12.28.2011 // Posted by: Tom Valliere // Posted in: Articles, Supply Chain

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In our October MarketEye article, in anticipation of progress at a scheduled October 18th SEC meeting, I had promised an update regarding implementation of section 1502 of the Dodd-Frank Economic Reform Act commonly known in our industry as the “Conflict Minerals Act.” This piece of legislation is intended to restrict the flow of funds to rebel groups in the Democratic Republic of the Congo (DRC) and adjacent areas of central Africa by requiring consumers of certain minerals to disclose their sourcing and usage of these minerals to discourage buying from rebel-controlled mines and areas. Today we will examine the outcome of that October meeting as well as an overview of the issues and how this legislation may serve to provide a platform for more robust origin information overall. Finally, at the end of this article, I have also included a reminder of the due diligence requirements of the RoHS recast directive.

October 18th 2011 Roundtable: A roundtable meeting with industry representatives was held at the SEC offices in Washington DC on the afternoon of October 18th. The meeting was organized into two panel discussions that somewhat overlapped:

Panel 1: What is covered by the rule and what steps will be required to comply with the rule.

• Scope of the rule including possible definition of terms in the rule
• Tracking the supply chain

Panel 2: What steps will be required to comply with the rule (continued) and reporting.

• Tracking the supply chain
• Form and timing of conflict minerals information and report
• Audit of conflict minerals report

Primarily the discussions functioned as a forum for industry to restate their longstanding concerns. The key areas of concern remain mostly unchanged from earlier meetings:

How to define manufacturing
De-minimus or minimum levels of concentration
OEM/ODM responsibilities
Transitioning/phasing in
What constitutes “due diligence”
Costs and qualifications of auditors

Fern Abrams, Director of Government Relations and Environmental Policy for IPC, an industry organization that has done an excellent job of tracking and reporting on this legislation, has published an excellent summary of the meeting. For a more detailed report of the roundtable I suggest you review Fern’s summary at IPC October 18th Panel discussion.

A recording of the entire meeting is also available on the SEC website SEC October 18, 2011

The outcome of this roundtable was inconclusive and the issues remain unresolved. As previously reported the legislation is problematic in several areas:

Costs and Guidance: Industry concerns over costs ( $7.9B), traceability issues and lack of guidance in several key areas including scope, timing and “due diligence” have now delayed implementation almost 12 months.

Unintended Consequences: Uncertainty over the finalization and inherent problems with tracking and control of these mineral elements have had the unintended consequence of actually reducing business for legitimate producers in the DRC and surrounding areas as mineral consumers move their sourcing to less controversial geographic and political locales.

Changing Landscape: The political mood in Washington also appears to be changing as we enter a new election cycle. Additionally improvements in the political environment, humanity and governance of the targeted areas may also render this act obsolete.

In that context, with the continuing implementation delays, resistance from powerful manufacturing interests, and uncertainty regarding implementation costs, it is the opinion of this author that this legislation may never be implemented.

That stated, the legislation is still active so the presumption must be that it will enact and we need to prepare for it. Additionally, there is an overriding need for more and better origin information and traceability in the supply chain so regardless of outcome of this particular legislation, industry efforts towards implementation are not necessarily for naught

Supply Chain Origin Information: This past April, I wrote extensively on the growing need for better origin information in the supply channel. I used the example of the devastating March earthquake in Japan and its uncertain impact upon the electronics supply chain to make the point that there are reasons other than legislated requirements to obtain and utilize this type of information.

Lacking access to a database with comprehensive origin information, most supply managers were unable to quickly assess the impact of the earthquake upon their extended supply chains. The resultant unpredictability certainly caused a reactionary ripple through the industry. We now see a repeat with the recent floods in Thailand

We cannot be in a continuous reactive mode. Regardless of the issue, natural disaster, political strife, or even shortages as experienced with rare earths, we simply need a better understanding of where our components and the raw materials for those components originate – as well as all value added processing steps.

The Conflict Minerals Act could act as the catalyst for an expanded traceability capability in the overall supply chain. The collateral benefits could extend far beyond the narrow scope of the act. This expanded origin knowledge could aid sourcing decisions as well as enhancing myriad tasks such as planning, risk mitigation and logistics including carbon optimization. Transparency being the enemy of counterfeiting, better origin data could strike at the heart of that beast as well.

It is Already Happening: Even with today’s uncertainty surrounding conflict minerals, the supply chain is already beginning to act. Many of us have received letters and instructions from our OEM customers requesting mine and smelter origin information usually in the reporting template developed jointly by the Electronics Industry Citizenship Coalition (EICC) and the Global e-Sustainability Initiative (GeSI) Conflict Minerals Reporting Template & Dashboard. Further, these requests usually require development of internal policies and procedures for managing the due diligence and reporting requirements likely to be imposed. As these types of requests tend to be non-negotiable, the requirements flow upstream until the entire supply chain is involved and working towards compliance. That is happening today. Even the 3rd party data provider companies that typically provide chemical content and component lifecycle information are stepping up their offerings in this area. As we already have the momentum, it would be relatively easy to leverage off of the conflict minerals requirements and look at the entire origins issue. I urge the service and tools providers to develop their offerings with this greater need and probable eventuality in mind.

Changing Gears – RoHS Recast: In a related regulatory area – related in that much of the burden also falls upon the supply chain - directive 2011/65/EU otherwise known as RoHS Recast has fundamentally changed the “due diligence” requirements necessary to support proof of RoHS compliance. No longer will it be sufficient to self declare compliance in the absence of objective, demonstrable, and sustainable data. CE marking of finished products along with a signed Declaration of Conformity and supporting Technical Documentation must be readily available for inspection by authorities empowered by EU member states. The DoC and Technical Documentation must be kept on file for 10 years and needs to be in a language - there are 23 official languages in the EU - that is easily understood by the member state authorities. Finished product manufacturers may appoint an “authorized representative” in the EU to keep the required information and provide it to EU authorities. EU member states have to transpose the directive into national law by January 2 2013 at the latest.

If you are a component manufacturer, contract manufacturer, supplier or manufacturer of raw materials, distributor, sub system supplier or manufacturer be prepared to provide objective evidence that the goods and services you provide or are provided to you by another supplier are RoHS compliant and that you have taken the necessary steps to document that series production is and will continue to be RoHS compliant. The links that make up the "Supply Chain” will be required to be constructed of objective, demonstrable, and sustainable data