After years of preparation time, we’re now about a month past the effective date of the Restriction of Hazardous Substances (RoHS), a regulation which mandates electronics products sold in the EU need to be essentially void of six hazardous substances: lead, mercury, cadmium, hexavalent chromium, and PBB and PBDE flame retardants. Primary and anecdotal research shows that this is still a major problem, one that leaves electronics investors without enough information. A $30B problem The industry will spend $30B the next five years to address this compliance problem, our research shows. This conservative number is based exclusively on the U.S. electronics industry only, and an average 3% top line revenue spent to rectify the problem. In fact, this really affects global companies in the electronics supply chain, with some reporting spending greater than 6% of top line revenue to become compliant. The issue is twofold: - As a rough guideline, most electronics sold in the EU are affected, except those needed for national infrastructure, military, and some medical devices.
- All products that are not subject to RoHS but utilize electronics face a changing supply as upstream manufacturers change products and discontinue components.
Manufacturers exposed Based on in-depth discussions with electronics manufacturers, component suppliers, software vendors, service providers, and EU officials, we present a 360-degree view of the problem. Exposure is likely to come in three forms: - Revenue implications from the EU banning the sale of products
- Legal and branding concerns
- The reliance on compliance efforts of suppliers and partners
Unfortunately, the entire supply chain is still woefully unprepared, creating significant risk to investors. Very few products are fully compliant, and of those that are, product managers feel they cannot provide enough due diligence to survive the scrutiny of authorities. Most companies are still in the most rudimentary phase of compliance, collecting detailed materials information about their component parts. Software and information provider vendors agree their electronics customers are not prepared. When asking questions about their clients’ RoHS preparedness, companies overwhelmingly state that this has been an education and a work in progress, but no one is fully compliant. As a testament to the lack of preparedness, three well-known companies were recently in the news regarding RoHS: - Palm publicly stated that it stopped shipping the Treo 650 Smartphone to Europe because of noncompliance with RoHS.
- Apple recently pulled several products for sale in Europe because of RoHS. The list includes iSight, AirPort Base Station with modem, AirPort Base Station power over ethernet and antenna, iPod Shuffle external battery pack, and all versions of the eMac all-in-one desktop computer, according to the trade journal, AppleInsider.
- Last quarter, IBM had problems meeting demand for some of its servers; it changed its manufacturing processes and suppliers to become RoHS compliant
The investment community appears unaware Researching the past year’s annual 10-K filings, only 145 of the thousands of public companies even mention RoHS, let alone declare the issue as a material risk. With more than 600 public electronics companies in the United States, this does not appropriately alert the investment community. Remember, this simply is not affecting OEM electronics sales in the EU; all industries, from automotive to consumer products to retail, that utilize electronics in their products, regardless of where the revenue takes place, face a changing supply. None of the above companies—Palm, Apple, or IBM—list RoHS as a material risk in their 2005 10-Ks. Instead, companies use default language such as “environmental hazards may disrupt business.” Does this suffice? Without the specific mention of this law, how do investors know to ask about the preparedness of a law that can materially affect revenue, expense, and brand? Consider Sony: In 2001, the company had its PlayStations halted from entering the Netherlands because they contained too much cadmium, resulting in more than $110M in lost revenue. Interestingly, Apple issued an SEC document (14A) on April 14, 2006, stating: “Apple is on schedule for compliance with the European Union’s directive on the Restriction of Hazardous Substances (RoHS) by July 2006.” Who is prepared? This is a difficult question, considering 100% compliance with virtually any regulation is impossible because of time and cost considerations. However, there are many that treat the issue at a more senior level than others. Only Intel and Lucent list RoHS as a material risk in 10-Ks, and also submit a sustainability report to the Global Reporting Initiative (the GRI is an organization that collects reports on a company’s economic, environmental, and social programs, and currently has over 800 companies in its index). Fixing the problem Originally outlined in the AMR Research Report “Environmental Compliance: Assessing Product Exposure and Executing a Strategy for Readiness,” August 2005, fixing the problem requires the following: - Executive insight—Compliance needs to become part of the culture of a company and the manner in which business is conducted. Without executive sponsorship, companies will not obtain the appropriate budget or authority to invest and adjust processes as needed.
- Product design readiness—Products on the market that do not adhere to the regulations need to be redesigned. This can become a significant effort, as all levels of the supply chain and product reliability may be affected.
- Technology adoption—In order to create compliant products and adapt to changing legislation, technology to aid design, procurement, and manufacturing is needed. Ultimately, robust reporting is needed to prove compliance.
- Process readiness—Processes need to be examined and modified to ensure adherence to regulations. Examples of process modifications include part renumbering, supplier management, manufacturing processes, and repair management.
- Content collection—Company strategies to collect information on products vary dramatically. Many simply collect a yes or no from the supplier that a part is compliant with a given regulation. Some try to collect the full material disclosure of every item, and therefore have the flexibility to adapt to changing and future regulations. The most proactive will verify the content with a third-party testing facility.
More than RoHS A plethora of additional compliance mandates are affecting companies in the electronics supply chain worldwide. Understanding the regulations and tracking the differences add complexity, and those that assess processes and make the correct investments upfront can create long-term competitive advantages. For more information on environmental competitive advantages, see the AMR Research Alert article “Green Compliance: Yes, It’s a Competitive Advantage.”
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