough, the Wal-Marts and P&Gs have threatened to cut them out of the deal and order the devices through small start-ups they partially control.
Alien Technology: Start-up at the leading edge
Idle threat? Maybe not. In January, Gillette (G, news, msgs) got the ball rolling by placing an order for 500 million RFID tags from tiny, privately held Alien Technology of Morgan Hill, Calif. -- the first major commercial deal for the technology. Alien, which boasts Avery Dennison (AVY, news, msgs) and Dow Chemical (DOW, news, msgs) among its investors, is out in front because it developed, and holds patent rights to, a manufacturing process called Fluidic Self Assembly. The company says the process allows it to package tiny integrated circuits, termed NanoBlocks, into electronic product tags at a rate of 2 million per hour -- about 200 times faster than the 10,000-per hour rate of manufacturing conventional ICs. Not only does that reduce the cost of the tags (the Gillette order is estimated at 10 cents per chip), but it will permit the annual production of trillions of tags in the expected future.
Louis Sirico, founder of the Washington, D.C., consulting firm RFID Wizards, recommends investors step back from the big picture and just look at the valuable uses the technology already provides today. At an automobile parts assembly plant, RFID transmitters are embedded in the foam that ultimately will go in the seat of a car. The transmitter identifies one type of foam as a $25 asset, and a denser but identical-looking piece of foam as a $45 asset. Once the foam is covered with nylon or leather, the transmitter makes it easier for the car maker to ensure that the correct foam is inside the seat assembly; and to direct it right instead of left on a conveyer belt for special handling if necessary -- labor-intensive actions prone to human error today. The ability to quickly identify components within a finished good without destroying the finished good is a powerful concept that doesnt exist without RFID; its a new capability that saves money and time, Sirico said.
Unfortunately, opportunities for pure-play investments in RFID through public companies seem scant. Sirico, who advises clients who wish to implement systems, offers this analysis:- Texas Instruments makes good equipment in the lower-frequency ranges and recently sold its 200 millionth transponder, but has not adopted the new global standard and could get shunted aside. Moreover, RFID is only part of a sensors division that produces just 12% of the companys $8.8 billion in sales.
- The Intermec division of Unova (UNA, news, msgs) has a promising new line of patented RFID products.
- The Dutch electronics giant Philips is a major maker of equipment and has made numerous investments in private companies.
- The Sensormatic division of Tyco International (TYC, news, msgs) is a major player, partnering for well-regarded RFID devices with ThingMagic.
- Bar-code specialist Zebra Technologies (ZBRA, news, msgs) and wireless-device manufacturer Symbol Technologies (SBL, news, msgs) each have separate and joint RFID solutions.
- A small Canadian company, Samsys (CA:SMY, news, msgs), also makes well-regarded readers.
The safest bet for public equity investors may be on the big manufacturers and retailers who expect to use the technology to wring significant expense savings from their infrastructure. Mark Roberti, publisher of RFID Journal, notes that a typical, well-run Wal-Mart might be out of stock 5% of the time. If RFID networks can reduce that to 4%, the 1% additional sales will add $2.5 billion to their revenues per year. Thats just Wal-Mart and does not include labor savings or improved efficiencies, he says. The potential is mind-boggling.
| Beam me up: 10 RFID plays | | Company | 6/20 price | Price/sales | Market cap | Exchange | % chg YTD | | Unova (UNA, news, msgs) | $10.55 | 0.48 | $619 M | NYSE | 75.80 | | Symbol Technologies (SBL, news, msgs) | $13.96 | 2.52 | $3.2 B | NYSE | 69.80 | | Zebra Technologies (ZBRA, news, msgs) | $74.22 | 4.75 | $2.3 B | NASDAQ | 29.50 | | Texas Instruments (TXN, news, msgs) | $18.50 | 3.66 | $31.9 B | NYSE | 23.30 | | Samsys Technologies (CA:SMY, news, msgs) | $0.97 | 32.33 | $27.86 M | Vancouver | 21.30 | | Tyco International (TYC, news, msgs) | $19.33 | 1.06 | $38.6 B | NYSE | 13.20 | | Koninklijke Philips Electronics (PHG, news, msgs) | $19.80 | 0.76 | $25.3 B | NYSE | 12.00 | | Wal-Mart Stores (WMT, news, msgs) | $54.26 | 0.96 | $237.6 B | NYSE | 7.40 | | Procter & Gamble (PG, news, msgs) | $91.23 | 2.77 | $118.5 B | NYSE | 6.20 | | Gillette (G, news, msgs) | $32.10 | 3.77 | $32.7 B | NYSE | 5.70 |
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This retail utopia is still several years away. Procter & Gamble, one of the most enthusiastic promoters of the technology, will start testing the new standard in the fall but wont put transmitters on cases and pallets until 2004 or 2005. Putting electronic product codes on individual bottles of Tide detergent, boxes of Cover Girl lipstick, or tubes of Crest toothpaste -- about 23 billion items per year in all for P&G -- would follow that. But it is coming. Our out-of-stock levels are much higher than wed like, said Jeannie Tharrington, a P&G spokesperson. We think this technology is viable and has tremendous potential to make our supply chain more customer-centered, and we are doing everything we can to get it up and running.
Roberti, the RFID Journal publisher, said he believes the industry is about where the Internet was in 1994. But we think itll be bigger than the Internet, he said. All the Web did was connect computers to computers. Thats not as big as connecting things to computers.
If the business transpires as expected, one thing is certain: Those piles of chips and miles of wireless beams will produce mountains of data for companies to analyze. This summer, I will look at the burgeoning industry of business intelligence software and how it will potentially intersect with electronic product codes. In the meantime, please send your ideas on ways to invest in this trend to me at supermodels@runbox.com, and Ill publish them in a future column.
Fine Print
The Auto-ID Center, a partnership between 100 multinational companies and five top universities, is at the center of research and development of RFID standards. This page explains the technology well. Mark Roberti was a crack reporter for the late, lamented Industry Standard when he got the idea to start the RFID Journal. The online trade magazine provides excellent daily reporting and commentary on the industry. eRetail News explains the electronic product code well in a report found on this page. ... Privacy Digest is keeping track of RFID issues; a major recent blow-up came over concerns that Italian apparel maker Benetton was embedding transmitters in its clothing. (See this Wired story and this RFID Journal story.) Learn how the technology is being applied to tag and track livestock, game and pets here. Alien Technology explains its unique tag manufacturing technique here and lists its partners and investors here. Matrics, a Maryland-based company, is also a top private manufacturer of RFID tags and readers. See its press releases here. ... The Intermec division of Unova provides a lot of background on RFID. Texas Instruments also provides great information. Learn more about Philips role in the industry here. ... Samsys explains its technology here. Zebra explains its role here. ... RFID Wizards, one of the leading consultants, provides news and analysis at its Web site. ... Micromuse (MUSE, news, msgs) objected to a statement in my Jun 11 column (Which price is right: $108, $10 or $1.37?") contending that companies needed to rip out network-management systems and commit to a six-month rebuild in order to take advantage of its NetCool product suite. Spokesperson Nicole Fortenberry said NetCool is interoperable with legacy systems and that customers are able to deploy it in a few weeks, not months. Micromuse, which I suggested was overvalued at around $9.50 then, is down around 17% since the story ran, vs. -2% for the Nasdaq Composite ($COMPX).
Jon D. Markman is senior investment strategist and portfolio manager at Pinnacle Investment Advisors. While he cannot provide personalized investment advice or recommendations, he welcomes column critiques and comments at supermodels@runbox.com. At the time of publication, neither he nor his fund had positions in any stocks mentioned in this column, but portfolios can change at any time.
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