Could Conflict Mineral Legislation Complicate The Business Of Building Cars?

May 19, 2011

Stop for a minute and contemplate how many components go into building a new car. Now take a step back and look at how many smaller components go into making the components used in new cars.

We’re still not done, because the next step is examining the raw materials that go into making the components used to produce components to build new cars. How easy would it be, for example, to trace the tin used in solder back to the mine the cassiterite ore used to make it came from? What if automakers were forced to do this, simply to prove that raw materials didn’t come from conflict regions like the Democratic Republic of Congo and surrounding countries?

Under an upcoming government mandate, that’s exactly what will be expected of automakers (and other industries) who use components containing coltan, niobium, tantalum, cassiterite, gold, wolframite and derivatives of these minerals. Coltan (from which niobium and tantalum are extracted) is used in the manufacturing of capacitors, universally present in electronics and automobiles. Cassiterite is primary source of tin, used in solder to join electronic components. Gold, a superb electrical conductor that’s also resistant to corrosion, is used in electronics when the connection between components is of the utmost importance.

In other words, you probably can’t build a modern automobile without using these minerals.

Mining of conflict minerals is often done under extremely hazardous conditions, using either forced labor or child labor. Much of the revenue paid for conflict minerals is used to fund armed conflict, promoting further bloodshed in a region that’s already renown for wars and civil unrest. The ruling has the best of intentions from a humanitarian perspective, but ensuring compliance will prove both difficult and expensive for automakers.

Beginning in August, automakers will need to certify that components used in production don’t contain minerals from prohibited areas. The amount of material used is irrelevant, since using any at all requires compliance with the ruling. Worse, the legislation applies to minerals necessary to the functionality of the final product. Is an audio system, using capacitors containing conflict minerals, necessary to the functionality of a finished automobile? The Securities and Exchange Commission, who will enforce the new ruling, says that manufacturers must make a “reasonable country-of-origin inquiry”, but stops short of defining what a reasonable inquiry is.

In the short term, expect manufacturers to push back on suppliers to determine the origin of their products. The Automotive Industry Action Group (AIAG) suggests that automakers adopt a three-step process to prepare for the new requirements, including:

  • Determine what components use conflict minerals or their derivatives.
  • Work with suppliers to map supply chains of those components.

If automakers find themselves unable to prove that minerals used did not come from conflict areas, the SEC will require them to file a “full conflicts report” as an exhibit to their SEC filing, and that will also require auditing by a third party. It’s not yet clear what the penalties or fines will be for non-compliance.

[Wards Auto]

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