RFID and China are, respectively, two of the hottest technology and business subjects to recently emerge. Much has been written about the explosive potential for growth and the exciting investment opportunities relating to each of these topics. I hope to offer some fresh perspective about RFID technology specific to its applications in China and along the way explore China’s role in the global technology development sector.

These days it is difficult to read a business magazine or newspaper without coming across an article about economic growth in China. And it is equally hard to browse the technology press without finding a pundit waxing lyrical about the potential for the RFID solutions market. These media phenomena are relatively recent and the subjects are certainly hot topics. However, each of these stories is actually based on fundamentals that are not particularly new or revolutionary in their nature.

Those of us who have worked in China-related businesses for a while look on with a certain amusement at the rebirth of “China Fever” which seems to be gripping investors and analysts alike. And so too, anyone who has worked with radio frequency identification systems used in transportation cards and keyless door entry systems will be long familiar with the basic technology that is now being applied to supply-chain and retail applications and taking the media by storm.

Radio Frequency Identification, or RFID, uses a small radio chip that is embedded into a card or label and carries information about the bearer, whether bearer is person or product. It has been used extensively in toll-collection, public transport and building security cards for many years and the key ability is to store and transmit information over the air without the need for battery power. This provides a relatively low cost form of digital information storage that can be written and read without the need for contact or direct line of sight. Hence it is often regarded as the next generation to magnetic strips which require swiping or barcodes which need laser contact and cannot be re-written.

This technology has captured the media’s attention because large retailers such as Walmart have decided that by asking suppliers to label pallets and cartons with RFID tags, they can get track their produce to much greater accuracy and visibility in a real-time environment.

So the Walmart RFID mandate announcement–and the similar activities of other retailers and suppliers who have followed suit–has two important implications. Firstly, technology vendors such as Oracle, Hewlett Packard and SAP–who have grown rich selling ERP and Supply-Chain Management applications and solutions to manufacturers, logistics companies and retailers–see a new market opportunity. They are scrambling to RFID-enable their existing software suites and introduce new product initiatives that make use of this new source of data capture. Secondly, consumer interest and privacy pressure groups, fuelled no doubt by the media’s imagination, express concerns about how big business will have a new way to compile data on unsuspecting consumers based on the transmissions of a tag embedded in a product, even after the product has been sold.

As is usually the case, both truth and exaggerated hype reside in each of these discussions. And as you might expect, there is a particular spin on each where China is concerned.

Walmart alone accounts for around 10% of China’s exports so mandates from the large retailers are an important issue for many a supplier of manufactured goods. The main competition for Chinese exporters, aside from each other, is multinational companies who are themselves manufacturing in China. The problem is that these suppliers have the option to tag their products stateside once the shipment clears the US or European port. So domestic suppliers are faced with the problem of either having to spend on RFID compliance in China, or rely heavily on distribution or logistics partners to comply in the retailer’s home country on their behalf. These supply-chain related services are becoming increasingly important to a manufacturer’s competitive advantage.

The unusual aspect of RFID in China is that in many ways the country is ahead in its use and acceptance of the principle technology and its applications. Millions of taxi, bus and metro passengers carry a transportation or “Jiaotong” card which can store prepaid credits and they find it a very convenient method of cashless payment.

Students now carry an identification card that transmits information via RFID and the scheme is being extended to the next generation of ID card for all China citizens later this year. And China has long been a pioneer of using Intelligent Transportation Systems that rely on RFID technology for vehicle registration and identification. The first of such systems was introduced in Sichuan province back in 2000.

This head start, combined with a civilian tendency towards cooperation with new government-sponsored initiatives, means that RFID faces few of the consumer obstacles that might hinder adoption in the US or Europe. As such, the barriers to implementation in the supply-chain are purely economic and based on the costs of tagging manufactured product packaging and setting up the infrastructure to scan them.

It is clear that widespread adoption of a technology in China requires strong government initiative and support. One of the things that I always find inspiring about working in China’s technology marketplace is the can-do attitude in getting things done when motivations are aligned in the right direction. And public security, customs, transportation management and the export supply-chain are all key issues to the current economic policy in Beijing.

It is for this reason that China has set up a RFID tag standards working group to report to the National Standardization Committee to formulate technology protocols and guidelines as to how RFID should be used in the commercial sector. Semiconductor companies such as Shanghai Huahong Semiconductor are busy developing tags that can be fabricated in China to supply both the domestic and regional marketplace and they offer a Chinese alternative to the multinationals such as Texas Instruments, Philips and Infineon. And Shanghai’s Fudan University is one of the six main labs that provide research and technical input to EPC Global, the main industry association for vendors and users of Auto-ID systems.

So, there is much to suggest that RFID has a good future in many applications in China. Both industry and government are pursuing initiatives to ensure that Chinese organizations are actively participating in the formulation of national standards and there is an extensive effort to ensure that auto-identification systems in China are interoperable with the rest of the world. However, as with any emerging “cutting edge” technology there is a debate as to how far China should participate as an early adopter.

Given the extensive costs for conducting trials, never mind full deployment, Chinese suppliers should think very carefully about how important RFID compliance is to their role in the global supply-chain. The reality of RFID is that even highly intensive IT users such as Walmart and Proctor and Gamble will not realize cost savings until mid 2005 at the very earliest. Adding service value to the supply-chain will be a major part of extending competitive advantage for China’s manufacturers and logistics providers. As China becomes the de facto country of origination for a majority of the world’s manufactured produce, the low wage advantage is an asset that every international supplier will enjoy. Extending fabrication and assembly to retail-compliant packaging services will be a new aspect of export competition and growth for both contract and brand manufacturers.