MarketEye: Catch the Wave—The Coming Onslaught of Environmental Regulations and Their Impact on the Electronic Industry

06.15.2010 // Posted by: Tom Valliere // Posted in: Articles, Supply Chain

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Last month I talked about the “greening” of the supply chain and the challenges of managing the huge amount of environmental data necessary to meet even the current minimal content reporting requirements. Today, I am going to expand our discussions beyond the supply chain and content reporting to examine the bigger picture and how current and proposed environmental regulations are likely to affect not just our supply chains, but our very products and the infrastructure used to manufacture and distribute them.

Rather than a single event or a point in time, these regulations are in motion, rapidly evolving and coming at us from all directions. My partner Ken Stanvick likes to use the image of a tsunami to describe the overwhelming number of environmental requirements rushing in — sometimes with little warning and from distant shores. Pamela Gordon, president of Technology Forecasters Inc, amplifies on this thought. “I like to think of the challenge facing all of us to strategically prepare for environmental requirements as yet another fiercely competitive element of excellent supply-chain management. It’s not as much surfing treacherous waves as building a strong infrastructure with insights into the future and with unwavering executive support.”

I agree with both. There is a tidal wave of regulations heading our way and our only path forward is to address the issue strategically and not reactively as we have largely been doing as an industry.

How big is the problem? Below is a chart from Compliance and Risks Ltd a company that provides global environmental tracking services. The data from 2002 through 2009 shows the enacted, known and pending legislation and does not include company-specific requirements that are being imposed in addition to the government mandated or legislated requirements. The graph clearly shows the exponential nature of the requirements. Projected over the next 5 years, it shows the folly of attempting to adddress each instance and new regulation or category as a single event or in a reactionary manner.

It is not only the sheer number of regulations coming at us that is a cause for concern, but also their ever-widening scope. Going far beyond the original Product Targeted Environmental Regulations (PTER) like RoHS, WEEE and REACH, these additional requirements further burden your supply chains and ultimately every facet of your business. What are some of these requirements?

Carbon, Green House Gasses (GHG) and Energy: Really, multiple sides of the same coin, these issues continue to drive regulatory behavior including mandatory caps, carbon or energy taxes, credit trading, and other behavior modifying tactics. Much has been written about this subject even in this column. Suffice to say, energy usage and conservation will continue to grow and affect our enterprises. Some of these will be product targeted such as EPEAT and Energy Star, others like LEEDS will impact our facilities and business models. It is reasonable to expect an ever increasing regulatory burden will be placed upon any business activity that consumes energy – and that is practically everything.

Not just the environment: Increasingly social responsibility issues are making the headlines and are becoming regulatory targets. We are all familiar with sweatshop conditions in emerging countries through well publicized articles beginning with clothing and apparel manufactures and ultimately migrating to our business as we have moved offshore. Voluntary attempts to rectify these conditions have been implemented by industry and trade associations. Much emphasis has been placed upon the Electronics Industry Citizenship Coalition (EICC) and their Code of Conduct. Members include industry giants HP, Dell, Apple and many others. However despite their efforts and successes, issues still remain as evidenced by the recent spate of suicides amongst workers in China’s southern provinces. There is an increasing likelihood that remedies may migrate from voluntary compliance organizations and standards to legislated and mandated regulations.

Conflict Minerals Trade Act (HR4128) Primarily targeted towards human rights violations in the eastern Congo, this bill would require greater transparency and accountability from those companies whose products contain mineral ores or their derivatives from this or other designated regions. This bill would require determination of the mines of origin for processed materials and raw material imports. It would further require verification of the chain of custody (supply chain) through audit and investigation. How to establish this traceability through the supply chain is problematic, but the certainty of additional requirements along these lines is absolute.

Needed - A new Approach.

Several years ago, a senior executive at a semiconductor company was complaining to me about poor forecasting at my previous company. His words have remained with me through these years. He said, “Tom, the only way I can run my business and satisfy your demand is to look backward. I feel that I am steering my ship by standing at the stern and watching my wake.”

I thought at the time the example was extreme, but in retrospect find it was not only a reasonable tactic (our wildly fluctuating forecast had a way of being fairly stable over time) it was remarkable prescient in its accuracy for his planning purposes.

I am certainly not advocating that we all look backwards to see where we are going, but there is a value in analysis of where we have been as it can be a predictor of where we are going.

I bring this up because many clients and companies have come to Design Chain Associates asking how they can get ahead of the curve and become less reactive regarding environmental issues. They are stymied in their planning processes and are largely reacting to customer demand, changing regulatory landscapes and most of all – fear of the unknown. Lingering deeply within their subconscious is the fear that they are overlooking something; that their new product might be obsolete or require significant alterations before planned introduction or end of life, or that their budget or manpower resources are inadequate for dealing with unforeseen new requirements. Most of these companies have already had unpleasant experiences and they are anxious to move to a more predictive path.

To continue to react to each new regulation and iteration and treat them as a separate event is not economical or even sustainable. What is needed is a new approach to set us upon a sustainable path of predictability.

Getting Proactive. To address these issues, my company has partnered with Pamela Gordon and her team at Technology Forecasters Inc to develop a program that allows our industry to become less reactive by projecting the trajectory of these environmental requirements forward. We have developed a methodology we call Design for Environment Process Integration Roadmap or DPIR. Using our presence within the various policy making groups, analyzing past directions and evolution, and utilizing our vast experience in environmental matters, we find we can derive a very accurate 1 to 3 year trajectory for these regulations. Further, we find we can project a 3 to 5 year roadmap with sufficient accuracy to allow for budgetary and planning actions. By combining and updating on a regular basis, we can give a very accurate rolling peek into the future.

Let’s look at a few of these trajectories and see how this works.

Granted this is a high level summary, but a few things are glaringly obvious and some of the proactive strategies we might derive from this chart are self-evident. Chemical content is one good example.

Regarding chemicals, we have been advising clients for several years to obtain complete chemical disclosure for their components and raw materials. We knew through our activities with REACH and proposed recasts of RoHS along with industry and Non Government Organization (NGO) initiatives regarding fire retardants and other chemicals, that it was just a matter of time before the list of banned, restricted, or reportable substances would grow thereby rendering RoHS Certificates of Compliance (CofC) functionally obsolete. This of course has happened, and those who followed our advice do not now shoulder the burden of once again returning to the supply base with additional queries for newly controlled substances. In other words, they have proactively addressed the issue and have achieved some degree of protection and coverage for future regulatory advances in this category. Of course nothing is 100% and changes in things like homogeneous rules could require a re-spin, but at least the fundamentals are in place putting those companies at a competitive advantage over their peers that have not collected full content data.

The same logic and reasoning can be applied to each of the above and other categories not listed. The objective is to develop a predictive roadmap for each regulatory classification, assess the impact upon your products and operations, and develop an overlay that allows you to achieve your objectives in a less reactionary and risky manner.

In Closing: Again the tyranny of space limitations abbreviates my thoughts. However here are some key take-aways:

• Environmental compliance is a process not an event.
• The stakes are too high to remain in a reactive mode treating each new regulation as a separate event.
• You need a roadmap.
• Get involved – many of the organizations formulating these requirements are looking for industry input and resources. You can make a difference.

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