Intel's CEO Reveals The Company's Plans To Build A Conflict-Free Supply Chain By 2016
How the electronics giant is leading the industry in making sure its products do not fuel war, corruption, and atrocities in mining nations.
If you use electronics or wear gold jewelry, you're participating in an economy that finances armed groups in the Democratic Republic of Congo, which gather significant sources of income from the mining of tin, tantalum, gold, and tungsten in the country. At least, that was the case until recently.
An uptick in corporate social responsibility efforts, combined with pressure from the Dodd-Frank Act--a bill that requires U.S. companies to prove due diligence to theSecurities and Exchange Commission that they are trying to remove conflict minerals from their supply chain--is making it more possible than ever to reach the ideal of a conflict-free supply chain.
In January, Intel announced that all of its microprocessors are conflict-free. Now, the company is taking on a more ambitious goal: making every Intel product conflict-free by 2016.
A few years ago, this wouldn't have been possible. Now, it's a realistic, but still incredibly challenging goal. Here's why.
THE EARLY YEARS
When Intel first decided to investigate conflict minerals in its supply chain a little over four years ago, it was a big undertaking, as we detailed in this story on Intel's conflict-free microprocessors (See "Starting Now All Intel Microprocessors Are Conflict-Free, Here's How The Company Did It"). The company spent years sorting out its supply chain and trying to find the smelters that supply the minerals used in its products. (Smelters--who melt down the ore from mines to get more pure metals--are a pinch point in the mineral supply chain, so they are targeted by most companies ferreting out conflict minerals in their products).
Carolyn Duran, the director of supply chain at Intel and program manager for its conflict mineral efforts, has worked with her team to visit 86 smelters in dozens of countries over the past few years.
Initially, most smelters were resistant to certification. "If you went back in the beginning of 2012 or 2013, we were pushing. Everything was a push," says Intel CEO Brian Krzanich, who led Intel's supply chain and manufacturing efforts before taking on his current role. "Carolyn would come to me and say, 'This smelter won’t talk to me, this trader won’t come in the door.' In 2013, it’s gone from a push to where you can start to see the pull. You see the rest of the country, the SEC rules starting to pull people through."
Intel is able to exert some powerful pressure; the company is the largest commercial consumer of tantalum. Now, 90% of the world's tantalum supply is conflict-free.
Other companies, including HP and Apple, have also been instrumental in pressuring smelters to go conflict-free (HP and the GE Foundation helped fund efforts to hire auditors for smelters who couldn't afford independent auditing themselves).
"It is slow, it’s not linear, and there’s all kinds of bumps in the road. But there's steady progress in moving armed groups away from profiting from the most lucrative activities," says Sasha Lezhnev, Associate Director of Policy at the Enough Project, which helps Intel and other companies with conflict-free sourcing.
DODD-FRANK
The Dodd-Frank act has been instrumental in pushing companies to think about conflict minerals in their supply chains. The act originally required companies to disclose conflict mineral use on their websites; that piece of the legislation has been overturned. While corporations were supposed to have sent reports to the SEC earlier this summer detailing potential conflict minerals in their supply chains, most didn't do the rigorous work of Intel, HP, and Apple before the deadline--though they're starting to do it now.
"The momentum you’ve seen so far is less about the legislation and more about companies that are trying to do the right thing, companies that are proactive," says Krzanich. "If you ask that question two years from now, when people having to be reporting no matter what, [legislation]would be the bigger driver."
Nonetheless, a report from the Enough Project on Dodd-Frank's effects in the DRC reveal that the act has already had a positive impact since the market for traceable tin, tantalum, and tungsten has grown so much. From the report:
Before 2011, armed groups could be involved in the mines and still sell to the electronics supply chain. For example, in 2009 tantalum mined in the Kivus and Katanga sold at $132/kg whether it was conflict-free or not, and electronics companies, smelters, and other end-users bought it without question. Now, if they are still involved and outside companies discover this through improved reporting and/or audits, their buyers are unable to sell to westernelectronics company supply chains, instead only able to sell to Chinese buyers at an approximately 30% to 60% discount.
Even if more of Dodd-Frank is overturned, the momentum is already there--and perhaps most importantly the bill has gotten the public thinking about conflict minerals, which means that companies have to pay attention.
"Everything is not white, everything is not black. The USA legislation has dissuaded this mafia economy in eastern Congo, which unfortunately sustains most of the people here," notes Fidel Bafilemba, the Enough Project's Congo field researcher and a native of eastern Congo. He also has a different take from Intel's Krzanich, arguing that, "All in all, if not for Dodd-Frank, there would be no change at all in the supply chain."
The Congolese government also needs to play a part; the Enough Project argues on its website that the security situation in the DRC will remain unstable without anti-corruption reforms and a commitment to fair elections. (The DRC is one of the five most difficult countries to do business in, according to the World Bank and UNDP). "I want to highlight the need for people to go forward and stay committed. There is still so much to be done, simply because the biggest obstacle we are facing has been the state authority failure, the lack of political will from [president Joseph] Kabila to push things forward."
THE AUDITING PROCESS
At this point, all of the smelters used in Intel's microprocessors are conflict-free, having been certified in many cases by third-party audits (others are certified via direct observation). In total, 97 out of the 159 smelters in Intel's supply chain are certified.
Intel's auditing process has three components. First, smelters need to have a management commitment to a conflict minerals policy. Next, they need to keep track of what comes in (i.e. ore and recycled materials) and out of their doors. Once smelters know what goes in and out, they need to understand their transactional history. If they are using recycled materials, for example, they need to demonstrate they came from a certified recycler. If they are using ore, smelters need to trace it back to the individual mine it came from.
This is where mineral certification systems, which "bag and tag" minerals from conflict-free mines to make them more traceable, come in handy. A bagging and tagging system for tin mined in the DRC rolled out in April.
According to Lezhnev, nearly 50% of the world's smelters are now certified as conflict free. So what's holding up the rest of Intel's smelters from being certified?
FUTURE CHALLENGES
"The microprocessor was a big deal, and this goal is probably 10 times bigger. To say anything you do is conflict free--that’s quite the challenge. It’s not a sure thing. We have about 75% confidence," admits Krzanich, of Intel's 2016 goal to be completely conflict-free.
Tantalum, as mentioned before, is mostly conflict-free at this point. Tin and tungsten are moving along, according to Duran. But gold is still a problem. Much of Intel's gold comes from Asia, where it passes through the Shanghai Gold Exchange. That masks the sourcing of gold, but Intel is hopeful that the Exchange might begin to help suss out conflict minerals.
"It's the third or fourth time we've approached them, and now they're listening," says Duran.
In the end, it's just a matter of scale. Getting smelters to go through the auditing process takes time, and a handful inevitably refuse to clean up their acts. Intel has had to ditch fewer than five smelters so far, but that number will certainly grow at least a little bit as the company moves to a conflict-free supply chain.
"There's a psychology that happens with these things. I think with conflict minerals and other social responsibility issues around, public understanding adds a considerable amount [of pressure]. Then legislation, government support, in whatever form it comes in is definitely beneficial. It can come in the form of something like Dodd-Frank or it can come through government support in whatever form it takes," says Krzanich. "If you get all three lining up, then you get a result. It happens in relative terms fairly quickly. It does become a tsunami."
Intel may be the first company to attempt a conflict-free supply chain, but more companies will certainly follow soon after. It only takes one electronics giant to prove that it can be done.
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