Given the bare-knuckles competition among video-game console makers, the news was an unwelcome surprise. Just before Christmas, 2001, Sony (SNE) was stunned to learn that nearly 1.3 million of its best-selling PlayStation 1 game machines had been stopped at the border by Dutch customs agents.
Sony's offense? Cables in the consoles contained levels of cadmium considered unsafe under recent changes to Dutch law. The chemical element has long been used by electronics companies to boost the performance of cables and batteries. But a growing body of evidence had begun to show that when disposed of, cadmium can accumulate in the environment and cause serious health problems. And the Netherlands wanted no more of the stuff.
MORE SNAFUS? In the days following, Sony went into high gear. It had to squelch rumors of a broader recall while sparring with its Taiwanese cable supplier over just who was to blame for the slip-up. In the end, the seizure delayed the sale of $160 million worth of consoles, and Sony had to bear big costs for replacements parts, storage, and repacking the goods.
Rare as episodes like this have been, Sony's snafu may foreshadow similar dramas that could unfold on a larger scale across Europe come next July 1. That's when new European Union rules come into effect strictly limiting the import of goods containing six key toxins regularly used by electronics manufacturers, including lead and cadmium (see table below).
The changes haven't caught major manufacturers by surprise. Big global brands -- the likes of Sony, IBM (IBM), Intel (INTC), and Nokia (NOK) -- and their contract manufacturers and suppliers began work on this problem in the late 1990s. Still, worries are rising that secondary suppliers and manufacturers may fail to be ready and that a repeat of the Sony episode is inevitable. "A lot of this is probably going to catch players by surprise," says Steven Fox, a technology analyst at Merrill Lynch.
GLOBAL STANDARD. Motivated by rising public concern over the harmful impact of packaging and waste, lawmakers across Europe have enacted country-specific rules on the use of toxic materials over the past decade like the regulations that stopped Sony's game consoles from entering the Netherlands. But the Reduction of Hazardous Substances, or RoHS, mandate, extends and expands those effort across the entire 25-member EU. The rule complements a related EU initiative, the Waste Electrical & Electronic Equipment (WEEE) directive, that makes manufacturers responsible to take back gear at the end of its life, to recycle parts, and safely dispose of toxic materials (see BW Online, 1/18/05, "Turning Tech Green in Europe").
RoHS may be a European law, but U.S. manufacturers will have trouble avoiding the directive. The rules amount to a de facto global standard, since similar efforts are afoot in Asia, too. Japan's so-called Green Procurement rules and China's Agenda 21 goals are following in step. For U.S. manufacturers, which exported $191 billion worth of high-tech gear last year, including $41 billion to Europe, according to industry trade group American Electronics Assn., these markets are vital to survival.
While national guidelines remain conspicuously absent in the U.S. and Canada, a few states like California and New Jersey are pursuing limits on toxic materials such as lead. "Companies that think WEEE/RoHS will only be a temporary problem are missing the boat," says Geoffrey Bock, an engineer with TUV Rheinland of North America, which specializes in compliance, testing, and certification. With few exceptions, he adds, most manufacturers are fazing out non-RoHS-compliant parts as fast as they can. That means even companies that don't sell into Europe will increasingly buy RoHS-compliant components and will have to certify that they work the same way.
TRICKY SWITCH. For the electronics industry, the cost of the RoHS mandate is difficult to quantify. But industry execs and analysts say it may easily run into tens of billions of dollars. In Europe alone, research and development costs for RoHS conversion -- including collecting and maintaining the vast troves of paper and electronic test results data -- will total $19 billion, estimates Orgalime, a European electronics industry trade group. Throw in $1 billion to retool machines to handle nonlead solder in Europe, estimates Underwriters' Laboratories.
"It has eaten up a lot of time and resources across the industry," says Mike Steidl, senior vice-president for advanced product development at Amkor Technology (AMKR), based in Chandler, Ariz., which assembles chips into the packages that are soldered onto circuit boards.
Analysts say most big electronics companies are in good shape to make the crossover to the new materials. But many suppliers to these companies are finding the switch trickier than they planned. In a study of components makers and contract manufacturers released last month, Technology Forecasters found that 60% of the contract manufacturers were either less than halfway through the process of making production lines RoHS-compliant or didn't know their readiness. Indeed, the report concludes, 33% of these manufacturers "may not make the July 1, 2006, RoHS deadline -- putting revenue streams in jeopardy."
BAD CONNECTION. It's easy to understand why some companies might miss that deadline. Making sure their products comply with the new law is an extremely complex and tedious process. First there's the discovery and development of new materials to stand in for the old. For example, lead has been a key ingredient in the solder used to fuse wires for the past century. The soft metal is melted to bond wires from chips onto circuit boards, and a bad connection can render a device useless.
But since lead is a toxic material, especially harmful to children, the industry has turned to tin-based solder as an alternative. It works pretty well, except for one problem: In extreme environments, tin solder can fail due to "whiskering." That's when nearly invisible hairs of metal sprout from the tin solder. If they form a bridge to other components, they can short-circuit a device. Although rare, it happens often enough that RoHS rules permit very-high-performance devices, as well as medical and military systems, to keep using lead solder until a better substitute is found.
Another big challenge has been to adapt the new materials into existing manufacturing systems. Consider solder again. Lead solder melts at around 230C, while tin must be heated to over 260C. A small gap, perhaps, but a substantial difference for chips on a circuit board that can be damaged if heated too much. A vast number of components had to be tested for their ability to survive higher temperatures.
THE LEAST OF IT. This new manufacturing recipe drives up operating costs, too. On a large-scale production line, higher solder temperatures require more energy, points out Dan Shea, chief technology officer of Toronto-based Celestica (CLS), a contract manufacturer. Longer cooking times mean that an existing assembly line produces less per day, cutting overall output -- by as much as 10%.
The slowdown is forcing companies to invest in new equipment just to match the output they had using banned materials and older systems. In turn, energy costs are expected to rise by a few percent using the new guidelines.
And the technical difficulties are the least if it. The biggest challenge, say industry execs and analysts, is the documentation and logistics of the new materials that RoHS demands. Sony's troubles showed how even a well-prepared company can be tripped up by bad parts from a far-off vendor. In fact, while the final responsibility to comply rests with the company whose name is on the product, the day-to-day challenge of compliance falls on the lesser-known components suppliers, distributors, and the contract manufacturers that actually build most of the world's electronic gear.
FRIDGE-SIZE BOX. For the companies in the trenches of this transition, the logistics have nightmarish complexities. The number of parts and suppliers that need to be vetted is staggering. A single circuit board in a so-called "god box" -- a fridge-size computer able to switch huge volumes of voice and data signals at a phone company -- can have thousands of parts from hundreds of suppliers.
Melville (N.Y.)-based Arrow Electronics (ARW), a leading electronics components distributor, deals with 600 suppliers and serves a market of some 150,000 manufacturers with which it's working to keep continuously updated on the status of RoHS parts in its inventory. To accommodate RoHS guidelines within this mountain of parts and partners, Arrow boosted the amount of critical environmental data it tracks five-fold and has made it available to clients and partners.
In a web this complex, even tiny omissions can cascade into big trouble. Consider the mundane role of the unique component part number that's given to each of the thousands of screws, metal fasteners, chips, boards, and components in your average PC. In a recent industry survey, Avnet (AVT), a Phoenix distributor of electronics components, found that about one-third of respondents who have converted existing designs to RoHS-compliant substitutes haven't changed the part number. In the absence of a clear RoHS-approved mark, or unique part number, there's no way to tell if the parts are green, frets Greg Frazier, Avnet's executive vice-president for its global supply chain. "That's a recipe for trouble."
SURE TO STING. Where new numbers are issued for RoHS-compliant parts, the volume of components a company tracks can double, causing an explosion in the amount of electronic data that has to be maintained and exchanged between partners in the supply chain. And during the switchover period -- which will start to gather steam at the beginning of the new year before peaking in the months before July 1 -- warehouses designed to be as lean as possible can't easily accommodate duplication of components. "It's an undertaking of enormous complexity," says Patrick Hehir, vice-president for global initiatives at Singapore's Flextronics International (FLEX), an electronics manufacturing contractor.
More costly materials together with less efficient manufacturing processes will also boost operating costs. Smith Barney analyst Kirk Yang estimates the new rules will cost Taiwanese motherboard makers up to $4 per board extra and could cut output by 10%. That's in line with estimates from market consultancy Gartner Group that the new rules will add about $10 apiece to the production costs for PCs through 2006. Not huge numbers, to be sure, but given that profit margins are thin on a $400 generic desktop computer, such increases are sure to sting.
Then there's the unforeseen: The host of costs such as inventory write-downs and the threat of liability and penalties. Earlier this year, Abacus, a British electronics distributor, wrote off noncompliant inventory worth more than $6 million and warned that its yearend profits would fall short of forecasts partly because of the charge. Penalties, which will be established nation by nation, remain to be set. In establishing its own electronic materials laws, Ireland, for example, has set penalties of up to $18 million, 10 years' imprisonment, or both.
GOOD NEWS. Remarkably, these rising producer costs may not necessarily spell higher prices for consumers. If anything, increased components costs will only slow the downward spiral of electronics prices that consumers have grown accustomed to. "Competitive pricing pressure is just too intense," says Celestica's Shea.
With the RoHS deadline less than 12 months away, the good news is that much of the industry is prepared to make the switchover. The larger the company, the more likely it has been planning, in many cases for years. European players such as Philips Electronics (PHG) and Nokia have been at the front of the pack.
In the U.S., major companies, from chip giants such as AMD (AMD) and Intel to PC makers such as Dell (DELL) and Hewlett-Packard (HPQ), have likewise declared they'll be ready. That's partly thanks to the forceful push from their suppliers, such as big contract manufactures like Celestica and Flextronics, along with electronics components distributors such as Avnet, which have all rolled out aggressive "readiness" campaigns to help -- and check in on -- their suppliers.
Still, the reality is that a supply chain is only as strong -- or green -- as its least RoHS-compliant link.
Six Toxic Targets
Cables, connectors, and batteries
Breathing high levels of cadmium severely damages the lungs and can cause death. Ingesting very high levels severely irritates the stomach, leading to vomiting and diarrhea. Anticipated to be carcinogenic.
Metal finishes, some magnetic media
Nasal damage if inhaled. If ingested, digestive disruption and bleeding, or skin ulcers on contact. Suspected of being carcinogenic.
Solder connecting, cathode ray tubes, batteries
Lead affects almost every organ and system in the human body, especially the central nervous system, kidneys, and reproductive system. At high levels, lead can decrease reaction time, harm memory, and cause weakness and/or anemia.
Fluorescent tubes used to illuminate flat-panel displays
Exposure to high levels can permanently harm the brain, kidneys, and developing fetus. Effects on brain functioning may result in irritability, shyness, tremors, changes in vision or hearing, and memory problems.
Polybrominated biphenyls (PBBs)
Added to plastics to increase their fire resistance.
Can cause skin problems and may be linked to more serious effects such as nausea, abdominal and joint pain, loss of appetite, fatigue, and weakness. Possibly cancer causing.
Polybrominated diphenyl ethers (PBDEs)
Similar to PBBs, injected in plastic to reduce their flammability.
Animal tests suggest that PBDEs affect the thyroid and may cause neurobehavioral alterations and affect the immune system. Possibly carcinogenic.
* Military, health-care, and certain high-performance devices are permitted to continue to use lead solder.
Data: Official Journal of the European Union; U.S. Agency for Toxic Substances & Disease Registry (CDC) By Adam Aston in New York, with Andy Reinhardt and Rachel Tiplady in Paris