Last June, the EU’s environmental testing law for the chemicals industry—Registration, Evaluation, and Authorization of Chemicals (REACH)—went into effect. The main objective of REACH is to improve the protection of human health and the environment from any chemical risks, while maintaining and enhancing the competitiveness of the EU chemicals industry. REACH is estimated to cover about 30,000 substances. The actual downstream uses of these substances can run into the millions, representing a massive data acquisition and tracking undertaking for any company required to register their chemicals inventory with the EU. In fact, survey participants in a 2007 AMR Research study on innovation in the chemicals industry indicated that the amount of products affected by REACH will only increase in the next three to five years. 
Under the REACH directive, anyone manufacturing or importing hazardous substances into the EU must register and communicate information on chemical properties and the safe uses of chemicals up and down their supply chains. The key constructs of the directive require that companies register the products they intend to import into the EU or produce with the European Chemicals Agency (ECHA). This alone directly affects the roughly 30,000 chemicals used in the EU today. The specific information gathering requirements and registration deadlines that occur thereafter will vary depending on production volumes (measure in tons per year) and potential risks. Once registered, substances must then undergo evaluation and authorization by EU authorities. Chemical companies are also now expected to track the downstream usage of their products. At the onset REACH appears to be isolated to the chemicals industry. The long-term ramifications and effects of REACH, however, will be felt in any industry that is reliant on chemicals to manufacture and deliver their own products. It’s the chemicals consumers who are at risk in the future Participants in the 2007 innovation study largely agreed with statements about REACH’s potential impacts on pricing and data integration. However the same set of respondents in Figure 2 below didn’t agree as strongly to statements concerning the dimensioning of REACH’s impacts beyond their direct customers. In fact several of the companies that AMR Research has spoken with individually about their REACH strategies have indicated they have largely dimensioned the directive’s potential impacts only one step up and one step down in their supply chains; not taking a broader perspective. 
Entire product lines and supporting pricing scenarios could be subjected to redesign based on costs and material availability as chemicals companies must now determine whether or not certain downstream usages should be approved or not. This places adjacent industries such as automotive, high-tech, and consumer products—all of which rely on the chemicals industry to manufacture their own products—at risk with REACH. According to “The Hidden Backbone of U.S. Manufacturing,” in the United States alone, 55% of the companies surveyed indicated direct dependence on the chemicals industry for inputs to their products. Within the food, medicine, and other process industries the percentage is even higher. Nearly 75% of firms in the process industries have a direct dependency on chemicals as manufacturing inputs. Now imagine what happens if a critical supplier discontinues a certain product. Not only must alternate supply routes be identified, but ongoing product innovation and the ability to fulfill customer demand are also put at risk. Additionally, 90% of U.S. manufacturers said that replacing their current chemical supplies with alternative materials would be either too expensive or technically infeasible. The risk of mark-up scenarios for what now would be considered scarce commodities by chemicals companies looking to push the costs of product registration onto their customers could effectively price some products right out of the market. As chemicals companies sift through their product inventories, they must weigh the registration cost per substance against its overall profitability. If a company sees a profit per year on a chemical or substance that is less than its potential registration costs, it just might not be financially feasible to register a substance that carries a minimal revenue return. It is expected that as a consequence of weighing the tradeoff of registration costs versus profitability that some product development (and overall product) lifecycles will be at risk, and ultimately certain substances might be removed from the market until safer alternatives are found. Furthermore, the risks of discontinuing production of a substance might result in other risks, such as price/cost increases for last-minute buys on soon to be hard-to-find products or risks that can directly affect brand presence like the emergence of black markets for discontinued products. Also, for companies that are choosing to discontinue the manufacturing of a product must still understand the disposal costs associated with these noncompliant inventories. Chemicals companies under $500M in annual revenue stand to experience potentially serious disruptions as consequence of the cost-versus-profitability factor of REACH. These companies, according to the 2007 study, are leading innovation in the industry, having introduced 45% of the new products in the past two years, versus the 30% of new products introduced to industry by firms with more than $1.5B in revenue. These midsize companies, already hamstrung by cost cutting and pressures of competing in a global economy, must now grapple further with the tradeoffs of costs versus bureaucracy as scarce resources from multiple parts of the organization will be consumed for the registration process. Not to mention that the resources need to find new ways to increase savings while driving service-level improvements through business process innovation and ongoing IT consolidation. It’s not just downstream manufacturing industries that stand to be affected either. REACH will ultimately extend into the apparel and retail domains. End consumers will further exercise their right to know what chemicals are in the substances they choose to buy and command more complete descriptions of what is in their chosen products. Independent retailers and private organizations with powerful supply chain positions are placed in the position to take action on chemicals of concern, seeking to screen them from their supply-chains as part of their broader sustainability initiatives. For example, in October 2007 Wal-Mart announced its plans to promote the use of preferred ingredients in detergents and other chemical-intensive products it sells, such as cosmetics and other health and personal care products. Now manufacturers must not only be cognizant of whether or not they are accepting approved substances from upstream entities, but also of a retailer’s ability to control brand influence on the end customer. Downstream industries can stay ahead of the curve—and also help their chemicals suppliers—by creating industry guides of substances and their suppliers. This means coming to agreement on necessary common data elements and creating standard reporting and data exchange formats to communicate product usage upstream to suppliers. For example, in the automotive industry, the AIAG has established a working group to develop an automotive industry guideline for REACH. Industry consortiums can ultimately help the chemicals manufacturers grappling with what to register better understand true demand. Chemicals companies: even if you’re in the game, how do you plan on staying on the field? While REACH was formally enacted in 2007, June 1, 2008 marks the first significant deadline as pre-registration commences. The pre-registration phase of REACH will lay the groundwork for future registrations of chemicals and substances. Registration must contain information on exposures and risks in downstream uses of substances and preparations. Formulators, manufacturers, and importers of chemicals in the EU—as well as firms that market and sell their chemicals into the EU—must electronically submit dossiers containing the following, per substance, to the ECHA: - Tonnage bands—Production volume per year by ton
- CAS numbers—Unique identifiers for chemicals substances (and other substance identifications)
- Registration deadlines—Which specific registration deadlines, which span out to 2013, the substances (based on production tonnage per year) are expected to meet
The main objective of the pre-registration period is to start the sharing of data between multiple registrants, where possible, in order to reduce unnecessary testing and other costs for the industry. While cost reductions are always attractive, the chemicals companies that pre-register will truly gain fast-mover advantage by securing their suppliers and protecting client relationships. REACH requires a closed loop of information flow from customers back upstream in order to ensure that substances and preparations used in products are properly registered. This creates the opportunity for potential differentiation among the competition through value-added services that would help a company’s downstream consumers that don’t understand the data or cost ramifications associated with it. In fact, 83% of the firms surveyed in the 2007 chemicals innovation study view offering new services as an opportunity to innovate in the face of burdensome REACH compliance efforts. The (long) journey is just starting Companies that are behind the eight ball with respect to dimensioning the effect of REACH on their supply chains and compiling their chemicals inventories for submission to the ECHA will find themselves in a difficult position and should take the following actions today: - List every chemical substance your firm either purchases or sells.
- Assess the hazards of these substances and understand whether or not they have to be registered.
- Assess the costs of registration and understand whether or not those substances or products will still be profitable and competitive after registration.
- Examine your position in your supply chain and communicate with your suppliers and customers to understand their needs and plans. Specifically seek to understand what substances they will be registering, and what their needs will be with respect to data sharing, collection, and shipment tonnages. Also understand for your suppliers, specifically, their registration timeframes if raw materials will either disappear or become more expensive.
REACH comes at a time when the fiercely competitive chemicals industry is facing the need for increased joint-value creation and higher economies of scale because of increasing commoditization, shifting global demand and competitiveness, and lack of product innovation. Burgeoning regulatory compliance initiatives like REACH only complicate matters, yet also point to the need for increased strategic planning. REACH can cost a company anywhere from $60M euros to $550M euros over the next 11 years. That financial risk alone doesn’t cover the IT risks and ramifications, which likewise cannot go ignored. While it’s easy to point to technology to increase automation, remove manual processes, and even compensate for the looming brain drain in the chemicals industry, REACH can complicate IT architectures for some chemicals manufacturers—many of which have multiple IT systems housing the necessary data required for REACH compliance. The need to track and trace product usage throughout the downstream value chain will only further exacerbate master data and product specification issues—not to mention intellectual property and security ramifications. If you thought chemical engineering was a daunting job, imagine being an enterprise architect. IT support for REACH initiatives will drive companies to re-examine their competencies in product development, data maintenance, business process innovation, and documentation. This only creates a massive opportunity for environmental health and safety (EH&S), product lifecycle management (PLM), ERP, and supply chain management (SCM) vendors, not to mention services firms. Part III of this series will explore these issues specifically, and identify the technology options for both imminent and long-term support. In the meantime we recommend the following research:
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