Clock Ticking for Manufacturers as Court Upholds Conflict Minerals Requirement

As of last Tuesday, manufacturers are required to conduct a thorough review of their supply chain to determine if any “3TG” minerals—tin, tantalum, tungsten, and gold—are necessary to the production or function of their products.

Once that initial assessment has been made, companies must then determine if any 3TG minerals were sourced in the Democratic Republic of Congo (DRC) or several of the surrounding countries, resulting in a classification as “conflict minerals” under the law.

The intent of Dodd-Frank Section 1502 is to cut off the flow of funds to armed groups in the areas that have been responsible for years of atrocities, including murder, rape and the use of slave labor to extract minerals from the earth for processing and export.

The conflict minerals compliance guidelines will impose a significant reporting burden (and costs) on the part of OEMs and their suppliers.

In his U.S. District Court ruling, Judge Robert L. Wilkins rejected numerous arguments by the National Association of Manufacturers, the Business Roundtable, and the U.S. Chamber of Commerce, who claim that the rule violates companies’ First Amendment rights by forcing them to make disclosures that could potentially link their products and brand(s) to human-rights abuses.

Is your organization ready? Many manufacturers may have delayed their preparation for the first conflict minerals filing in the hopes that the requirements in Section 1502 would be overruled, or at the very least, watered down. Still others may not be sure where to even start. In either case, the May 2014 filing deadline is quickly approaching.

PricewaterhouseCoopers (PwC) recently published the findings from its survey of nearly 900 respondents, assessing the readiness level, concerns, and general understanding of the conflict minerals reporting challenge across multiple industries. Some of the highlights include:

  • 16% of respondents haven’t started gathering information
  • 32% are still in the process of determining the applicability of the rule to their products
  • 32.4% of the respondents believe that their first-year costs for complying will be less than $500,000, which is lower than many estimates
  • 56.6.% are unsure of the potential costs

The cost associated with data collection, reporting, and ongoing compliance is universally expected to be significant. The SEC itself has estimated that the first-year reporting efforts will cost all affected organizations between three billion and four billion dollars, with recurring annual costs thereafter in the range between 200 million and 600 million dollars.

The key driver of those cost estimates is the scale of effort required to gather and validate the data from the entire supply chain, beginning with the chain of custody from the mine to the smelters, and from there to the producers of the materials and components that go into the finished products. A single product could have hundreds or even thousands of different upstream suppliers.

The electronics industry association IPC has published its research findings on the estimated resource requirements and workload for conflict mineral compliance, saying that “EMS [electronics manufacturing services] companies anticipate a significantly greater first-year impact than other industry segments. The typical EMS company, as defined by the median figures, expects to spend more than 2,200 staff hours in the first year and 850 in the following year.”

What’s at stake? There has been some debate about the ultimate impact of this well-intentioned legislation. Reducing the flow of money to the groups that have extracted these minerals from the earth and processed them using slave labor may not curtail the violence that has raged for years in the region. And, the disappearance of revenue as manufacturers and their suppliers choose to no longer source their 3TG minerals from the DRC and surrounding countries could further destabilize the situation by stifling sustainable development in the region.

Enforcement of Dodd-Frank Section 1502 is another grey area. While some commentators indicate that the officers of an organization that knowingly misrepresent their conflict minerals information may be subject to shareholder lawsuits and/or SEC investigation, there are no specific fines or penalties attached to the Section 1502 requirements at this time.

Rather, the requirement of affected organizations to post their Form SD disclosure or Conflict Minerals Report on their company website for a full year is viewed as more of a “scarlet letter” or “name and shame” penalty. The brand impact of having your organization associated with the cycle of violence in the affected African countries could be severe with customers and shareholders alike. Nintendo has already been singled out by one activist organization, for being ranked “last among 24 major consumer electronics companies in steps being taken to address conflict minerals in their products.”

What can you do? Stay informed on the best practices for conflict minerals compliance, and begin mapping your supply chain, if you haven’t already done so.

Visit our Conflict Minerals Resource Center and subscribe to our Product Lifecycle Stories blog for regular updates, including manufacturer case studies and practical guidance on how your organization can address the requirements of Dodd-Frank Section 1502 as part of your larger supply chain strategy.

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Photo Credit: Mining32 by thehunter1184 on Flickr (CC BY 2.0)

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