The impact of the shortage of chips on the promotion of RFID technology

The impact of the shortage of smart chips on the promotion of RFID technology

Sales of RFID technology have increased as smart chip shortages continue to impact hardware production. Almost everyone in the RFID industry can understand the irony: The technology needed to mitigate supply chain delays is being delayed by supply chains. While the source of the challenge is complex, the result can be summed up simply – supply exceeds demand. The RFID industry isn't the only one facing a shortage of smart chips. The worldwide shortage of microchips affects everything from smartphones to electric toothbrushes, cars, airplanes, and the gaming industry.

Reasons include COVID-19-based factory closures, poor supply chain planning (exacerbated by a lack of RFID to track shipments from factory to store, for example), and a low number of Wafer industry players; coupled with a spate of factory fires, record consumer demand, and the recent war in Europe and soaring energy prices.

"Right now, we're seeing companies struggling to get a limited number of chips and rushing to build new wafer factories," said Bindiya Vakil, CEO of supply chain solutions company Resilinc.

At the same time, the demand for RFID technology, including UHF and HF RFID tags and readers, is growing. This is not expected to stop, hence the delayed deployment of the RFID industry is increasing. For example, RFID technology company Impinj said in its first-quarter 2022 results that the company will be severely affected by wafer shortages and will not be able to meet demand.

"We're starting to hear more and more about the potential impact of chip shortages on RFID, whether it's an unfulfilled order or a Delivery times are affected". "If current conditions persist, with constrained supply and high demand, I suspect this could have broad implications for new projects or projects being deployed later in the year."Analyst Sandeep Unni, senior director of Gartner's retail industry research practice said.

Indeed, companies that are currently grappling with supply chain disruptions are already using RFID technology to increase transparency to identify bottlenecks and understand where goods are in transit, according to Bill Ray, research vice president at Gartner. This includes retail markets, charging, supply chain and logistics industries, and government programs, among others.

 "Ironically, you need semiconductors to make semiconductor chips, isn't it?" Vakir said.

In the fourth quarter of 2021, IC demand exceeded shipments by more than 50%, according to an earnings report from Impinj co-founder and CEO Chris Diorio. This could mean a slowdown in production for inlay manufacturers, who have periodically shut down their production lines.

 "We still believe that if we had more supply, they would increase orders. Unfortunately, as of today, we haven't," Diorio said in the quarterly report.

Impinj found that wafer supply in the first half of the year remained largely unchanged, with supply commitments for 8-inch and 12-inch wafers to match or exceed last year's fourth-quarter shipment levels by mid-year. "But these shipments fell well short of our rapidly growing demand," Diorio added in the report. "While our foundry partners continue to prioritize our upstream wafer supply, and we all want to ease pressure on the process nodes we use, to date, the node for such mitigation has not come -- at least, not meeting our need."

Nonetheless, Impinj said it will continue to expand its 12-inch post-processing capabilities to be ready when wafers return to normal supply. Meanwhile, the company said it had received record bookings and retail demand remained strong.

According to a report by IDTechEx, the largest wafer suppliers expect supply to be constrained in the next few years, with new wafer fabrication facilities not coming online until 2024 at the earliest. Supply and demand imbalance leads to a worse RFID supply shortage.

Most RFID manufacturers rely on chip suppliers and capacity in Asia, and as such, share challenges with other industries. The difference is the demand side. The growth of RFID has, at least in part, been driven by a pressing need for more item-level inventory accuracy. This continues this year, with companies like Walmart, Nordstrom, and others filing for new pending authorizations. Uni pointed out that this supply-demand imbalance could make the RFID supply shortage worse than in other industries.

Some chips used in RFID hardware are affected more directly than others. Brian York, vice president of content and user experience at LevaData, an integrated management software provider, said they are seeing increasing lead times for microchips related to clock timers and oscillators. Bill Ray pointed out that the supply of power management ICs and related chips is particularly serious, which affects readers and supporting technology more than RFID tags, and the result is delaying project deployment. For example, semiconductor company NXP has a lead time of 50.9 weeks, while STMicroelectronics has a wait time of 47.4 weeks, according to LevaData.

By the end of 2021, things look promising, York said. "It looked like we might be reaching a lead time that was about to level off. Then it spiked after December."

In some cases, chip suppliers have responded to shortages by only supplying customers who have agreed to long-term commitments. Those customers may have to buy next year's chips at the same price to secure this year's supply. That's good for big companies that can make such promises, Bill Ray said. "However, we expect semiconductor prices to come down next year, so it remains to be seen whether customers will deliver on those promises at a critical juncture."

Faced with these challenges, many RFID companies, especially the larger ones, stocked up in advance to prevent supply shortages. However, analysts agree that as these supplies are sold, longer lead times and potential price increases are worth watching.

Chip shortages have also pushed technology suppliers to develop new RFID chipsets that perform better and are easier to use in RFID tags. Whether or not chips take a long time to come to market will have little impact on the demand or advancement of the technology, Vakir said. But she predicts that in the coming months and even years, "this could reduce the ability to produce high volumes". The good news, she noted, is that discussions have started around how the industry can create supply chain ecosystems for key industries that rely on semiconductor products.

The outcome of this discussion will focus in part on better transportation – building rail, roads and infrastructure, and leveraging IoT technologies such as RFID for true supply chain freedom and flexibility.

"The focus should be on the ecosystem we've built around manufacturing," Vakir said. "Semiconductors aren't sold to people -- they're put into products, many of which are made in Asia. For example, by making in the U.S. By taking semiconductors and shipping them to Asia, placing them in products, and then shipping those products back to the U.S., users create a more complex supply chain.”

"We need to explore a more regionalized supply chain," Vakir said. "In this supply chain, goods are manufactured closer to the sales market. Running a factory requires a complete ecosystem, and not everyone can Come in and operate a facility like this.   Supply chains depend on qualified, specialized people to produce, create and transport goods. We now need to plan capacity based on expected demand over the next three to five years. For supply chain industry leaders, this is It’s a great opportunity to design and plan the supply chain.”

At the same time, RFID companies are looking for solutions to the problems that will occur in 2022. Some hardware vendors have begun redesigning products to fit existing chips, an expensive and risky proposition. "From an engineering perspective, it was challenging," York said.

Ron Giles, director of consulting services at LevaData, said many had previously considered redesigning products to meet supply needs as a core option. More recently, the product redesign became Plan B. And even choosing a spare chip is itself fraught with challenges if there are further supply issues.

The Omicron variant has led to the closure of a large number of factories supplying semiconductor packaging in Southeast Asia. Those factories reopened later, but delivery times may not adjust at the same pace as production ramps up.

In a way, manufacturers don't have a lot of incentive to shorten lead times and deliver earlier than originally planned, "because they prefer to make the order as accessible as possible," Giles said. He explained that this provides a sense of security that the order is in place for production.

Uncertainty drives such conservative planning, analysts say. "Everyone is on edge right now," Giles said, "so, I think the possibility of manufacturers shortening lead times is unlikely to immediately impact RFID product manufacturers. They don't want to catch themselves by surprise. Because of this caution, It's hard for us to know if the existing lead times are completely accurate. I think a lot of them are now just saying, 'We don't see new capacity today, so they're going to continue to offer longer lead times for new orders ."

There's also the question of how much inventory is still in transit, somewhere out of sight in the supply chain -- something RFID is designed to solve.

Additionally, some companies have placed multiple orders with different suppliers, meaning some orders may not be transparent. Over the past two years, RFID companies and other manufacturers have tended to transition from a lean inventory model to bulk ordering, which may have contributed to the oversupply.

The dawn of the dark end remains elusive, but the industry expects it to come from increased supply, not reduced demand, York said. "If something happens with interest rates rising, the economy slumping and demand slowing, then you might see a shift. But there's very little sign of that downward shift right now."

Giles believes that the RFID industry still has to struggle to compete with industries such as gaming and automotive for limited IC supply. "It depends on how much leverage you have to put yourself in the lead," he explained. "With all of these factors in mind, most indications are that capacity won't ramp up significantly until the end of this year or early 2023."

While almost all parties predict that the rest of the year will be difficult from a supply perspective, the RFID industry will play an important role in addressing these challenges.