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The US Securities and Exchange Commission (SEC) finally issued its long-awaited conflict minerals rule in August, as mandated by Section 1502 of the Dodd-Frank Act. It requires companies to report to the SEC on the use of any “conflict minerals” sourced from the Democratic Republic of the Congo (DRC) and adjoining countries.
This is the region where a violent conflict has been raging for 14 years, claiming over 5 million lives. The four materials of concern — tin, tantalum, tungsten, and gold — are used in electronic components, jewelry, automobiles, and many other manufactured products. Investors have commended the SEC for issuing its rule requiring companies subject to SEC reporting (and their suppliers) to:
- Determine the origin of any conflict minerals present in their products
- Conduct supply chain due diligence
- Have a third party audit conducted of their due diligence
- File reports with the SEC every year by May 31 (first one is to cover calendar year 2013 and be filed by May 31, 2014).
Before deciding whether it was good or bad for electronics companies, let's look at why it took the SEC so long to issue the final rule. It issued a preliminary rule in December 2010, but didn't issue a final rule until August of 2012.
The rule was delayed due to the large number of comments and questions from affected parties after the preliminary rule was issued. A lengthy comment period was needed because the empowering legislation was an add-on amendment (section 1502) to the Dodd-Frank Wall Street Reform and Consumer Protection Act, rather than a stand-alone law. The usual process of proposing a law, forming a congressional committee, and obtaining input from affected parties was by-passed. The SEC was directed to issue a rule in an area for which it had little or no expertise, without adequate input from affected parties.
It was only after the SEC issued its preliminary rule and reviewed comments from affected parties that it was able to craft a workable final rule. To its credit, the SEC listened closely to affected parties and made necessary changes.
So is this rule good or bad? While nobody can criticize the intent of the rule, there is disagreement over how it will affect both industry and society. Two of the five SEC commission members voting on the final rule were so uncomfortable they voted against it. The two dissenters:
- Said they weren't convinced the rule would be effective in stopping the flow of funds to rebel groups committing human rights abuses in the region
- Expressed fear the rule would encourage illegal smuggling of mined materials out of the region, and that conflict region materials would then be mixed with conflict-free materials
- Said they weren't convinced that targeting manufacturers was the right approach in addressing this issue.
DRC government officials have long voiced concern that the rule could result in companies not buying mined materials from the DRC region. If that happens, it would make conditions worse in the region for those trying to make a living by mining.
So what's the verdict? I don't think anyone in the electronics supply chain is pleased with the legislation process that was followed by Congress or the amount of after-the-fact work that was needed to create a workable rule. Compliance will undoubtedly be a burden on industry. Regardless, if the final rule proves effective in stemming human rights abuses in the DRC region, I think it will have been worthwhile. What do you think?
I agree with your point that this rule circumvented the usual procedure. Perhaps if it had been vetted the same way most bills are, it would have developed differently. These add-ons are designed to sneak in under the wire of bigger legislation, and I agree the intent of this rule is a very good one. The devil is in the details.
Ken, I like the way you framed the conclusion of your article. Electronics makers and their suppliers and distributors may worry about the cost of implementing the SEC rules on conflict minerals but right now they are better off trying to figure out the best ways to comply. The die is cast, as they say. There's no going back at least not as far as anyone can see.
If regulators say jump, we complain, moan and try to define how high but eventually we jump.
Agree with comments that the rules and certainly the issue is here to stay just look at the news over the last week.
Congo calls for embargo on Rwandan minerals
http://af.reuters.com/article/topNews/idAFJOE88I00T20120919
Conflict free tin initiative announcement
https://www.itri.co.uk/index.php?option=com_zoo&task=item&item_id=2539&Itemid=177
The Initiative introduces a tightly controlled conflict-free supply chain using the iTSCi procedures of traceability and due diligence as the fundamental basis. So far, Royal Philips Electronics, Tata Steel, Motorola Solutions, Research In Motion, Alpha, AIM Metals & Alloys, Malaysia Smelting Corporation (MSC) and Traxys are committed to the Initiative which welcomes participation from additional companies. ITRI, the iTSCi field advisor and capacity building NGO Pact, and other partners will implement the required procedures in co-operation with Government agents of the DRC Ministry of Mines.
http://www.enoughproject.org/blogs/house-subcommittee-examines-rwanda%E2%80%99s-involvement-m23-highlights-us-role-ending-conflict
http://foreignaffairs.house.gov/112/HHRG-112-FA16-WState-NtandaN-20120919.pdf
Mr. Chair, as established, the current war that Rwanda is fighting in the Congo is not ethnic-based as suggested before but resource-based.
http://online.wsj.com/article/SB10000872396390444032404578006402881940258.html
“Nobody wants bad press, significant investors divesting or a lawsuit,” said Schulte Roth & Zabel partner Michael Littenberg. “There are a whole host of reasons for companies to take this seriously.”
http://www.independent.co.uk/news/world/americas/mitt-romneys-team-rocked-as-key-player-tim-pawlenty-walks-8160852.html
“but right now they are better off trying to figure out the best ways to comply.”
This could probably result in new companies that could provide the tracking services to control the origin of the materials and also provide centralised services to many semiconductor companies.
Rich the financial sector worldwide has not had the over sight needed as any prospective new rules have been met by intensive lobbying along the line off we do not need more bureaucracy or restrictions on free trade, any rules here will make it harder to compete with other foreign companies, outsiders do not have the expertise to know what to do, and we can be trusted totally to regulate ourselves.
We have had the exactly the same kind of tired arguments being trotted out over the conflict mineral debate and right back to the fight over slavery.
Elctrnx_lyf the new rules and the focus on the DRC supply chain will mean lots of opportunity for some firms that can come up with solutions to the problems.
Supply chain professionals have had a lot dropped in their laps but i think they are up to the challenge.
Well paintball is a bit old fashioned maybe something like this http://www.zombieevacuation.com/index.php
Brings a whole new meaning to a group hug!
Think every office has a few people you have to poke with a stick to see if they are alive, funnily enough they do not seem to like it.
I agree that the conflict minerals rule is here to stay. Nothing to do but comply.
Congress put the SEC in a tough position. The SEC couldn't have crafted a workable final rule without the valuable input they received from electronics industry representatives. I want to commend one trade group (IPC) in particular for their contributions.
For over a year I have been serving on two IPC conflict minerals taskforces. Our goal was to prepare “due diligence” and “reporting” standards that electronics companies can follow in complying with the conflict minerals law. IPC hopes to have these standards endorsed by ANSI/ISO for use worldwide, and to release them in early 2013. Thankfully we have an organization like IPC looking out for our industry, for providing needed input to the SEC, and for preparing industry standards to make it easier for companies. The legislation process followed may have disappointed us, but not IPC.
Ken thanks for your kind words and your participation. As everyone has said, while Congress had the best of intentions it is unclear what effects the law will have and that the SEC is to be commended for their efforts to make the best of a law that was not adequately considered, discussed, or vetted.
Regardless, we must now focus on compliance. In addition to the due diligence document Ken mentioned (and which we hope to finalize and publish by December), IPC has developed a summaryof the final rule and has scheduled two seminars in the next couple of months to explain the regulation further and ensure understanding. “Conflict Minerals Critical Issues,” will be held on November 1, 2012, in the San Francisco Bay Area, Calif.; and on November 14 in Chicago, Ill. For more information or to register for a “Conflict Minerals Critical Issues” seminar, visit http://www.ipc.org/conflict-minerals-seminar.
Speaking just for myself while i am not happy over some of the many concessions the IPC managed to get, the argument has to move on to making Dodd Frank work, as it is here to stay as is the issue of conflict minerals.
There is a real need for actions to be taken now with the present conflict in the DRC which has now spread to threaten the mountain gorillas.
http://phys.org/news/2012-09-dr-congo-conflict-endangered-mountain.html
Guess their plight might seem trivial compared to what is happening elsewhere in the region
http://foreignaffairs.house.gov/112/HHRG-112-FA16-WState-NtandaN-20120919.pdf
but why should animals have to suffer for our mistakes?
Can only echo Ferns prompting for people to get informed and there are plenty of sources out there.
http://prezi.com/_rahxrywggbg/elm-summary-of-secs-final-conflict-minerals-regulations/?auth_key=d2fa840c323b348fe7e22368f5fd87b83f7de24e
http://www.enoughproject.org/blogs/new-enough-policy-brief-making-sense-sec-conflict-minerals-regulation
http://www.globalwitness.org/library/artisanal-mining-communities-eastern-drc-seven-baseline-studies-kivus
http://www.eicc.info/CFSProgram.shtml
http://solutions-network.org/site-solutionsforhope/
and for a wider insight into the DRC's troubles.
http://congosiasa.blogspot.co.uk/
R.J. Sometimes half a loaf is better than non. It would be nice to get the kind of support for the folks in the Congo that this issue deserves but as you are quite aware business imperatives also tends to push back against some of these. While one isn't necessarily in agreement with the concessions granted the IPC, there have been gains to the region as a result of the passage of the Dodd-Frank bill. However, in the longer term vigilance on the part of monitors, companies and human rights activists will help achieve the desired goals.
One thing is certain, without some compromise on all sides the sufferings in that part of the world would have been greater.
Agree Bolaji not in anyone's interest to drag things out any longer so compromises had to be made.
Progress has been achieved just by the subject being highlighted and then industry starting to tackle it, even before the law came in.
Should be possible now to accelerate that progress, with all the various parties working together.
Roll on Rich's team building paintball weekend!
Bring manufacturing close to home. Along with transportation, it will bring ten more advantages.
Agreed if the transport medium by road is reduced, cost of logistics are bund to go high. And ultimately parts are going to get expensive. But truck driver's job isnt a fancy one. Its a hectic job with less pay. The risks are more.
In last few years i have seen something quite interesting happening in India as far as logistics and supply chain is concerned. With the advent of e-commerce in last decade and now it becoming a rage, these companies are building their own courier and postage network rather than relying on pre-existing private and public services. I do not know the real reason but i think tha better customer service, bit expensive but more reliable service and long term planning can be some reasons. I know that in US, FexEx and UPS etc are usually preferred for e-commerce services but not in India. I wonder whether any such activity is happening in other emerging countries.
Rather than bringing manufacturing close to home, i will prefer either manufacturing at low cost destination or at home because either reduce logistic and supply chain simple or keep it at low cost. A middle way can be of little benefit.
_hm, Sorry, a great deal of the manufacturing that's been transferred outside the United States and other Western nations isn't coming back but I do agree that high-end production may return as manufacturers consider their total cost, including logistics.
@Bolaji,
Anyway, that is good news even if all the jobs dont come back home. But as you said, the surge will depend on the production cost in the home country. Apparenty in the US, manufacturing jobs are coming home fast according to this article.
HH, we cannot say like that, Obama is trying his level best to bring back atleast some of the companies and to stop outsourcing. But again it may be for a short while still completing the next presidential election. Last week he also announced certain packages including tax rebate and exemption for native companies.
Bringing manufacturing closer to where goods are purchased would involve effort, and involve a lot of urban planning. Will phasing out the off-shoring logistics, with all its sunk costs, be more economical in the long run? The numbers indecate that this may be true.
_ hm – bringing manufacturing back closer may offset the transportation costs, but it may not lessen the total, longer-term costs, and that's still what will drive business decisions.
Himanshugupta – That's an interesting trend, thanks for sharing the news. Do you know which companies are setting up their own delivery services? Any high-tech companies? I'd love to look into and maybe do a story about it. Thanks.
Hospice – Thanks for sharing the link. I'll check it out. I tend to agree with Bolaji — I can't imagine all manufacturing will come back to the US, but rather some select portions within some industries could make it back onshore, if all the numbers and risk assements somehow come into balance.
Stochastic – I agree with you… there's a lot of pre-planning and urban redevelopment work that needs to be done before manufacturing can come back in any significant way. Also, there has to be tax incentives in place to bring businesses back to certain cities, and a relatively skilled and reliable labor force to employ. Doing this pre-planning work will be expensive initially. However, there are many blighted neighborhoods and cities that once had a strong industrial base that could benefit from some sort of private-public collaboration to re-establish manufacturing. The big hurdle will be fighting the “not in my backyard” syndrome… will local residents want a big chip production facility or a factory that makes metal casings for electronic devices down the street? Many hheavy industries were linked to health and environmnetal issues, and costs towns and companies a lot of money to clean up when they left before. Certainly there will people who won't want these factories back, or at least won't want them near their houses.
@Jacob,
“Last week he also announced certain packages including tax rebate and exemption for native companies”
Thanks, tax rebartes are good incentives. Hopefully, these good intentions and the job onshoring momentum will not slow down after the election.
Do you have the information on the cost difference between all methods. There must be breakeven points based on kilometers, etc between them.
Perishables and other products need a specific transportation method but others are more flexible.
Jennifer, the companies that i know are mostly local companies and involved in e-retail business. i do not think that you know any of these companies though they have been growing very fast and plan to hit 100 million USD business within 5 years. Some of the most notable are: flipkart, tradus, zabong.
@Mr.Roques, i think that rail-road is the cheapest for land/intra-continent transportation and shipping is cheap for inter-continental transportation. Though such mode of transportation are slow and might require extensive supply chain management. I am pretty sure that both organic and inorganic products are transferred but organic product require special attention and conditions so that they can be consumed at the destined place.
Inertia at all levels has to be faced, especially as our increasingly transient society makes involvement in local government less of a priority for ordinary citizens. On the other hand, there have been advancements in the caliber of professionals responsible for planning the growth and change of communities. I'm guilty of optimism here, but I think the few who are inspired may determine the course of change for the better on US shores.
” Many hheavy industries were linked to health and environmnetal issues, and costs towns and companies a lot of money to clean up when they left before”
@Jennifer: That's a very valid point. Unfortunately, when people are calculating the cost of a project or comparing two projects, they tend to ignore the social costs completely. In many cases, it may not just be an abstract cost – companies may have to pay for the damage to the environment out of their own pockets and that's a significant cost.
These are Indian online companies which are very much similar to eBay isn't it himsnshugupta ?
Jennifer I think it's good if all the companies do not come back to USA since then it will give the investors to diversify the market to other countries which will indirectly bring revenue to USA
@hash, these companies are as similar as apart from e-bay. I think, on ebay anyone can sell but these companies are more like amazon…online e-stores for very much everything.
HH, even I have the same thought. He is trying to do something before the election, but I don’t know how long such momentums will last. Once after the next year presidential election, wait and see on how much spirit he can take it further.
Ok I got it. It seems much clearer now but dont you think the process is the same still ?