Conflict Minerals Shame Game: Will it Work?

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Published August 27, 2012

| FOXBusiness

If a smartphone carried components whose materials -- somewhere down the supply chain -- came from a conflict-strewn country in Africa, would Westerners care?

It's a question that has been brought to light through new rules passed last week that require companies to disclose if products used in popular consumer products came from areas like the Democratic Republic of the Congo, where so-called conflict minerals have contributed to a civil war that has killed millions of people.

From gleaming smartphones and tablets to the unseen chips in PCs, components made of materials such as tantalum, tin, gold or tungsten by some of the world’s biggest consumer electronics companies can have a bloody history.

The Securities and Exchange Commission, which approved of the mandate (part of the larger Dodd-Frank Wall Street Reform bill) last Wednesday, is calling for full disclosure if those products are used, but it isn’t actually requiring that companies cut ties with these conflict-prone regions altogether. 

Rather, it seems to be an effort to try to shame them into compliance.

It’s a risky bet, especially since some Westerners are so far removed from the conflict in the Congo that they may not fully fathom how their coveted phone may be related to rape, death and plunder an ocean away. Then again, it might just work.

“No firm that markets smartphones to students and parents wants its logo to be associated with mass rape and the death of 5.4 million people,” said Sasha Lezhnev, senior policy analyst at the Enough Project, a nonprofit that fights genocide and crimes against humanity.

To be compliant, companies don’t have to stop conducting business in the Congo. But if regulators are requiring them to disclose it, they will be forced to admit that some of their products are tainted, which might not resonate well with shoppers.

After all, while scalping minerals from Africa may be a lucrative business as it lowers the supply chain costs for companies and boosts their profits, a brand’s image carries powerful sway among consumers. Sometimes all it takes is public awareness about an unfavorable issue for it to resonate deep within buyers’ psyches.

“At the end of the day if they don’t protect their brand they’re not going to have a company,” said Mickey North Rizza, vice president of strategic services at BravoSolution and a long-time supply chain consultant.

For an example of this look at Mattel (MAT), whose earnings took a worse-than-expected dip in 2007 after it was forced to recall 19 million toys sent from China because they were covered with lead paint. The El Segundo, Calif.-based toymaker faced fierce backlash from parents and was forced to unveil a slew of expensive, much stricter regulations at Chinese manufacturing plants to try to save face.

Earlier this year, when Foxconn’s sweatshop-like conditions emerged, a red-faced Apple (AAPL) was forced to take very public steps to chastise its biggest supplier, despite the fact that Foxconn ensured cheap labor with high production rates at low costs.

“You’re dealing with moral and cultural issues here … you never know how the consumer is going to react to that,” Rizza said.

The Enough Project’s Raise Hope for Congo subset recently ranked the largest electronic companies on their efforts toward using and investing in conflict-free minerals. Not surprisingly, the most proactive companies topped the list.

When the bill first emerged as a draft two years ago, Intel (INTC), H-P (HPQ) and IBM (IBM) founded the Electronic Industry Citizenship Coalition [EICC], now comprised of dozens of electronic industry leaders like Adobe Systems (ADBE), Best Buy (BBY), Cisco (CSCO) and Microsoft (MSFT).

The coalition is dedicated to improving efficiency and social, ethical, and environmental responsibility in the global supply chain. Members must apply, sign a commitment letter and, if accepted, pay dues and promise to abide by its bylaws.

Lezhnev said an overwhelming majority of the world’s tantalum smelters have been audited by the EICC, which has led to a 65% drop in armed groups’ profits from tin, tantalum and tungsten.

So while the SEC rule may not be foolproof, it carries a powerful force of influence.

Rizza, who works with Fortune 500 companies on their sourcing and business strategies, said it will take time for companies to fully and honestly be able to disclose which materials may carry bloody components, and it will take even longer for a company to be able to say that it is 100% conflict free.

“All these companies that are competitors, working [together] in the EICC, they’ve been leading the charge,” Rizza said. “The unfortunate thing is it’s going to cost them to ensure they are doing the right thing.”

There are many, many layers to a supply chain. For example, a PC H-P sells in Target (TGT) will have gone through dozens of  supplier and manufacturing hands and the tech giant will be responsible for pulling away each of those layers to discover the true origin of a product’s components, a costly expedition.

But it’s a necessary evil, particularly since companies “make money not just on the products they sell but on the image they portray,” Rizza said.

Of course, some companies will be much slower to adopt these efforts, if they ever do at all.

Nintendo, the world’s largest gaming company, finished at the bottom of the Enough Project’s ranking and has since been widely criticized for its ties to conflict minerals. It will disclose its use of these materials as part of the SEC rule but whether it actually takes efforts to stop business dealings with suppliers that fund militias remains to be seen.

Nintendo officials weren't available to comment. 

“At what level does the individual decide to buy the toy for their kid or not and at what conscience stream do they make that?” Rizza said. “Many people [are] so far removed they just don’t see it."

It’s a valid question, especially since Western consumers often forget about the tainted history of products if their demand for a product, or its discount compared with competitors, exceeds its questionable past. Because of that, it’s unclear whether Nintendo will see a slump in sales as it continues conducting business in areas prone to genocide.

However, Rizza said she's hopeful that the mass media attention and regulatory spotlight on conflict minerals will pressure companies such as Nintendo.

“In theory, [consumers] are not going to want to buy products of warlords that are killing and raping people,” she said. “If that’s the premise we’re going on, the ruling makes sense.”

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