RoHS: More Red-Tape for Business

In early 2003, the European Union (EU) adopted The Directive on the Restriction

of the Use of Certain Hazardous Substances in Electrical and Electronic Equipment (also

known as the Restriction of Hazardous Substances Directive or RoHS). This directive

went into effect on July 1st 2006. RoHS restricts the use of six hazardous materials in

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most electronics that are manufactured to be sold to states within the European Union.

RoHS was established to stop the flow of electrical devices containing lead, mercury,

hexavalent chromium, cadmium, polybrominated biphenyls, and polybrominated

diphenyl ether in an attempt to reduce the amounts of harmful waste brought into the EU

and ultimately put into the environment. As a result of RoHS many electronics

manufacturers and suppliers of major manufacturers suffered tremendous hardships and

financial distresses attempting to tailor their business operations to the demands of the

RoHS directive. This paper will focus on the burdens that were unfairly thrust upon

equipment manufacturers as a direct result of the RoHS directive, and will clearly

illustrate that RoHS has created significant harm and hardship to these electronics

component manufacturers.

The beat-down of electronics manufacturers has been a four-fronted

assault. The four areas of impact include ever increasing and changing regulation,

increased costs, suppressed growth, and quality/integrity issues for the firms. We will

take an in depth look at each of these four areas of concern to gain a comprehensive

understanding of how each works alone to stifle business as well as how they can

synthesize to create ever expanding trouble for businesses.

Regulatory Environment

The first area of concern to manufacturers is the increasing regulatory and

governmental intervention environment. The shear production, logistics, marketing, and

sales aspect of a business are staggering and they often operate with little lead time and

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minimal profits just to remain viable and competitive in the rapidly changing

technological markets. When this delicate balance of skill and customer dedication is

interrupted by regulation and intervention it can create significant hardship to the firm.

The RoHS directive currently only applies to the states within the EU but it has spawned

similar regulation in areas such as China. A great problem arises when there are multiple

markets with multiple restrictions on trade. These forces businesses to have to custom

build their products for geographical regions. HP can still produce and export goods to

everywhere in the world as they have traditionally with the exception of the EU. HP is

left to ponder the question of whether to produce two goods for two markets (more

expensive than a streamline manufacturing process) or to simply make all of their

products RoHS compliant (even for domestic markets) and spend more on design and

materials. HP has chosen to shift their production to all RoHS compliant components,

which has driven up costs but has shielded them from penalties and fines. In the past

companies have been able to look to the US markets as the benchmark for standards in

production and compliance, but now those standards are less easy to identify and comply

with (Spontoni). Companies now face much greater difficulty in identifying and building

to a broad array of regulations that have sometimes little uniformity. Issues of differing

regulations are pairing with changing and evolving regulation to further the pain. RoHS,

for example, is considering tacking 46 additional building materials to the directive.

Additionally there are currently 29 materials that are identified as exempt from RoHS,

but they are temporary and may be revoked in the coming years (Carbone). Industry

participants are also forced to prove and certify the compliance of their products to meet

RoHS guidelines (see figure 3). Other major technology leaders are feeling the pain of

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unpredictable legislation as well. In an interview with John Mason, Nokia Environmental

Director Markus Terho pleaded his case with the following: “Adhering to the EU

Commission’s changing rules and regulation has been a burden, but not from what you

might expect. Technological implementation has been straightforward; the burden has

been, and still is, that the legal requirements keep changing. We would have liked the

requirements frozen, giving us a year to implement them. Instead, the changes are

frequent [and] sudden changes by the Commission are not transparent.” So what are the

effects of this unstable and unpredictable regulatory arena? Hardships of the other three

major areas of concern are magnified.

Costs

Since its inception RoHS has proven to be far more costly to business than ever

predicted. Prior to taking effect, estimates of the cost to the industry as a whole were

typically expected to hover right around the $20 billion mark (Jorgensen). That is a

staggering number but industry would probably look back on that number and cry. What

should have been a fairly predictable cost turned into an industry financial drain to the

tune of $32 billion in less than two years of being in effect just for initial compliance and

it is now costing approximately $3 billion annually to sustain compliance (Carbone). That

was calculated to be an initial cost of $2.64 million for an average business with an

annual maintenance cost of $482,000 (Carbone). This may not seem like a great deal of

money per company but it is important to remember that not all businesses affected are

large corporations like HP and Nokia. Most commonly these costs are being absorbed by

suppliers and manufacturers down stream in the supply chain from the larger companies.

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“For many smaller and medium-sized businesses, the scope of the compliance challenge

may exceed the capacity of internal resources to effectively manage it (Spontoni).”

The costs of RoHS don’t stop at compliance costs; they extend to materials,

procurement costs, development costs, and inventory costs. Because electronics are

typically considered to be throw-away goods (meaning that once they break they are

cheaper to replace than to fix), HP will order all the inventory of a particular component

that they ever plan to need in one shipment. Thus, when a new product is released the

company typically has significant inventory levels of the components that go into that

product. Although the company can still use existing (Pre-RoHS) inventory to service

and sell within domestic markets and other areas around the world, they have not been

able to utilize any of it for the EU sales. It has been reported that the average increase in

inventory levels gearing-up for and following the RoHS directive was 21% with an

average carrying cost of $688,000 (Carbone).

Component costs and lost sales are also important to consider. Of the business

polled 77% reported and increase in manufacturing costs directly related to RoHS, with

the average component price increase being 11.6% (Carbone). These costs can be

associated with running multiple lines to produce compliant and non-compliant costs,

increased material costs, and machine costs due to incompatibility between lead-based

soldering operations and tin-based soldering operations. Increases in manufacturing can

also be attributed to rising costs of non-compliant parts to be sold domestically because

manufacturers have cut back or even stopped producing components made with lead,

even though there is still demand for those products (Carbone).

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 RoHS has also been linked to industry sales losses. Approximately 29% lost sales

because of the RoHS directive with and average loss of $1.84 million) (Carbone). This

loss was related to delays in getting product to market and firms that were not able to

continue to do business in the EU (Carbone). Some manufacturers had to cease business

operations in the EU because they weren’t able to financial bear the burden of

compliance. Those manufactures were now effectively barred from participating in the

EU electronics market with over 400 million potential customers (Quinnell). This was a

huge blow to many small and start-up companies. This also begs the question of how

many new entrants and possible competitors were regulated out of the market before they

even had the opportunity to enter the market?

Suppressed Growth:

A very important but often overlooked hardship shouldered by business as a result

of the RoHS directive the depletion of company resources that were previously utilized

for strategic development and research and development of new products. This is a

difficult area to quantify the losses sustained but the losses are real. As companies utilize

resources for RoHS compliance, they simultaneously have to divert resources from

growth oriented activities whether this is cutting R&D spending or redesign existing parts

to comply. One can not help but wonder what innovation could’ve been achieved

amongst these technology firms had they not been forced to divert talent and research

funds to comply with the RoHS directive.

Quality and Integrity Issues:

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 When a company sells a product, the customer typically expects to be able to add

on to the system or make modifications as needed. Not being able to supply components

to customers puts the companies reputation at risk because they are either not able to

support the products they sold effectively. In order for HP to only produce RoHS

compliant products they must also force their suppliers to produce RoHS compliant

products, which can take time and resources. HP has seen some difficulty in this area

with suppliers such as Intel. Intel was selling HP (under contract) old inventory which

contained lead all the way up until RoHS went into effect. As a result, HP was

manufacturing and selling equipment to customers in the EU that it wouldn’t be able to

support or sell add-ons for after RoHS went into effect.

Suppliers to the electronics manufacturers also pose quality issues to compliance

with the RoHS directive. In many cases, suppliers didn’t adopt new part numbers when

they transitioned from lead-based solder joints to non-lead-based solder joints

(Jorgensen). Although this may not appear to be a problem, there have been numerous

incidents in which parts and components were shipped to the EU because of supplier

error in shipping non-conforming material to the manufacturer because they confused the

compliant parts with the non-compliant parts. This could have been easily avoided by

assigning new part numbers to compliant materials. These errors have resulted in large

fines for the company that sells these materials to states within the EU.

Quality issues have also extended into the materials which are used for production

among the technology manufacturers. Lead-based solder is usable and liquefied at a

temperature range of 20-40 degrees Celsius less than that on tin-based solders (see figure

1) (Quinnell). This additional heat poses significant risk to other components and

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circuitry during manufacture. Non-lead solders are also more rigid, and as such they have

increased likelihood of failure resulting from cracking and deforming the circuit boards

over time (Wikipedia). There is an additional drawback to using tin-based soldering,

greater risk of circuitry shorting out. This risk is due to the tendency of tin solders to

generate microscopic extrusions, referred to as whiskers (see figure 2) (Quinnell). These

whiskers can bridge gaps in circuitry and create short circuits which can damage or

destroy the equipment that electronics firms create. This poses additional risk to the firms

because it is possible that warranty costs will go up and sales will wane if this proves to

be a persistent problem.

Conclusion:

The RoHS directive set forth by the European Union has had a great and far

reaching impact on the electronics industry throughout the world. The intent of the

directive was good but it is very clear the interests of all parties involved were not taken

fully into account. Many businesses have been forced out the markets or have seen profits

turn to losses as a result of RoHS and all have seen their business impacted in one form

or another. Those business hit hardest have been the smaller firms, and their subsequent

exits from the markets have cost consumers money in the form of product costs and have

also stifled the competitive nature of those markets. Businesses have been left with

useless and unsalable inventories of non-compliant products. Innovation has also been

drastically hurt as a result of RoHS in the sense that the investment in compliance could

have been used or was even diverted from research and development projects. Business is

still dealing with fallout from the directive in the form of decreased quality. This impacts

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business through sales. They are no longer able to offer the reliability that lead based

solders used to offer their products, and in some cases they are no longer able to honor

promises and guarantees on products that were sold with non-compliant products. This

results in slipping consumer confidence in the company and lost sales. For these reasons

and those detailed in the paragraphs above, it is very apparent that RoHS has created

significant harm and hardship to these electronics component manufacturers that will be

felt for decades to come.

Figure 1 (Quinnell)

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Figure 2 (Wikipedia)

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Figure 3 (http://www.cdt21.com/rohs_c.gif)

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References:

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Carol Baker (2005, July). Red Tape remains the biggest burden and threat to
business. Credit Control, 26(5), 6-7. Retrieved November 19, 2008, from
ABI/INFORM Global database. (Document ID: 909252231).

James Carbone (2008, June). RoHS cost: $32 billion and counting. Purchasing, 137
(6), 6. Retrieved November 19, 2008, from ABI/INFORM Global database.
(Document ID: 1497392801).

Barbara Jorgensen (2006, March). IT'S TOUGH to be green. Electronic

Business, 32(3), 30-35. Retrieved November 19, 2008, from ABI/INFORM
Global database. (Document ID: 1002417651).

Richard A Quinnell (2006, March). ROHS compliance: IT'S NOT EASY BEING
GREEN. EDN, 51(6), 37-38, 40, 42, 44. Retrieved November 19, 2008, from
ABI/INFORM Global database. (Document ID: 1009549061).

Cristiana Spontoni (2005, June). International Regulations Are Impacting Global U.S.
Supply Chains. World Trade, 18 (6), 8. Retrieved November 19, 2008, from
ABI/INFORM Global database. (Document ID: 850337381).

http://www.electronicsweekly.com/Articles/2007/03/27/41054/how-is-europe-tackling-
rohs-legislation.htm

http://en.wikipedia.org/wiki/restriction_of_hazardous_substances_directive. 11/12/2008.

http://www.chassis-plans.com/images/rohs-decision-tree.gif (ROHS decision tree)

http://www.cdt21.com/rohs_c.gif

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