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From Our Market Blog
The Force of Change: Environmental Rules and the Component Market
Today’s global marketplace is “greening” rapidly, evidenced by myriad environmental legislative acts from the local to the regional level (i.e., legislation based at the US state level, to individual countries, to the European Union). Each law or rule is different in its scope of electronic products covered versus exempted, timelines for partial to full enactment, review processes, and legal and monetary penalties for non-compliance.
The path to compliance has been costly for many in the electronics industry. Re-designing and re-tooling, new research and design, new labeling and disclosure practices, legal consultation, and in some cases hefty fines have all chipped away at companies’ bottom line. The question begs for the electronics supplier and manufacturer, is there a business strategy for the short- and long-term to weather this environmental storm? What market forces can we look to as indicators of the impact of this increasing “green” legislation? Is there a stabilizing factor to this change?
As environmental legislation globalizes, the market will necessarily follow and bring along with it different commercial off-the-shelf (COTS) components. This new set of COTS will be the driver of change for all markets, even those holding exemptions from and exceptions to RoHS legislation. An important business opportunity lies in emergent and redesigned technologies and materials that will meet the various standards and requirements for all sectors (e.g., not only commercial, but also military, medical, industrial, among others).
The March of RoHS
For the electronics manufacturing community and their suppliers, the first far-reaching environmental policies came in the form of the European Union’s (EU) Restriction of Hazardous Substances (RoHS) and Waste from Electrical and Electronic Equipment (WEEE) initiatives that took effect in July 2006 and January 2003, respectively. These can no longer be considered a geographically isolated set of directives, as many of the world’s governments line up to enact similar measures.
‘China RoHS’ was enacted in March, and in April, Korea’s National Assembly passed it’s own RoHS-like legislation that will go into force on 1 January 2008. Japan, Taiwan, Canada, and several U.S. states are presently engaged with similar legislative proposals (California, Maine, Massachusetts, Minnesota have adopted legislation and other states are pending - over 50 bills are pending in roughly 20 states). The result of this widespread legislation is the increasing number of products that must fall into compliance. In effect, RoHS is now a global force.
The State of COTS
What comprises the set of COTS can be a source of confusion for some, and so the following definition is offered as the intended reference:
The accepted definition of COTS simply refers to components that are available from manufacturers` catalogs or through distribution channels — regardless of specifications. That which is not COTS, however, involves some level of custom or value-added design.
(http://mae.pennnet.com/)
COTS is an important variable to understand broader market shifts as a result of RoHS legislation because of the simple economic impact that COTS has throughout the electronics supply chain. The importance of a COTS component is not found solely in the above definition, it is the significant economic impact that a COTS component entails. A COTS component, by virtue of its market availability, has the important added benefits of lowered costs, shorter time lags, mitigated quality and traceability issues.
It is well-known that designs that include COTS components are preferred to those that do not. To this end, the US Office of the Secretary of Defense has established the Defense Microelectronics Activity (DMEA) to guide the US military in acquisition, transformation and support of microelectronics technologies with particular emphasis on the incorporation of COTS components, when feasible (http://www.dmea.osd.mil/).
Is there a greener pasture, or just the same greening one?
One way to forecast the global “greening” is to search for a variable, an indicator, that may reveal the trajectory of change. Evidence supporting such an indicator can be found by understanding the outliers to the general market – the industries that are exempt from or have limited exceptions to the rules (e.g., military and medical sectors). It is important to underscore that some newer and pending RoHS legislation does not provide for any special exemptions.
Have exemptions from the directives meant that some markets have been sheltered from the costly revisions and tumultuous shifts seen along the entire supply chain in the general electronics marketplace?
Exemptions and exceptions as a fortress?
In short, manufacturing products that carry exceptions to or are exempt from RoHS has not proved to be a true safe harbor. While suppliers to the commercial market have, by and large, obsolesced non-RoHS compliant parts and product lines; most suppliers providing individual components and subassemblies to the military and medical markets have made one of three strategic business and marketing choices:
(1) Status Quo – continue to provide non-RoHS compliant product, i.e., maintain existing, pre-RoHS, lines. These suppliers have made a decision to supply only the exempted military and medical sectors and those companies who do not do business in markets that abide by EU RoHS and WEEE directives (a shrinking number that is becoming truly niche).
While the “Status Quo” choice allows for an immediate ‘business as usual’ solution without the commitment of expensive R&D, changes to design, line changes, and other costly adjustments, this solution is really only temporary. Furthermore, because their components are, for the most part, no longer COTS, those companies who have embraced this option have experienced numerous problems that are necessarily passed on to their customers: manifold cost increases on Leaded (Pb) parts, lead time increases, and issues of compliance, quality and traceability (Thryft 2007: http://www.cotsjournalonline.com/home/article.php?id=100623&pg=2).
(2) Obsolescence – follow the broader commercial market trends and discontinue the non-RoHS compliant lines and products. These suppliers are making the shift to supply only those components which are RoHS compliant, likely excluding large parts of the military and medical sectors. Having shifted their lines to be RoHS compliant, these suppliers will not be able to meet all of the present military and medical standards for components. As a result, they will have to shift their focus away from their traditional client base to capture more commercial market clients – a potentially risky venture as this move may not represent their core competencies.
(3) Innovation – develop dual lines supporting both RoHS and non-RoHS compliant components, including adopting a “5 of 6” approach (i.e., removing all restricted substances except Lead (Pb)).
The innovative supplier will be in the best position to strengthen relationships by leading their manufacturing clients through the transitions to RoHS compliance. To do this successfully, these suppliers must have the available capital to purchase or redesign manufacturing processes and lines to ensure quality and traceability for both RoHS and non-RoHS compliant components. Furthermore, these suppliers (and now designers!) will have the opportunity to increase their margins while providing significant value adds.
The split among military and medical suppliers is an interesting market development which, while logical, is not reflective of the broader commercial market. Each choice poses significant risks, entails significant costs, affects the military, medical and commercial sectors differently, and mandates changes to business and market strategies. Despite the differences in these choices and their ramifications, the suppliers themselves are both affecting and are being affected by the broader market shifts. Ultimately all these choices lead to RoHS compliance.
RoHS & COTS: The chicken & the egg
We see that the complexities of RoHS and WEEE compliance are not really mitigated by exemptions or exceptions. Exemptions or not, all component suppliers are faced with developing product and marketing strategies that enable them to continue to best serve their market sectors while preparing to engage in a solely RoHS and WEEE compliant global marketplace.
Exemptions and exceptions come with a terminal date. Furthermore, non-RoHS compliant components are obsolescing at a rapid rate. Those non-RoHS compliant components that do remain on the market will not be COTS, and as a result will likely be more costly and involve greater lead times. These specialized non-RoHS compliant components will also involve increasingly difficult issues of traceability, quality, and sourcing for repair and replacement parts.
The commercial market pressures are changing what comprises the set of COTS products (due to RoHS compliance issues) and hence, are affecting mid- to long-term component choices for all market sectors. As many across the electronics supplier industry have noted, despite the special standards military and medical sectors require, it is simply a matter of time until the global marketplace is RoHS and WEEE compliant. As succinctly stated by Tom Barnum, VP Sales for VersaLogic, “[…] the fundamental objective of the COTS movement was to streamline the deployment of commercial, “state-of-the-art” technologies. Since commercial technologies are moving toward a RoHS model, the military must follow” (Thryft 2007:7 http://www.cotsjournalonline.com/home/article.php?id=100623&pg=2).
Policy slogs onward and COTS morphs
While existing RoHS legislation has provided exemptions and exceptions to subsets of the market, it appears that the resulting market forces of COTS will be the true drivers for the electronics supply chain.
As RoHS legislation globalizes, the electronics marketplace will necessarily follow and bring with it a transformed set of COTS components. This new set of COTS will be the driver of change for all markets, despite exemptions and exceptions to RoHS legislation.
The keen electronics supplier will recognize the costly position that clients with exemptions or exceptions are in. By working with these clients in designing for green solutions, significant business opportunities and competitive advantages can be realized (e.g., green (re)designs, customer loyalty, value adds). The greening marketplace is difficult for OEMs to navigate and costly if there are mistakes, yet based on the trajectory of COTS, ongoing market shifts, and pending legislation throughout the world, RoHS is certain to be the dictum that all must follow.
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