Many Manufacturers Unprepared for Conflict Minerals Rule

May 7, 2013

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A new conflict minerals regulation is expected to affect more than 6,000 manufacturing firms and have a powerful ripple effect through the materials supply chain. Although the rule has drawn a great deal of attention, many companies have done little or nothing at all to prepare for meeting the new requirements in time.

According to a recent survey by IHS, an information and analytics service provider based in El Segundo, Calif., more than a third of electronics firms have not yet started working on compliance for the conflict minerals rule set to take effect a year from now.

As previously reported, the conflict minerals regulation derives from Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (H.R.4173), signed into law on July 21, 2010. The rule, scheduled to go into effect May 2014, requires manufacturers to report whether their products contain any conflict minerals – gold, tin, tantalum, or tungsten-based ores – used to finance armed conflict in the eastern Democratic Republic of Congo.

IHS surveyed 134 electronics industry managers during a webinar in April about their companies' progress on compliance with the regulation. Only 7.5 percent of respondents said they were well-prepared for meeting the regulatory requirements, and 35 percent said they had done nothing to comply.

IHS notes that tantalum, tungsten, gold, and tin “are widely used in the electronics market, in products ranging from cellphones to hearing aids, to pacemakers.” The firm estimates that every smartphone contains $0.15 worth of tantalum, which amounted to $93 million of the metal in smartphones in 2012.

Industry groups have mounted a legal challenge to have the rule struck down, and the case is set to be heard this month at the D.C. Circuit Court. However, Michael R. Littenberg, who heads the public-companies practice at law firm Schulte Roth & Zabel LLP, told IMT that his clients are taking compliance seriously.

Littenberg stressed that “even if the rules are burdensome, which for many public companies is undeniably the case, compliance is not optional.” Interestingly, Littenberg noted that even if the rule gets struck down by the courts, “I have many clients that still intend to implement compliance programs that are consistent with the rule's policy goals as part of their CSR [corporate social responsibility] commitment.”

The rule, which will be enforced by the Securities and Exchange Commission (SEC), only imposes a reporting requirement. Whether a company decides to actually eliminate conflict minerals from its supply chain is another matter, but advocacy groups hope that public exposure and companies' desires to be good corporate citizens will move them to make adjustments.

Scott Wilson, content solutions strategist at IHS, thinks that compliance might turn out to be easier than many expect. The minerals involved in the issue have to go through smelters, and those companies are starting to support compliance efforts. “Smelters are a good control point, and this simplifies how far back in the supply chain companies have to go,” Wilson noted. Nonetheless, he urged companies to get busy performing due diligence.

Wilson recommended four key areas to focus on when developing compliance strategies:

  1. Configuring management systems, such as materials requirements planning (MRP) and enterprise resource planning (ERP), to track relevant materials;
  2. Assessing supply-chain risk by identifying the suppliers most likely to be handling conflict minerals;
  3. Taking action by finding new suppliers, if current suppliers are not cooperating; and
  4. Auditing smelters for compliance – the Electronics Industry Citizenship Coalition can provide guidance for this step.
A company should start its compliance effort by forming “a cross-functional working group that engages different aspects of the organization,” not just finance but also such functions as “legal, procurement, supply chain, sustainability, public policy and investor relations,” Kristen Sullivan, a partner at Deloitte, told the Wall Street Journal. Such representation will help assure that all affected viewpoints are taken into account.

Moreover, it might not be enough to take suppliers at their word about their use of conflict minerals. “[T]he prevailing view is that the due diligence needs to be pushed down as far into the supply chain as necessary to determine the source of the conflict minerals that are contained in the company’s products,” Sullivan added. The process could require “going all the way back to the smelter or refiner.”

The conflict-free smelter program mentioned by Wilson might eventually help with this, but Sullivan said the program will not be fully implemented for a few years.

Before initiating a company-wide compliance effort, Sullivan recommends consulting the Organisation for Economic Co-operation and Development's (OECD) conflict-mineral due diligence guidelines as a good starting point. The OECD provides a five-step framework that will help a company get the right processes implemented.

Littenberg warned that time is of the essence in setting compliance in motion: “One piece of advice that I give to all companies is that you cannot wait for the court challenge to get resolved to begin your compliance efforts. For most companies, there is just too much work to do and that strategy will not give them enough time to do it.”

Sister-publication IMT Procurement Journal recently interviewed Bill Michels, president of ADR North America, about the conflict minerals issue:

[embed]http://vimeo.com/65221513[/embed]

 

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