Electronics manufacturing services (EMS) providers in many regards resemble OEMs – they design, assemble, ship and even support end products. But the distinctions between the businesses are extremely important, particularly when it comes to matters of compliance.
The conflict minerals provision of the Dodd-Frank Act, for example, requires manufacturers to disclose the use of tin, tungsten, tantalum or gold (3TG) mined in certain regions of Africa. In areas such as the Democratic Republic of Congo (DRC), mines are held by rebel forces that exploit workers and fund terrorism through the sale of ore. The Dodd-Frank Act, in essence, encourages publicly traded U.S. companies to avoid minerals sourced from those regions.
Sanmina Corp., a $6.37 billion EMS provider; also manufactures its own printed circuit boards, memory products, enclosures, cables and other devices. These products may be used in equipment Sanmina manufactures for its OEM clients. Although Sanmina can only control sourcing for its own products, it adheres to Dodd-Frank for customers as well. “Regardless if it is [our own] products or products we manufacture for customers, we are responsible as a manufacturer under the SEC rules to perform a country of origin inquiry and due diligence, if required, for conflict minerals used in anything we manufacture,” said Craig Hebrink, vice president in Sanmina’s global supply chain organization. “For customers, we provide the [conflict minerals reporting template (CMRT)] information we collect and consolidate from our suppliers.”
That’s a lot of data to collect and manage. “Sanmina operates a number of different types of businesses,” explained Gelston Howell, senior vice president, marketing, for Sanmina Corp. and 42Q. “The most familiar is the EMS, but we also have a PCB assembly business; Viking, which makes SSD and DRAM; enclosures, cables, backplanes, precision welded frames – we use a lot of metal. As an EMS we have a tremendous number of suppliers that we are engaged with and in turn they bring their own group of suppliers. Sanmina is often obligated to use component suppliers on the OEM’s AVL, so there are different aspects to how we handle our conflict minerals compliance, depending on whether we make the component internally such as a PCB, or purchase a component.”
Sanmina is not alone as a “middleman” in the supply chain: electronics distributors sell components and systems to their end-customers. Dodd-Frank only requires manufacturers – companies that sell products under their own brand — to disclose conflict minerals information. However, because of the volume of components and subassemblies handled by distributors and EMS providers, the compliance challenges are considerable. Many component makers, for example, provide conflict minerals information on their websites. EMS and distributors can direct their customers to that information, but most OEMs don’t want to compile data from hundreds of websites. So EMS companies and distributors collect conflict minerals report (CMR) information as well.
Sanmina’s CMR information-gathering process is continually evolving, explained Hebrink: the company has compiled its own data and has engaged third parties. In the early days, the lack of a standard CMR form was problematic for electronics companies. Now, “When a customer comes to us for our [conflict minerals] information they typically ask for the [Electronics Industry Citizenship Coalition] EICC standard CMRT form." The EICC promotes responsible practices in the global electronics supply chain. “The first time we filed [CMR], the first thing we did is identified which of our products might contain conflict minerals. Since we control the production of these products, that helped us drastically reduce the scope – we focused on the suppliers directly engaged with,” said Hebrink. “I would say less than half provide materials that might contain conflict minerals.”
Sanmina engages with hundreds of suppliers for its end products, and its extensive sourcing of metals means it pays strict attention to those suppliers. “We compile the information on the suppliers which we use for generating a separate CMRT—the good news is that the list of suppliers we have for materials potentially impacted by conflict minerals is relatively small," Hebrink continued. "We also tend to buy volumes of metals, such as gold, directly, so we are closer to the smelters. Therefore, it is easier to gather smelter information for those products. The companies that we are buying from also tend to be pretty advanced in terms of their conflict minerals programs. We do have control over who we buy solder from, for example. The solder manufacturers saw the [conflict minerals] issue coming before the mainstream companies so the solder guys have already gone through the process.”
“For our EMS business we are required to use the suppliers that our customers have designed in to their products,” Hebrink added. “We have limited ability to control [our customers’] CM compliance, if you will. We are not in the position to say ‘we can’t buy from supplier X based on their CM status.’”
More CMR to come
In spite of these challenges the electronics industry in 2015 had a very high compliance threshold – 89 percent of computer communications equipment manufacturers adhered to the SEC rule. Hebrink said the adoption of EICC practices and the development of compliance tools has helped with the collection of data. “There’s also the Conflict-Free Smelter initiative which helps identify smelter information -- that helps with due diligence,” he added. However, there are still segments of the supply chain that carry a compliance risk. “The biggest issue we have is not with electronics component suppliers as much as small mechanical device suppliers or small suppliers in general, especially outside of the U.S. and Europe. Some suppliers are not bound by CM reporting rules so collecting the information in their supply chain is not easy; or they don’t have sophisticated [IT] systems.”
The next challenge for the global supply chain will be conflict minerals legislation that is being developed by the EU and other regions of the world. The EU’s provision is likely to go beyond the U.S. requirements to include more raw materials and more areas embroiled in conflict. “Unless [foreign governments] are able to work with the SEC I think CMR will only get more complicated,” said Hebrink. “It will make things very difficult especially if they ask for different types of information.”
There’s also a question of just how much impact Dodd-Frank has had on sourcing practices. “My feeling is that at some level this legislation has -- probably to a 90 percent point or higher -- had the desired effect that [conflict minerals] is on the radar,” said Hebrink. “It is encouraging the supply chain to be cognizant.”
OEMs have a significant impact on influencing their supply chains, research finds. Based on a company's purchasing power and its due diligence performance, according to the Conflict Mineral Benchmarking Study RY2015, Apple, General Motors, Honda Motor, HP, China Mobile, Cardinal Health and Microsoft exercised the most influence in 2015.
“Companies are putting their cards on the table with their SEC filings,” said Dr. Chris Bayer of Development International, who conducted the study. “The best-in-class performers among them need to be recognized. In essence these companies are saying they can’t turn a blind eye to these armed groups. Now there is more than anecdotal evidence that establishes the link [of rebel activities] to 3TG.”