Solectron has spent six years preparing for July 1, 2006. That's the date when the European Union's legislation mandating a reduction in lead and other hazardous chemicals in electronic equipment goes into effect. The $11.4 billion electronic manufacturing services company has watched the environmental legislation gain momentum and crest into a tidal wave that's about to wash over the electronics industry. You'd think that it would be ready.

And yet, last summer a memo leaked from an EU committee sent Solectron and other companies scrambling. The memo suggested that hazardous chemicals had to be tracked down to the subcomponent level rather than the component level. That would mean tracking the chemical content of not only a cable, for example, but also of the individual metal wires and the insulation material.

"Until this year, we were under the assumption that if we tracked chemical weights down to the component levels, we'd be fine," says Art Morgan, Solectron's senior manager of technical marketing. "Now they're throwing in the subcomponent level. For every record we thought we'd keep, we're now looking at five or six," he says.

Such are the frustrations as the electronics industry prepares to meet the EU's directive on the restriction of the use of certain hazardous substances in electrical and electronic equipment (RoHS). "One of the biggest challenges of compliance for our industry is that some of the most important details are yet to be decided," says Jennifer Shepherd, senior manager of corporate environmental affairs for Solectron. If they are to meet the July 2006 deadline, suppliers say, they must redesign parts and change manufacturing processes now. So companies are making educated guesses, spending millions of dollars to prepare and struggling to figure out which parts of the supply chain will shoulder the burden.

It's either that or do nothing. And with China and several U.S. states also considering similar initiatives, doing nothing is considered the riskier alternative. "If you don't have a lead-free action plan right now, you're way behind the times," says Kenneth Stanvick, senior vice president of consulting firm Design Chain Associates. "The risk is that your products will be locked out of the market." (For more information, see "Materially Deficient," August 2004.)

Although industry experts typically use the term lead-free to refer to the mandate, the EU law actually restricts the use of six hazardous chemicals in electronic equipment: lead, mercury, hexavalent chromium, polybrominated biphenyls, polybrominated diphenyl ethers and cadmium. This is about as definitive as it gets, however. In addition to the wavering guidance about tracking to the subcomponent level, the EU has yet to specify the maximum amounts allowed for each chemical or even which categories of electronics products will be exempt. Military and aerospace are exempt, for example, but the EU hasn't decided yet whether to also exempt telecommunications, storage, server and medical equipment from the requirement to use lead-free solder. Neither has it proposed any standard way for suppliers to label their new products nor standard forms on which companies are to report the chemical levels in them.

Hopes are high that the technical adaptation committee of the European Commission (EC), the organization that is supposed to be working out such details, will settle many of these questions when it meets this month. Meanwhile, some EU member countries have become so frustrated by the slow progress of the committee that they have stepped in with their own guidance. For example, the United Kingdom's Department of Trade and Industry issued guidelines in July 2004 that permit a maximum concentration of 0.1 percent by weight for lead, mercury, hexavalent chromium, polybrominated biphenyls and polybrominated diphenyl ethers and 0.01 percent by weight for cadmium. (For more on the UK guidelines, as well as guidelines from other organizations, see the box "Clear as Mud," below.) U.S. companies hope that the EC committee will ratify these guidelines at its December meeting.

"We're hoping we can reduce the number of old products as we get in the new lead-free products."
—Greg Frazier, executive vice president supply chain services, Avnet

Despite the lack of guidance, electronics companies are moving ahead. Many U.S. electronics companies are presuming that the UK guidelines will be the final limits. Numerous chip companies are redesigning parts so that they contain no hazardous substances, so they'll be compliant no matter what the final requirements specify. Most large companies are taking a conservative approach, tracking the hazardous substances down to the subcomponent level, says Stanvick. OEMs such as Sun Microsystems, Dell and Hewlett-Packard, which make products such as servers that may end up being exempt, are going ahead and making their products RoHS-compliant anyway, he says. Distributor Avnet and market research company Technology Forecasters surveyed more than 65 component makers, contract manufacturers and original equipment manufacturers (OEMs) last summer. The results: 94 percent of the companies said they were designing lead-free components, and 44 percent were manufacturing them. The survey also found that two-thirds of contract manufacturers expect to be fully compliant by July 2006. On the other hand, a substantial proportion of the industry, mostly the smaller companies, is not moving fast enough, says Stanvick. "About 25 to 30 percent of companies have declared that they won't be ready" by the deadline, he says.

Intel has been working with its suppliers for four years. "The logistics are a nightmare," says Vivek Gupta, program manager of assembly technology development at Intel, which deals with 200,000 electronic components. The company began by identifying and converting the least complex products and worked its way up to the more complex ones. Intel certified its first lead-free product in October 2001 and shipped its first lead-free product in October 2002. "We believe that our suppliers are ready," says Gupta.

But even as new lead-free products ship into the supply chain, they are causing headaches and confusion, because different companies are adopting different ways of labeling the parts. Of the suppliers surveyed in the Avnet/Technology Forecasters study, 52 percent will use new part numbers on lead-free products, 31 percent will use a date-code (meaning that every component manufactured after a certain date is lead-free) and 27 percent will have a different way of marking their products. The variety of approaches not only is confusing but also will require distributors and contract manufacturers to upgrade back-end systems to keep track of all the possible variations.

In addition, while the industry switches from old parts to lead-free parts, the total number of components in the supply chain may increase. Some estimate that in the short term the number of parts will effectively double, as suppliers offer both a leaded and a lead-free version of each component. "It's conceivable that we will need to significantly increase warehouse space," says Greg Frazier, executive vice president supply chain services for Avnet. But the chances of that are small, he says, so Avnet has not yet added space. "We're hoping that we can reduce the number of old products as we get in the new lead-free products."

Such a huge transition is adding up to huge costs. Component suppliers, distributors, contract manufacturers and OEMs are all digging deep into their pockets to finance RoHS-compliant products and processes, they say. "Lead-free is not free," says Intel's Gupta. "We have spent millions of dollars to get to lead-free."

The costs have come in three areas: capital costs, research-and-development costs and operating costs. The capital costs consist primarily of redesigning lead-use machinery—substituting or refurbishing solder-bath machines and surface-mount ovens, for example. In a July 2004 regulatory assessment impact report, the UK government estimates that it will cost between $95 million and $464 million to retool those machines in that country, with a corresponding annualized cost of $9 million to $47 million. For instance, Solectron operates 21 wave-solder machines in Europe that need to be converted at a cost of nearly $1 million, according to the company.

Companies have also invested in research and development to find, test and develop new lead-free parts as well as substitutes for the restricted chemicals. Orgalime, a trade association of electronics manufacturers in Europe, estimates a cost of $19 billion for R&D investment in Europe to support the new regulations. Most of Intel's costs have come from finding a replacement for tin-lead solder, says Gupta. For contract manufacturers and OEMs, the additional time it can take just to source new lead-free parts for any given product can be astounding. For instance, one product Solectron manufactures at its Dunfermline, Scotland, plant consists of 237 components from 67 suppliers. It took one Solectron employee two months to source new lead-free components for that one product, says Solectron's Morgan.

In fact, some contract manufacturers, including Solectron and Celestica, are launching a side business to help OEMs convert their products to lead-free. (For more on such programs, see "EMS Prepares For Its Next Phase".) These companies have entire teams devoted to RoHS compliance. "Twice as many people are talking to us this quarter as last quarter," says Dan Henes, general manager of engineering services for Celestica.

Operating costs are increasing, in part, from the use of substitute chemicals, some of which are more expensive than the hazardous chemicals they replace. The tin silver copper alloy Intel chose to replace tin lead solder, for example, is one of the most expensive substitutes. Companies will also need to use a greater quantity of alternative material, particularly with substitutes for hexavalent chromium and cadmium, to achieve the same result. Overall, the cost of metals will be about 30 percent higher in the first year of RoHS implementation, says Stanvick.

Companies also will face higher energy bills, because alternative processes such as using lead-free solder or brominated flame retardants require anywhere from 6 to 18 percent more energy. The EC estimates that the additional operating costs of using tin-based solders will total $189 million annually for Europe as a whole.

"Our customer will not pay more for a lead-free computer."
—Dave McCarron, director, lead-free program, Dell

Service and support costs may also increase. Data storage vendor StorageTek worries about the effect a new solder may have on the reliability of its product. Because alternative solders require higher heat to melt, components will be subjected to higher temperatures, which may ultimately affect reliability. "If the reliability goes down, there will be warranty repair issues," says Jim Goeppinger, a senior project manager at StorageTek.

As the production of lead-free components ramps up to high volumes, at least some of these costs should stabilize or drop, industry spokespersons agree. In the meantime, however, companies won't be able to compensate by increasing their prices. "We're looking at a 15 to 20 percent increase in costs, at least in the initial stages," says Solectron's Shepherd, an increase she thinks is conservative. "I don't know how OEMs are going to deal with this," she says. "How will they charge 20 percent more for a product that is exactly the same?"

The answer: They won't. "Our customers will not pay more for a lead-free computer," says Dave McCarron, director of the lead-free program at Dell. "Our direction to our suppliers is to launch lead-free products at cost parity," says McCarron. Translation: Dell's suppliers can expect to eat the costs associated with creating RoHS-compliant components.

OEMs are also trying to push some of the liability back into their supply chains. The majority of the responsibility for the product rests on the shoulders of the company whose logo appears on the box, according to the EU regulations, which means that OEMs are going to ride their suppliers hard. "It's not good enough to say, 'My supplier told me it was OK,'" says Stanvick. "You need to do a reasonable job of doing your due diligence." That means companies must be able to demonstrate that they took reasonable precautions to avoid violating the law, according to the UK guidelines. That, in turn, means collecting and storing vast amounts of paperwork for each product manufactured, which will also add significantly to operating costs. Dell, for example, requires all of its suppliers to provide a supplier declaration form, which lists the materials composition of their components. The company also requires that its suppliers demonstrate third-party testing of components in addition to the testing Dell also does, says McCarron.

Companies need to keep records for four years after they've put a product on the market, advises Stanvick. "Corporate officers can be jailed for violating these laws," he says, at least under the UK guidelines, which hold company executives responsible for any violation if the offense can be "shown to have been committed with the consent, connivance or through neglect of any director, manager or similar officer of the corporate body."

In practice, EU countries are unlikely to use jail time as a penalty, however. The most likely penalty will be barring shipment of a noncompliant product, says Stanvick. UK regulators have also said that they may impose fines.

If an OEM can show that it has operated in good faith, based on the data it has collected from its suppliers, then liability for a violation may fall on component suppliers. The UK guidelines provide for "liability of persons other than the principal offender." OEMs such as Dell are putting language into their contracts that share the liability burden with their suppliers, according to McCarron. "If our product does not ship, it has large implications," he says. "Our suppliers have liability."

As the countdown continues to July 2006, companies hope that the requirements they're racing to meet become fixed and well-defined. But even if they don't, industry experts advise companies to continue down the RoHS path as best they can. "The deadline is coming quickly, and there won't be a saving grace for companies that haven't started," says Pamela Gordon, president of Technology Forecasters. "The task is not insurmountable, but neither is there a lot of time to accomplish this."

What problems are you encountering in preparing for RoHS? Tell us at feedback@eb-mag.com.