The tag will be better in performance, not cost, said RSI chief executive Wolf Bielas.

RFID readers would be able to detect the new tag from a distance 40% greater than what is possible with existing tags, Bielas said. The tag would also be orientation-insensitive, or able to be read either horizontally or vertically. This means it can be slapped onto goods or pallets quickly, saving time, and therefore money, in the supply chain.

The tag, which complies with the latest Gen 2 standard, currently is being performance tested so RSI can back up its claims, Bielas said.

The company ballyhooing a performance tag is somewhat bold, given its peers have publicly undercut one another on price almost every other week during the past few months.

The goal for vendors is to capture as much so-called compliance business as possible. That is, companies that supply to retailers with RFID mandates, which is expected to drive RFID sales volume.

But RSI’s performance-not-price strategy may have legs. One of the world’s largest RFID users, Wal-Mart, which continues to rollout its RFID compliance mandates, currently has no penalties for faulty technology.

The retailer just demands its suppliers use RFID – it doesn’t enforce whether or not the technology actually works. As a result, Wal-Mart suppliers enquire about buying RSI’s defective tags (which RSI does not sell, Bielas said.)

RSI is betting on that changing, in about the first quarter of 2007. By then, Wal-Mart expects more than 1,000 of its outlets would be using RFID, thanks to more than 600 RFID-compliant suppliers.

At that stage, Wal-Mart’s reliance on barcodes will be overtaken by RFID. And performance of the RFID technology will become paramount, Bielas said.

He pointed to K-Mart, a pioneered in barcode mandates, which in 1993 enforced penalties for its supplies that used faulty barcodes.

Clearly, RSI wants to establish itself as a performance RFID maker early on. As the market matures, specialty capability will be advantageous, Bielas said.

Currently, the company is the only RFID-testing equipment maker in the country, Bielas said. Indeed, about one third of its RFID revenues come from sales of its testing gear. The company continues to plough R&D dollars into new test equipment, and benefits from internal use of its latest equipment before it is released to the market, Bielas said.

While RSI waits for demand from the compliance-driven market, Bielas said the company’s core closed-loop business customers, those that use RFID internally rather than in compliance-driven applications, will fill the void. That includes existing OEM, US Department of Defense and airport customers, he said. Non-compliance customers currently drive about 80% of RSI’s RFID tag volume.

Of course, RSI too is playing the commodity RFID tag game. Compliance business is important because it will drive a lot of volume in the long-term, Bielas said.

In late September, it announced a sub-15 cent finished tag in one million unit orders. For customers that commit to ordering about four million units per year or a two-year volume contract, the price per tag would drop to 9.9 cents by December 2006.

It must be noted that tag pricing in the US has caused confusion among mainstream media, which often mistakenly cites the price of an RFID inlay just one component of a finished tag as the full tag cost.

Inlays, which consist of an antenna and silicon chip, must be converted into a tag, a process that at least doubles the final price of a tag. Sub-15 cents in volume orders is the current low-cost watermark for finished tags. When publications such as Forbes talk about 7.9-cent tags, what they really mean is 7.9-cent inlays.

RSI’s Bielas said the majority of his competitors are selling inexpensive tags and components below cost, unlike RSI. Without naming rivals, he said some major vendors are selling cheap tags at roughly a 30% loss.

RSI can sell low-cost tags and maintain profit margins because it is the only company in North America that manufactures all tag components, except silicon, and is also a tag converter, according to Bielas. The Chula Vista, California-based company also has two manufacturing and assembly facilities in the US, which currently run at capacity, Bielas said.

But volume business is still key to RSI because it is the only way it can control its largest outside RFID cost: silicon. An RFID chip can cost be between 5 cents to 12 cents per tag, depending on frequency, performance criteria and volume, Bielas said. RSI can get up to a 40% discount on volume orders from its key Gen 2 silicon supplier, Impinj Inc based in Seattle, Washington, Bielas said.

Without the volume, RSI can’t lower its silicon costs, making it very difficult to compete in the compliance business.

The short-term roadblock that RSI and its rivals now face is the reality of customers holding off large purchasing decisions as they wait for the price wars to hit bottom.

Still, Bielas said RSI first received its first 25-million unit tag order from one of the top 10 Wal-Mart suppliers, which he declined to name, last September.

Privately held RSI, which has no venture capital financing, has been profitable since it launched in 1991, Bielas said, declining specifics. About 75% of its revenues are from its barcode business, which includes customers such as IBM, Hitachi, Hewlett-Packard and Matsushita.

Bielas hopes to convert some of its 70-plus Fortune 500 barcode customers into its RFID business, which makes up the remaining 25% of RSI revenues.

In total, RSI saw more than $10m in sales last year and Bielas said he plans to grow that to more than $100m during the next five years. To achieve that, he’s banking on the market maturing and customers demanding performance, not just price.