Valley firm has big plans for its tiny RFID chips
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Valley firm has big plans for its tiny RFID chips

-Jose Mercury News | August 31, 2005
By Dean Takahashi

Alien Technology likes to think both big and small. The company has built a semiconductor chip assembly factory in Morgan Hill that has the capacity to assemble 2 billion chips a year. In North Dakota, the company is building another factory that can produce 20 billion chips a year.

That's more than the 1 billion chips that Intel, the world's biggest chip maker, ships in a year. The reason Alien has such capacity is that its chips are a fraction of the size of Intel's.

They're tiny specks, about the size of ground pepper, known as ``radio frequency identification'' chips. These little tags carry an identification number and can transmit the data to a radio receiver, or reader, when they come within 30 feet or so.

Stavro Prodromou, chief executive of Alien, says the company needs that production capacity to fulfill the huge promise of RFID. The technology has been touted by Wal-Mart Stores and other retailers as the eventual replacement for the bar code and a way to keep better track of goods in transit. As a kind of license plate for billions of products moving through warehouses and supply networks, RFID will help companies like Procter & Gamble know where their products are at all times.

``We see the opportunity to make billions of things here,'' Prodromou said.

More than 500 companies are planning on using RFID tags for a wide variety of tracking purposes, beyond tagging warehouse pallets and cases, which is why Prodromou thinks he'll eventually need all of his production capacity.

Customers want Alien to bring down the costs of RFID tags from as much as 30 cents today to as little as a penny a piece over time so that retailers won't think twice about putting them on goods for tracking purposes. Alien is also making the readers that capture the radio signals sent from the tags and that retailers put in strategic spots such as loading docks. Each business represents about 50 percent of the company's revenues, said Keith McDonald, senior vice president of business development. (The private company does not disclose revenues.)

Tracking inventory

RFID tags have been around since the 1960s, but their prospects took off after the Massachusetts Institute of Technology convened a group in 1999 to study using them for inventory tracking. They had to sort out problems such as the limited range of the tags, their inability to scan through water or metal products, and how to gather and process information from the tags.

Wal-Mart announced plans to shift to RFID in its warehouses, and, in 2002, Gillette ordered 500 million RFID tags from Alien to start tracking its warehouse palettes of razors and other goods.

Getting that order and doing other early work helped establish Alien as a pioneer in RFID, said Reik Read, an RFID analyst at Robert Baird & Co. So far, Gillette still hasn't used all of those tags, and the market isn't all that big at perhaps 150 million chips a year.

But Dick Cantwell, vice president of the global value chain at Gillette, says the momentum is building behind RFID. Now his company has concrete results of the effectiveness of RFID in reducing lost or stolen inventory and increasing availability of goods on store shelves.

Research by the Grocery Manufacturers of America showed that consumers can't find the top 25 grocery items about 7.4 percent of the time. For the top 100 retailers, such out-of-stock problems result in $69 billion in lost sales a year, according to a 2002 study by the University of Colorado and the University of St. Gallen.

Cantwell estimates Gillette can cut operations costs as much as 20 percent in its warehouses with RFID. One store that used RFID tags was able to cut its out-of-stock items by 28 percent.

Leading this big change for technology in the supply chain is how Alien hopes to make money in a business that, if successful, may become the ultimate high-tech commodity. The company helped pioneer the standard for the second generation of RFID tags and is now preparing to launch the so-called Gen2 chips in the fourth quarter.

It expects a lot of competition from chip rivals such as Texas Instruments, Impinj and Philips Electronics. And there are a host of reader makers such as ThingMagic, Intermec and Symbol Technologies.

`Self-assembly' method

Alien's advantage lies in its roots. It was founded in 1995 by a former professor at the University of California-Berkeley, J. Stephen Smith, who is currently chief technology officer. Smith was trying to find a way to make cheap displays when he invented something called ``fluidic self-assembly.'' He licensed it from Berkeley and started Alien to put the technology to use for assembling billions of things. RFID seemed like the right application, and the company has raised more than $200 million to date.

Alien buys processed silicon wafers from semiconductor chip manufacturers such as ST Microelectronics. Then it separates those wafers into individual chips and submerges them into a fluid in its multimillion-dollar assembly factory in Morgan Hill. As they move through the fluid, the chips fall into place on a template. Then the chips are sealed in place with a thin film. Other automated processes then attach electrical connections and antennae.

This process enables the company to package 250,000 chips an hour. When the $40 million factory in Fargo, N.D., opens in 2006, its production capacity will be 3.6 million an hour.

Read said Alien will need every bit of that manufacturing capacity in a few years if the RFID snowball grows as expected. Wal-Mart and the Department of Defense have mandated their use.

If you add up all the pallets and cases that Wal-Mart ships in a year, it's probably around 5 billion, Read said. Adding all the other retailers and the number of RFID chips they might need every year becomes something like 30 billion.

``Their ability to make chips in large volumes becomes their differentiating factor,'' Read said. ``In the end, volume wins.''



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