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October 20, 2004
Are Electronic Components Producers Ready for Environmental Regulation?
    by William Baue

A Citizens Advisors study surveys 26 electronics components companies, and projects that many of them will be unprepared for European Union laws taking effect in 2006.


On July 1, 2006, European Union (EU) directives requiring electronics manufacturers to have phased out several of the most toxic chemicals commonly used in the electronics industry will come into force. The directives will also require companies to assume responsibility for their products at the end of their useful lives. Similar laws addressing toxins in electronic products and electronic waste (or e-waste) have been enacted or are pending in Japan, China, and several US states, including California and Maine. Obvious questions for shareowners of companies affected by these laws, namely electronic components producers, are: "how prepared are these companies to comply with these laws?" and "how will these laws impact shareowner value?"

Citizens Advisors, fund manager for the socially responsible investment (SRI) firm Citizens Funds, sought to answer such questions by surveying the 26 electronics components producers held in Citizens Funds portfolios as of January 2004. The resulting study, published in the October 2004 edition of the journal Corporate Environmental Strategy, finds that almost two-thirds (62 percent) of the companies are aware of the impending environmental regulations.

However, slightly less (58 percent) of these companies will be prepared to meet the July 2006 deadline of the EU's Waste Electrical and Electronic Equipment (WEEE) and Restriction of Hazardous Substances (RoHS) Directives. These directives, adopted in February 2003, call for the complete phase-out of lead, cadmium, hexachrome, mercury, and two brominated flame-retardants.

"Our overall sense was that the companies are actually more aware and better prepared than we expected," said Vesela Veleva, senior research analyst for Citizens, who co-authored the study with Suresh Sethi, research analyst for Citizens. "With the lead issue, they are certainly on track to remove it, many of them are already incorporated changes."

"It is going to be more difficult with flame retardants, which have been an industry struggle," Dr. Veleva told SocialFunds.com.

As for the affect on shareowner value, the study projects that this will be determined largely by how companies respond.

"There are short-term costs to becoming compliant with the new regulations, but the cost of inaction would be even greater," said Dr. Veleva. "Proactive companies can use this as an opportunity to increase their market share; laggards will risk market exclusion."

Customers of electronics components producers, original equipment manufacturers (OEMs) who will ultimately be held responsible for the components in their products, concur.

"Compliance violations are bad for the image, cost money, and undermine all other work," said Joe Johnson, environmental regulatory manager at Microsoft (ticker: MSFT), at a March 2004 wire and cable supply chain workshop, according to the study. In 1999, Microsoft was sued under Proposition 65 in California, which requires labeling of products containing toxins above certain thresholds, and paid a civil penalty of $65,000. "If we do the least today, we'll have a lot to do tomorrow, and that's a big concern."

Some of the electronics components companies surveyed did not realize how they could be held responsible for their supply chains or for their products making their way into items sold in regulated regions.

"In both cases, however, manufacturers will be affected by the new regulations since they operate in a global economy, where their customers, the large OEMs, want to sell the same products worldwide and not develop different products for different markets," the study states. "Even if an outside contractor does the manufacturing, the company will be required to certify that its products are free of the restricted chemicals."

The study was based on research of publicly available information, such as company websites and Securities and Exchange Commission (SEC) filings, as well as a survey administered by Citizens. Less than half (12) of the 26 companies in the study replied (which is actually a relatively good response rate for such a survey, according to Dr. Veleva).

Of those companies that responded, three--Linear Technology (LLTC), Maxim Integrated Products (MXIM), and Vitesse Semiconductor (VTSS)--declined to provide information. Responding companies that did provide information include Amkor Technologies (AMKR), Intel (INTC), and Texas Instruments (TXN).

The study concluded with recommendations that concerned shareowners write their companies inquiring about compliance preparations, vote in support of e-waste and toxin reduction shareowner resolutions, and to file such resolutions if they are qualified.

Copies of the study can be requested from Citizens.

 

 
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