Supply chain grapples with 'conflict minerals' regulations
African violence touches off red tape, bureaucracy
DETROIT -- Violence in the Democratic Republic of Congo and eight surrounding African countries has created a new layer of regulations for the U.S. auto industry regarding the use of certain raw materials from Africa.
While the industry's exposure to minerals from these mines is limited, adhering to the new regulations requires extensive research, collaboration and dollars, industry experts say.
A section of the Dodd-Frank Wall Street Reform and Consumer Protection Act, passed in July 2010, requires public companies to report direct and indirect sources of "conflict minerals" -- tin, tantalum, tungsten and gold, typically used in electronics -- in filings with the U.S. Securities and Exchange Commission beginning in 2014.
The U.S. government thinks the African minerals are funding several violent, armed regional groups who have murdered, raped and enslaved millions. Use of Congolese tantalum for electronics, including for vehicles, has been criticized frequently in the past decade by human rights groups. The disclosure rule is designed to expose to public scrutiny companies using conflict minerals.
The SEC said roughly 6,000 registered companies will be affected by the rules, but that will trickle down to tens of thousands more private companies that may or may not use minerals from Africa.
The auto industry began due diligence when the ruling was announced in 2010, said Tanya Bolden, program development manager for corporate responsibility at the Automotive Industry Action Group, an industry organization in suburban Detroit. But the industry couldn't develop reporting measures until the regulations were finalized Aug. 22.
The industry continues to enlist its purchasing and legal departments to identify mineral sources through the supply chain in preparation for public reporting, Bolden said.
"We're still creating awareness in the supply base," she said. "Companies can map down a few tiers (of suppliers), but this legislation is making them define it down much, much farther, and they can easily lose visibility (in the supply chain) before you get down to the smelter."
Besides the Republic of Congo, the other countries in the conflict area are Republic of Angola, Republic of Burundi, Central African Republic, United Republic of Tanzania, Rwanda, South Sudan, Uganda and Republic of Zambia.
But it's the cost and possible loss of competitive advantage that have suppliers worried, said Jeff French, audit partner at Grant Thornton LLP in Milwaukee and Midwest lead for the firm's conflict minerals services.
"The cost of compliance is just a really big issue," French said. "It's tough to predict the costs, and companies aren't always prepared to take on those extra costs."
The initial cost of compliance for U.S. companies is estimated at $3 billion to $4 billion, with ongoing compliance costing between $206 million and $609 million, according to the SEC. But the National Association of Manufacturers says the costs will be much higher -- $9 billion to $16 billion.
Mel Stephens, a spokesman for seating and electronics supplier Lear Corp., said while Lear does not directly use any of the materials, the supplier still must find its exposure among its own suppliers.
"We know we probably use some, but they're not materials we use at the top (of our supply chain)," Stephens said. "This industry has a long supply chain, so while (these minerals) are not used on our end, it's still a big process to find out all of the things that get supplied to us and what is used."
Other major suppliers, including Federal-Mogul Corp., Valeo North America and TRW Automotive Inc., deferred comment to AIAG.
The supply base is largely made up of smaller, nonpublic suppliers, and they fear that reporting to customers will cause them to lose competitive advantage, French said.
"Suppliers are doing things to be as cost competitive as they can, as efficient as they can," he said. "If you have to disclose some of those details to your customers, you worry that information could get out to the whole supply chain, which would be an issue from a competitive angle."
Large public companies have until May 31, 2014, to make initial filings on conflict minerals and small public companies have until 2016, according to the regulations.
French and Bolden urge companies to join one, or several, of the industry programs designed to address the issue of conflict minerals.
Ford Motor Co. has conducted a survey of its supply base and will require supplier content reporting to help Ford meet the regulations, Kristina Adamski, purchasing, supplier and legal communications manager, said in an e-mailed statement.
"The causes of conflict in the region are complex, as are global supply chains; we know that solutions to these challenges will not be simple," she said in the e-mail. "That is why Ford is working with multiple stakeholders, including in the automotive industry, to address supply chain concerns in a comprehensive way."
Ford is a member of the Public-Private Alliance for Responsible Minerals Trade, the Electronic Industry Citizenship Coalition's Conflict-Free Smelter Program, and others, to address the issue.
The electronic industry smelter program provides audits of smelters and refiners around the globe to ensure they are not using minerals from the conflicted region.
"If we are able to have visibility through the supply chain to the smelter and know that we're working with an audited smelter who doesn't do business in a conflict region, we have the ability to comply with the spirit of the legislation," Bolden said. "There are tools in place to comply; we just need to get everyone on board."
Minerals data management
AIAG also announced this month that it had collaborated with 24 member companies, including Robert Bosch LLC and Ford, to develop the iPoint Conflict Minerals Platform, a Web-based data management tool to help track the supply chain.
"It's clear that we cannot do what is required without the cooperation of the entire supply chain," Bolden said. "The resources throughout the supply chain are not the same, so it was important to develop common tools to create cooperation."
Mapping the supply chain has ancillary benefits as well, such as helping suppliers and automakers understand how to react to risk, Bolden said. For instance, it would help avoid shutdowns from disasters -- natural or otherwise.
"Companies have long known that what happens around the world does impact the business," Bolden said, referencing the 2011 earthquake and tsunami in Japan that crippled the supply chain for months. "The world is smaller now, and we do have to understand our business to a degree that we are able to respond responsibly and act, whether it's an armed conflict or a tsunami or a flood."
However, industry experts are worried the conflict minerals regulation is just another in a never-ending stream of new, expensive-to-comply government interference, French said.
Retail companies and manufacturers with revenues exceeding $100 million doing business in California are already required to report, under the California Transparency in Supply Chains Act, on whether their supply chain supports slavery or human trafficking across the globe.
"People are worried that there will be an expansion of these types of regulations," he said. "This could be the tip of the iceberg in terms of regulatory guidelines making sure their supply chain is meeting what any one government's standards of business should be."
AIAG is hosting an event, "Conflict Minerals: An Industry Briefing," on Thursday at its headquarters in Southfield, Mich. Go to AIAG's Web site, www.aiag.org, to register.
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