Suppliers Begin Costly Audit for African ‘Conflict Minerals’

This story appears in the March 4 print edition of Transport Topics.

Truck makers and suppliers say they will be among the industries hardest hit by a new federal rule that could cost U.S. businesses nearly $8 billion to search out and shed “conflict minerals” originating from central Africa.

Beginning this year, the U.S. Securities and Exchange Commission requires every public company to examine its supply chain for traces of tantalum, tin, tungsten and gold from central Africa that they use. Companies will have to report their findings annually to the SEC, starting in 2014.

The SEC defines conflict minerals as those commodities or their derivatives determined by the U.S. Secretary of State to be financing hostilities in the Democratic Republic of the Congo or the nine countries surrounding the Congo.

Ann Wilson, senior vice president of government affairs for the Motor and Equipment Manufacturers Association, said her group has received numerous requests from manufacturers and suppliers asking about their compliance obligations.

“Obviously, if you’re a manufacturer, bells should be going off in your head right away,” Wilson said. “We have been strongly suggesting to them that they form a committee with their legal office, their purchasing people and their internal accounting people to really take a look at the regulation and if they have to comply, how they’re going to comply.”

The rule, approved by the SEC last summer, stems from mandates contained in the Dodd-Frank Wall Street Reform and Consumer Protection Act, signed into law by President Obama in July 2010.

Although several truck manufacturers said they are just beginning to analyze their supply chains, early indications are that both truck and automotive manufacturing will be significantly affected because many suppliers make components ranging from brakes to electrical wiring that use some of the four targeted minerals.

Navistar Inc. spokesman Stephen Schrier said, “We do know that components such as headlights, interior lights, dashboard lights, onboard communication systems, etc., are likely to have tin, tungsten, tantalum or gold. However, we’ve not identified the raw material source throughout the supply chain.”

“The regulation is well-intended, but for companies like us who make hundreds of thousands of products and have tens of thousands of suppliers, it presents a fairly substantial burden,” said Tara Szmagala, vice president and deputy general counsel for supplier Eaton. “This will take a large effort.”

A spokeswoman for Cummins Inc. said the engine maker is “working to understand all of the details necessary to ensure compliance.”

Representatives from Daimler, Volvo and Meritor declined comment. Paccar did not return messages seeking comment.

In the manufacture of Class 8 vehicles, tin is used in brake pads and electronic wiring, tungsten and gold in integrated circuits and tantalum in tire-pressure sensors.

Rebel groups controlling some of the mines and smelters sell these minerals and use the proceeds to fund well-documented human rights abuses, according to human rights organizations and the U.S. Government Accountability Office.

For that reason, it makes sense for companies to want to fall in line with the SEC regulation — which also directs companies to put their findings on their website — or otherwise risk public embarrassment or possibly even shareholder lawsuits.

“Everybody wants to do the right thing in terms of making sure that we’re not supporting these types of minerals,” said Fred Andersky, director of government affairs for Bendix Commercial Vehicle Systems.

The controversy is similar to the one over conflict diamonds from South African mines that plagued the jewelry industry not long ago. But since 2000, some 54 nations, including the United States, have agreed to the Kimberley Process, an initiative to ensure that diamond purchases do not finance violence.

In the initial stages, the SEC said, compliance with its rule could cost U.S. businesses $3 billion to $4 billion related to required documentation preparation. Other estimates are higher.

For example, a study by Tulane University concluded that compliance costs would total nearly $8 billion, and the National Association of Manufacturers estimated the cost to U.S. businesses to be from $9 billion to $16 billion for the first-year report — and another $700 million annually for required status update reports.

Specifically, the SEC regulation requires companies to conduct a “reasonable country of origin inquiry” to determine whether there is “reason to believe” that the minerals originated in Congo or an adjoining country. Then, it must conduct “due diligence” on the minerals’ source and chain of custody.

The company then must obtain an independent private-sector audit and file a conflict minerals report describing its due diligence measures.

The first of the annual disclosure reports are due on May 31, 2014.

Already, there are promising software programs and other resources to help companies identify compliant smelters.

There is no penalty or fine for companies that do not comply with the SEC regulation. Rather, the expense will come from paying those who will have to determine whether suppliers use conflict minerals.

The National Association of Manufacturers said one member estimated the cost of compliance at $10 million, mostly for hiring 50 full-time employees to review supplier conflict mineral certifications. And the Tulane study said almost half of the total compliance cost would be for personnel, while the other half would comprise “outflows” to third parties for consulting, information technology systems and audits.

Catherine Boland, MEMA’s vice president of legislative affairs, believes the regulation will have a major effect on trucking.

“What we’ll see most likely is they’ll just stop buying from the region entirely, whether they’re buying conflict-free or conflict minerals, since it’s too complicated to determine otherwise,” Boland said.

Despite a lack of any penalties for continuing to use conflict minerals, companies that don’t comply could be vulnerable to possible shareholder lawsuits, according to Tom Quaadman, vice president of the U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness.

“You could have a [non-government organization] that is interested in Africa issues start going around and suing companies saying that the disclosure is insufficient,” Quaadman said.

Because of cost and other concerns with the SEC rule, the Chamber of Commerce, National Association of Manufacturers and Business Roundtable have joined forces in a lawsuit filed with the U.S. Court of Appeals for the District of Columbia Circuit, asking that the requirement be modified or thrown out.

“There are thousands of different parts that go into a truck,” Quaadman said. “And there are probably hundreds, if not thousands, of different suppliers that supply the parts that go into a truck.”

While trucking seems to be in its early stages of compliance with the SEC regulation, the automotive industry has been working on the issue since 2010.

Tanya Bolden, manager for corporate responsibility at the Automobile Industry Action Group, calls the process “a very large and daunting task.”

With the complexity of the supply chain, even if a company is not reporting to the SEC, they’re more than likely going to receive a request from their customers to determine if their products are made with any conflict minerals, Bolden said.

But Bolden said the auto industry’s two years of groundwork on the issue offers trucking manufacturers a number of lessons, including the formation of “cross-functional teams” within their companies to oversee the due diligence process.

“For example, those teams could include supply chain management, purchasing, materials management, legal staff, government affairs staff, communications staff and financial staff,” Bolden said. “All of these are touch points in a company’s conducting due diligence.”