By Yong H. Kim & Gerald F. Davis
AS outsourcing has become an increasingly common approach to cutting costs, many producers now rely on globally dispersed supply chains. Apple, for example, works with at least 200 suppliers and 242 smelters and refineries around the world. It’s no wonder that so many consumers have no idea where their favorite brands come from. But are businesses any better informed than their customers?
In 2010 the United States Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act, which mandates that companies listed on American stock markets disclose whether their products contain “conflict” minerals: tantalum, tin, tungsten and gold originating in the Democratic Republic of Congo or adjoining countries. Trade in those minerals by armed groups appeared to help finance conflict in the region.
We analyzed conflict minerals reports submitted to the US Security and Exchange Commission for the past three years. Filing companies were primarily based in the US, but they also included foreign firms listed on US stock markets. Only about 1 percent of the companies were able to declare that their products were conflict-free beyond a reasonable doubt. Eighty percent admitted that they were unable to determine their raw materials’ countries of origin.
One supply-chain manager told us that his multinational Fortune 500 company had over 1,000 first-tier suppliers, who, in turn, had 8,000 second-tier suppliers, with, perhaps, 30,000 third-tier suppliers.
A few firms, such as Intel, recognized early on that the only way to tackle the problem was to investigate the smelters that process tantalum and certify the ones that rely on conflict-free sources. Apple implemented a third-party auditing system and has stopped doing business with dozens of smelters and refiners. Industry groups have also made progress in identifying conflict-free smelters in the region.
Despite the real possibility of Dodd-Frank being “revamped” under the Trump administration, these efforts are paying off. Prices of verified conflict-free minerals are now substantially higher than those of untraceable minerals.
Yong H. Kim is a doctoral candidate at the University of Michigan’s Ross School of Business, where Gerald F. Davis is a professor of business administration.