Illusions of 'Conflict-Free' Minerals

The hubris over "conflict minerals" has resumed again. Several high-tech companies are being hailed as heroes that are "pioneering progress toward wiping out the use of conflict minerals," according to a Reuters report. The Enough Project's annual score card for electronics companies trying to cut out conflict minerals from the supply chain showed many Western manufacturers are getting top ratings from the industry body.

Perfect, clean, and 100 percent legally mined mineral materials from the Democratic Republic of Congo? That would be the day. Selfless electronics industry executives, sleeves rolled up, swatting away illegally sourced raw materials with the singular goal of saving the harried people of the Congo and its neighboring countries from horrible warlords? The tittering you hear is coming from a corner office somewhere in Silicon Valley, Tokyo, Shanghai, or Seoul -- but likely not from a tin-roofed shack in Goma.

Let's make one fact clear. There are too many realities and illusions surrounding the subject of conflict minerals depending upon where you sit in the electronics supply chain, in Congress, or on the ground in the Congo. These minerals include items like columbite-tantalite (used in making tantalum powder for capacitors), wolframite, and cassiterite; and a huge chunk of global demand for these products is supplied by the Congo, where most of the mines are either owned by or "taxed" by local warlords.

The US Congress included the matter of "conflict minerals" in the Dodd-Frank Wall Street Reform and Consumer Protection Act because it wanted to end the long-running wars that have ravaged the Congo region and resulted in the savage treatment of children, especially. However good its intentions, Congress has only waded chest-deep into an issue it barely understands and passed laws that, while looking good on paper, constitute a nightmare for folks on the ground mining the minerals as well as company executives trying to avoid a legal and public relations nightmare.

What has resulted is the farce of the Enough Project and other well intended but misguided efforts to either help the people of the Congo curb their decades-long civil war or keep Western companies' supply chains and consumer electronic products scrupulously clean of blood-tainted components. The report issued today by the Enough Project makes it clear that, while "leading electronic companies are making progress in eliminating conflict minerals from their supply chains [they] still cannot label their products as being conflict free."

Yet, the Enough Project gave at least four companies -- Intel Corp. (Nasdaq: INTC), Motorola Solutions Inc. (NYSE: MSI), Hewlett-Packard Co. (NYSE: HPQ), and Apple Inc. (Nasdaq: AAPL) -- high marks for being "pioneers of progress" and said these companies "have moved forward to develop solutions despite delays in the legislative rule-making process by the US Securities and Exchange Commission." It also identified electronics manufacturers described as "laggards" that are "standing out due to lack of progress and communication."

Before you tar and feather the companies proclaimed "laggards" by the Enough Project, understand this: You are most likely yourself an unwitting accomplice in whatever crimes are being committed in the Congo that propelled the US Congress to pass a law on the mining of the minerals. Furthermore, you may be as limited in what you can do to effect change as the companies that have been criticized sharply by everyone. You may be a laggard, yourself.

The conflict minerals are in our phones, tablet PCs, computers, and much other high-tech equipment. They haven't disappeared and won't, simply because Congress passed one law or a thousand laws. The companies that are described as being "in compliance" may have achieved the status as a result of several reasons, including that they no longer buy parts anymore from certain suppliers. They probably get certification from current suppliers who promise and "demonstrate" they are not buying raw materials from the "conflict region." But how deep into the supply chain can any company really go?

Here's why Intel and Hewlett-Packard received their hugely positive endorsement from the Enough Project:

Intel was the first company to publicly commit to making a fully conflict-free product within a deadline -- a conflict-free microprocessing chip by 2013. It has taken several other major steps under the leadership of Chief Operating Officer Brian Krzanich. Intel chairs the review committee for the smelter audit program, co-chairs the industry association work group on conflict minerals, has visited 50 smelters, co-founded a program with HP and GE to pay for smelter audits, and has visited eastern Congo to better understand how the company can have a positive impact.

HP has been active at multiple levels. When enough smelters are available it will require its suppliers to use only audited, conflict-free smelters. HP also co-founded the smelters incentive program. HP has been active by helping Congo develop a clean minerals trade, serving on the governance committee of the PPA, purchasing minerals from Congo, traveling to eastern Congo to see local systems firsthand, and being the most active corporate participant in a diplomacy work group on Congo. It also signed onto the multi-stakeholder group on strong SEC regulations.

These sound very good. In fact, it might work handsomely -- in the West. Think about how difficult it has been to get Foxconn Electronics Inc. to abide by Western labor regulations in China, and then multiply the problem a thousand times to get an idea of what is happening in the Congo. But let's make it even more graphical.

This is how the system works in the Congo and why getting 100 percent conflict-free minerals is impossible, impracticable, and delusional. Only certain areas in the Congo are designated "conflict zones." It's not the entire country. So, some companies operating in the same region are not conflict minerals producers. These might have been certified legal producers and freely supply the minerals to certified smelters. These are the ones Western companies patronize.

But this is in the heart of Africa where the impossible happens each day. The minerals produced in known conflict zones don't stay in the conflict zone; they can't be used there. They need to be turned into cash by the warlords who use the proceeds to finance their atrocities. These have developed and perfected backdoor smuggling channels to get their conflict minerals to the "certified zone" where they can get scrubbed and certified. Try identifying them after they've been processed into powdered form. It's not totally impossible, but who's going to pay the extra charges?

When integrating smuggled conflict minerals becomes too difficult or expensive, they are simply shipped to China, where they get certified, losing their trace to the conflict zone. So, Western manufacturers satisfy legal requirements, and the warlords get paid. Meanwhile, the mom-and-pop miners in the conflict zone get screwed because they don't have smuggling channels to get their tainted minerals to certified smelters.

They can't rely on Western inspectors either. No matter how many inspectors Intel and HP employ, locals know they can't rely upon them for protection. The inspectors don't live in the Congo, where the punishments for being a snitch were imagined and perfected in the reddest corner of hell.

Congress is the bumbler here. They never really understood what they were getting into. In the meantime, they've passed the Dodd-Frank legislation (which even the SEC is struggling to interpret and implement), left Western OEMs and suppliers holding the bag without a clear guideline, screwed up small raw material vendors in the conflict zone, and boosted the street value of the actual conflict minerals, because now the warlords must add smuggling costs.

However, Congress is happy it has done its moral duty, and you might be glad too that your next iPhone won't contain conflict minerals. Some Western OEMs have satisfied the law also and burnished their images with impressive reports from organizations like the Enough Project. And legal Chinese producers are happy they don't have to compete as fiercely with rivals in the conflict region. Life hasn't really improved, though, for the folks the law was meant to protect. It might, in fact, be worse.