US embassy cable - 05TAIPEI1963

UNCLAS SECTION 01 OF 03 TAIPEI 001963 
 
SIPDIS 
 
SENSITIVE 
 
DEPT FOR EAP/TC 
DEPT PLEASE PASS AIT/W 
 
E.O. 12958: N/A 
TAGS: ECON, EIND, AA, TW, CH, Cross Strait Economics 
SUBJECT: TAIWAN'S RFID INDUSTRY - LOTS OF HYPE, LIMITED 
POTENTIAL 
 
 
Summary 
------- 
 
1. (SBU) Taiwan industry and government is seriously 
interested in the economic potential of radio frequency 
identification technology.  Much of the focus is on 
logistics/supply chain management systems that would 
require a universal standard and inexpensive tag 
manufacturing.  Taiwan observers believe that the EPCglobal 
standard, favored by U.S. industry, will become dominant 
globally.  They are little concerned about PRC efforts to 
develop a unique proprietary standard.  Predictions vary 
about how soon tag prices will drop to levels that make 
widespread RFID supply chain management feasible.  Taiwan 
currently has an advantage in the manufacturing of tags and 
possibly the readers also.  However, Taiwan industry and 
policy makers should also seek to develop the island's 
potential to produce integrated RFID supply chain 
management systems, if the RFID industry is to become a new 
source of sustained economic growth.  End summary. 
 
The Hype 
-------- 
 
2. (U) Wal-Mart's requirement that its top suppliers attach 
radio frequency identification (RFID) tags to certain 
products has dramatically increased expectations about the 
growth of the RFID industry and its potential to spur 
economic growth in Taiwan.  Many Taiwan firms are preparing 
to take advantage of the expected boom in the RFID 
industry.  Major multi-nationals including HP and Microsoft 
have established research facilities in Taiwan to develop 
RFID hardware and applications.  The Taiwan government's 
Industrial Development Bureau offers subsidies for firms 
developing RFID technology, and the quasi-government 
Industrial Technology Research Institute (ITRI) has 
established the "RFID Research and Industrial Application 
Alliance" with private sector partners.  Nevertheless, the 
real economic potential of RFID is still not clear. 
 
Options for Taiwan Business - Two Systems... 
-------------------------------------------- 
 
3. (SBU) There are numerous potential applications for RFID 
technology.  Many Taiwan entrepreneurs break down potential 
business opportunities into two types of systems -- open and 
closed.  Open systems include the type of broad 
logistics/supply chain management systems that are required 
to implement Wal-Mart's new mandates.  This kind of system 
has two crucial features.  First, the system must have 
universal standards so that many different firms can access 
information recorded on RFID tags.  This has caused some 
international concern, particularly about PRC moves to 
establish its own proprietary standards.  However, Taiwan 
RFID industry executives and analysts express few concerns 
about PRC efforts to develop unique standards.  Most 
believe that the EPCglobal standard, favored by U.S. 
industry, will become the dominant standard for supply 
chain management globally.  Taiwan's ITRI is a member of 
the EPCglobal Inc., the industry organization that 
developed the standard.  (Note: EPC stands for electronic 
produce code.  End note.) 
 
4. (SBU) In addition, an effective logistics/supply chain 
management system will require low-cost, mass-produced 
tags.  Otherwise the savings offered by more efficient 
supply chain management will be eaten up by the cost of 
implementing the system.  Industry insiders frequently cite 
a cost of USD 0.05 per tag or less as the break even point 
for an overall cost savings system.  David Wang, the 
Chairman of Avisotech and a businessman who is active in 
Taiwan government and industry association efforts develop 
the RFID industry in Taiwan, doubts the cost of materials 
will permit production of economically efficient RFID tags 
in the near future.  However, Huang Chi-fang, an 
engineering professor at Taiwan's Tatung University, who 
works on the development of RFID tag antennas, told AIT/T 
that the costs have already dropped below USD 0.25 per tag 
and would fall to USD 0.05 within two years. 
 
5. (U) Closed systems, on the other hand, can operate with 
unique standards and less concern about the tag costs. 
This kind of system includes medical records and supply 
management in hospitals and other healthcare facilities; 
security systems, such as port container security programs; 
mobile payment systems for toll roads, public 
transportation and similar services.  Tags can frequently 
be reused in these types of closed systems and are 
generally used in more limited quantities.  Because the 
costs of the tags are less important, some Taiwan firms are 
already making money by providing components for this kind 
of system. 
 
...and Three Products 
--------------------- 
 
6. (U) Any kind of RFID system has three basic components 
-- tags, readers and systems.  Taiwan firms have already 
identified the manufacture of tags and to a lesser extent 
readers as the areas where they can compete 
internationally.  Because the tags basically consist of a 
chip attached to an antenna, Taiwan's powerful 
semiconductor manufacturing industry gives it an advantage 
in that area.  However, Taiwan firms have all but abandoned 
ambitions to provide integrated systems.  Although Taiwan 
firms might manufacture the computers and servers that are 
key components, they assume that firms like IBM, Microsoft 
and HP will dominate the industry in designing and 
marketing integrated systems. 
 
Future Potential 
---------------- 
 
7. (U) Taiwan already has a good start in the RFID tag 
market.  ITRI predicted last year that 2004 production of 
tags and readers by Taiwan firms would reach NT$ 5 billion 
(over USD 150 million).  According to a study by the 
International Data Corporation, the annual growth rate for 
the RFID industry will reach 73 percent for the next four 
years.  In 2008, the global market for tags would reach USD 
5.6 billion with as much as half produced by Taiwan firms. 
The study predicts the market for readers will total USD 
4.8 billion and USD 9.6 billion for integrated systems. 
However, Taiwan firms are likely to claim only one percent 
of the systems market. 
 
8. (SBU) Taiwan's lack of competitiveness in the systems 
market is already apparent in the domestic market.  The key 
players in the emerging RFID systems market are local firms 
acting as the agents for U.S. companies.  Fortune 
Information Systems Co., which claims a customer base with 
more than NT$ 100 billion (USD 3.2 billion) in sales, 
provides systems produced by SSA Global, a U.S. firm. 
Ascent Technology is an agent of the U.S. firm Savi 
Technology Inc., which provides port security RFID 
technology to Kaohsiung Harbor. 
 
Comment - Moving Beyond Tags 
---------------------------- 
 
9. (SBU) Taiwan firms are well placed to capture a large 
share of the global RFID tag market and will probably also 
be quite competitive in reader production as the RFID 
industry expands.  The island's expertise in using original 
equipment manufacturing (OEM) and original design 
manufacturing (ODM) manufacturing models to reduce costs as 
well as its strong foundation in information technology, 
communications equipment, and semiconductor manufacturing 
will be a key advantage.  However, tag and reader 
manufacturing may not offer Taiwan much in stimulating 
sustained economic growth.  Price pressures will keep RFID 
tag manufacturing margins razor thin.  This is exactly the 
kind of low margin production that is already moving 
wholesale to Mainland China causing fears of "hollowing- 
out" and "marginalization" of the Taiwan economy.  Taiwan 
businesses and economic policy makers should seek to expand 
Taiwan's potential to capture more of the systems 
integration market for the RFID industry.  This is the kind 
of "knowledge-based" industry that Taiwan seeks to 
encourage and that will allow it to advance economically as 
manufacturing moves increasingly to low wage countries like 
the PRC.  End comment. 
PAAL