While U.S. automakers may see some easing of the regulatory burden around conflict materials, global legislation and consumer demand for clean supply chains is on the rise.
The recent executive order terminating the proposed Trans-Pacific Partnership (TPP) shows the current U.S. administration’s stance towards trade agreements it finds harmful to national economic interests. It also highlights more broadly its goal to review and change existing trade and regulatory policies to fit its strategic economic goals.
According to Jesse Spiro, head of specialized research for Thomson Reuters World-Check, industry experts believe the administration’s emphasis on reviving manufacturing jobs once written off as dead, while also promising to ease the overall regulatory burden on business, may benefit the auto industry. However, shifting conflict mineral legislation globally and growing consumer demand for clean supply chains, creates a slippery slope for those in the auto industry to navigate.
We interviewed Jesse to learn more about the issue of conflict minerals and the complexities automakers face.
What exactly are conflict minerals?
Spiro: Conflict minerals are tin, tantalum, tungsten and gold (collectively known as 3TG), which come from the Democratic Republic of Congo or several adjoining African countries that are known for using proceeds from mining to fund ongoing war and violence.
Conflict minerals have a wide number of applications for automakers
|Conflict Mineral||Automotive Usage|
|Audio equipment, Climate control, Sensors, Wiper systems, Seat belts, fuel pump, etc|
|Fuel tank, Sealants, Wiring, Radiator, Seat cushions|
|On board electronics, Fuel cells|
|Circuits, Gear teeth, Bearing components|
What is the current U.S. legislation around conflict minerals?
Congress first passed laws against 3TG in 2010, and reporting on conflict minerals to the SEC began in 2014. The purpose of the rule is to ensure conflict minerals are not purchased from armed groups or warlords in Africa by requiring companies to tell investors if they have conflict minerals in their supply chains.
How has this affected automakers?
Companies dependent on these minerals for their products have become increasingly wary of their exposure to supply chain risk, which can cause reputational damage and lead to lower share prices or protests from consumers. According to industry reports, the cost of screening supply chains for conflict minerals was projected to be $3-$4 billion in 2014 and hundreds of millions of dollars thereafter. While the exact figures have been disputed, the magnitude of the issue and how costly it can be for automakers and their supply chain partners to comply going forward remains.
Adding to the challenge is the fact that the global supply chain for these minerals is complex and interconnected, cutting across many industries including automotive, aerospace, heavy equipment, electronics and more.
What is the new U.S. administration’s sentiment regarding the conflict minerals rule?
The U.S. government has taken aim at several rules within the Dodd-Frank Act it finds unduly burdensome to corporate interests, and one of the primary targets is the Section 1502 rule on conflict minerals. Many believe a suspension is imminent.
While corporations were hoping that updates to SEC guidance related to conflict minerals would become more lax in relation to required due diligence and disclosure obligations, this did not happen in 2016, and does not look to change drastically in 2017, either.
Would a rule suspension be a dramatic change for the auto industry?
It may ease the burden on OEMs with high exposure to supply chain risk due to conflict minerals, but broader underlying market uncertainty means they should still invest in risk management solutions to mitigate unforeseen changes. This is evident in light of a global push for greater supply chain transparency driven by changing trends in consumer behavior. Consumers want to make sure their consumption has not contributed to environmental or human rights abuses.
Even if national-level regulations are suspended, automakers must still account for state-driven initiatives to combat human rights abuses in supply chains, such as California’s Transparency in Supply Chains Act (TISCA) – and of course any initiatives within other countries with whom they do business.
How are other countries dealing with the issue of conflict minerals?
Consumers all over the world are taking a more active interest in clean supply chains, which increases the likelihood of similar rules on conflict minerals being adopted in other key car markets globally. This process has already started to take shape in Japan and Europe.
For example, the Organization for Economic Co-Operation and Development (OECD) issued guidance for corporates in 2010 on how to properly source minerals from high-risk areas in Africa. These guidelines are meant to help European companies avoid doing business with, and by extension supporting, human rights abusers in source countries. The European Union continues to develop the framework surrounding the OECD guidelines on conflict minerals, better regulating this trade amongst EU members.
In addition, the EU is expected to pass new regulations this month to stop conflict minerals and metals from being exported to the EU, stop refiners from using conflict minerals, and to protect mine workers from potential slave labor, unsafe conditions and abuse.
What’s the takeaway for automakers or others who invest in, or closely follow, the auto industry?
That this is going to be a key issue to watch. To be successful, automakers are going to have to strike the right balance between satisfying domestic and international regulatory requirements, managing costs and responding to increasing pressure from consumers who want products built through clean supply chains — free of links to African Militias and warlords.
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