Avery Dennison bets on boost by Motorola partnership.

RADIO frequency identification devices have been the next big thing in supply chain management for several years. Now Avery Dennison Corp.'s RFID business may finally be ready to take off after years of sluggish growth.

The Pasadena-based label maker is betting that a strategic partnership with wireless communications giant Motorola Inc. will jump start a business segment that has so far failed to generate profit.

Avery Dennison is one of the leading makers of supply chain RFID tags--virtually paper thin chips-on-a-label that allow products to be tracked without bar code scanning devices. Instead, the tags emit frequencies that are picked up remotely by readers made by Motorola and other manufacturers.

The technology has been adapted for a variety of purposes, including key cards and library books, but their use in supply chains has been limited because the relatively costly labels that are attached to shipped packages are generally often thrown away after just one use.

"You're seeing two major brands in the industry coming together," said Michael Liar& RFID research director for ABI Research, a firm that analyzes emerging technology markets. "I think that relationship is significant."

Under the agreement, Avery will provide finished tags--which consist of a small microchip provided by a supplier, an antenna and packaging--for Motorola customers. The two companies also have a cooperative marketing agreement through which they will share client referrals.

The agreement is expected to strengthen Avery Dennison's stature as one of the top three tag makers in the country, while allowing the Schaumberg, Ill-based Motorola to focus on its readers and eventually move out of tag manufacturing, which has become more of a commodity business.

It also follows a recent approval Avery Dennison received from the Federal Trade Commission to move ahead with its acquisition of Paxar Corp., a leading maker of RFID tags for the retail and apparel industries.

"We are still in a net loss position as the business is growing," said Bob Cornick, Avery Dennison's vice president and general manager of RFID. "I think it is an important step forward for both firms."

Unfulfilled promise

The Motorola agreement comes as the industry appears ready to take off after years of promise and incremental growth. The first modern incarnations of RFID were developed in the early 1970s, but RFID did not achieve any sort of commercial 1990s.

Then in 2003 the industry got a big boost when Wal-Mart Stores Inc. began using RFID tags to track inventory. Though the labels are catching on with other big-box retailers such as Best Buy Co. Inc., there are still only an estimated 1,000 to 2,000 companies that use RFID in supply chain management.

It's estimated the entire RFID market, including tags for clothing and other retail goods, amounted to just $2.3 billion worldwide in 2006, while the supply chain end was less than $450 million. But analysts predict that the supply chain market will grow by as much as 50 percent in the next five years--with that growth largely a factor of label cost.

Several years ago, the labels cost upward of 50 cents each. But advances in technology and manufacturing have helped push the cost of general use tags to as little as 8 cents each.

Still, Marc-Anthony Signorino, director of technology policy at the National Association of Manufacturers, said many retailers are waiting for a label that costs no more than 5 cents--what he calls the "Holy Grail" of RFID.

But even with prices still hovering near a dime, Signorino said there is a growing interest in the technology. The number of companies willing to switch their inventory tracking method to RFID is "going up because a lot of companies are finding value in it," he said.

In a speech at an RFID conference earlier this month, Rollin Ford, Wal-Mart's executive vice president and chief information officer, said the company plans to expand RFID capabilities to 400 additional stores by the end of the fiscal year. Ford lauded the technology, citing a reduction of excess inventory and a 30 percent reduction of out-of-stock items.

Growth potential

Avery Dennison entered the business in 2003, and has not released exact sales numbers for the business. But Cornick did say that annual sales are in the "tens of millions" of dollars.

The company expects business to grow as costs for the tags are lowered, and more corporations adopt them, especially after the adoption of a "Generation 2" standard in 2006 intended to improve performance, reliability and security while simplifying design and the ability to withstand harsher environments.

"I would expect almost all commercial enterprises in America and Western Europe to be using RFID within a decade," Cornick said.

And though the Generation 2 standard means that tags made by any of the industry's dozen or so tag makers should be able to be read by any reader maker, Avery Dennison and Motorola plan to optimize their tags and readers so customers buy them together.

"We're working together to develop a robust, complete solution," said Philip Lazo, Motorola's vice president and general manager of RFID. "Customers don't have to worry anymore about reliability issues."