Compliance Lagging on 'Conflict Minerals'

Electronics manufacturers have a long way to go before meeting the requirements imposed by regulators for the use and production of conflict minerals, according to a new research report from industry watcher IHS Corp.

The research firm said up to 90 percent of electronic companies "have not produced the data, declarations, or documentation that will help fulfill regulatory requirements detailing the presence of such minerals in their supply chains." IHS added those minerals -- including tantalum, tungsten and gold -- that are used in the production of a wide range of electronic equipment and are heavily mined in war-torn parts of Africa, with proceeds furthering the conflicts (hence the term "conflict minerals").

US regulators have taken steps over the last two years to end the use of minerals produced illegally in places like the Congo and have succeeded in imposing strict rules on both the suppliers and end-customers of the raw materials. OEMs and component suppliers must now certify the sources of such minerals used in their equipment and offer proof that they were not patronizing illegal miners. The rules are enshrined in Section 1502 of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act. A final ruling on the implementation of the Dodd-Frank Act was issued by the US Securities and Exchange Commission in August.

While suppliers and their end-equipment maker customers still have almost two years to achieve full compliance, industry organizations like IHS have been busily tracking compliance levels. Since the rules have been in effect for quite a while, it had been expected that manufacturers would be further along in scrubbing their operations of these products. At the very least, they were expected to demonstrate and be able to provide documentary evidence showing a higher level of compliance.

"Large electronic original equipment manufacturers (OEM) use tens of thousands of parts that must be examined to determine their conflict mineral content," said Rory King, director, supply chain product marketing at IHS, in the statement. "The next 19 months really is not very much time to communicate, collect, analyze, and prepare information on mineral sources across a globally diverse, multi-tier value chain, in order to determine conflict minerals content and develop reports that comply with the SEC rule."

The IHS report represents another black eye for the industry. Leading industry associations such as the IPC lobbied the SEC and politicians to grant electronics manufacturers additional time to achieve compliance. The IHS report seems to imply manufacturers are either not too concerned about the implications of the SEC guidelines or believe they still have adequate time to comply with the requirements.

The researcher said its investigations show only 11.3 percent of the companies polled had information available on their use of conflict minerals. The group represented companies that "account for 17.1 percent of active electronic components on the market." IHS said further:

Utilization of conflict minerals is widespread in the electronics market, employed in all kinds of products, from cellphones to hearing aids, to pacemakers and jet engines. For example, IHS estimates that $0.15 worth of tantalum -- a conflict material -- was contained in every smartphone shipped when Dodd-Frank was originally signed in 2010. In 2012, this would amount to $93 million worth of tantalum in smartphones alone.

The number of companies affected by the SEC guideline on conflict minerals is immense. Up to 6,000 companies may be directly affected, with another set of companies (numbering in the hundreds of thousands) indirectly affected either as suppliers to the initial group or as support services providers. This could hurt the electronics supply chain if the SEC starts enforcement when the industry isn't prepared to demonstrate compliance, IHS said.

"IHS has been gathering information on conflict minerals for more than two years," said Greg Wood, director, product management for IHS, in the statement. "Our conflict mineral data is not based on a survey or estimate, but rather was developed using data provided directly from companies, including environmental declarations, part descriptions and compliance documents. IHS has led the way on conflict minerals and has begun to incorporate conflict minerals documents, declarations and descriptions into our innovative solutions."

That's the scary part. If the IHS numbers are not based on estimates and represent actual figures showing the level of industry compliance, all segments of the electronics supply chain could be in for a rough ride over the next 18 months as companies tighten compliance requirements. If OEMs -- waking up to the legal jeopardy they could face from regulators -- suddenly require documentation on conflict minerals from an unprepared supply base, their entire operations could grind to a halt.

While the regulatory deadline may be important, companies could also face challenges from continuing efforts to remain compliant with the conflict minerals guideline. By setting up and testing the processes for compliance now, companies can ensure their system and operations remain in constant compliance with regulatory requirements. Their public image and the bottom line could be hurt if they can't continue to maintain compliance.