New Bottom Line Volume 14.7 – Avoiding the Next Train Wreck

Thursday, September 1, 2005

(This New Bottom Line was written jointly with Pamela Gordon, President of Technology Forecasters, inc., and Michael Kirschner, President of Design Chain Associates, LLC. A version of this article appeared as an OpEd in Wall Street Journal Europe on August 17 2005, and in The Wall Street Journal Online; subscription required.)

The “train wreck” now facing the electronics industry — owing to many companies’ failure to keep up with increasing global requirements for environmental performance — was completely avoidable. It raises concerns about the level of fiduciary duty exercised by business leaders who should have done a better job of seeing it coming, and of preventing it.

August 13th was the deadline for the European Union’s WEEE (Waste from Electrical and Electronic Equipment) directive for product reuse, upgrade, and recycling, and few companies were ready. Products without the new crossed-out-wheelie-bin labels, or from companies that have not registered, cannot be “put on the market” in Europe, which represents about one-third of global electronics industry revenues.

We’ve warned our clients about this slow motion train wreck for several years, and have been dismayed by how good companies, with good people, have failed to adequately address it.

Example: More than 40% of electronics companies, in a recent (May/June) survey one of us conducted, described themselves as ill-prepared for the WEEE electronics take-back requirements: Fewer than 25% had selected or ‘were actively selecting’ compliance schemes; 23% percent hadn’t even started and 17% were ‘completely confused’ — less than eight weeks before the trigger date! Three-fifths of respondent companies are doing nothing to reduce WEEE costs.

Example: One of our June/July benchmark studies indicates that one-third of electronic equipment manufacturers (both original equipment manufacturers and contract manufacturers) will not be compliant to Europe’s next key electronic equipment directive — the “Restriction of Hazardous Substances” (RoHS) — by its trigger date of July 1, 2006. Thus those companies’ products also risk being barred from the European market.

We’re surprised by the surprise. The directives and the impending deadlines have been known for years. The political momentum has been evident for decades. The driving science has been known for centuries. And, for those who’ve missed the signs, the EU periodically tips its hand with documents like Towards a Thematic Strategy on the Sustainable Use of Natural Resources (released October 2003 — nearly two years ahead of the WEEE trigger date).

The challenge doesn’t end with WEEE and RoHS; in fact it’s just begun. In just two years, Europe will require electronic and electrical companies to significantly reduce their use of energy—in the components/materials they buy, in their manufacturing processes, the products in their intended use, and even in their “end of life” recovery. The Energy Using Products (EUP) initiative makes the US EPA’s Energy Star requirements look minimal. (According to our recent benchmark study, 60% of electronic equipment manufacturers don’t know about EuP and/or have done nothing about it.) The EU’s forthcoming REACH (Registration, Evaluation and Authorization of Chemicals) directive, according to Mark Schapiro, “represents an upheaval in the basic philosophy of chemical regulation, flipping the American presumption of ‘innocent until proven guilty’ on its head by placing the burden of proof on manufacturers to prove chemicals are safe.”

It’s not just Europe. Sony issued its own list of restricted hazardous substances, and disqualified hundreds of suppliers who didn’t meet their requirements. Hitachi, NEC, Toshiba and others are following suit. HP is banning 100 substances, and Nokia 200. Their suppliers will have to change or will no longer be suppliers. Dozens more regions have escalated environmental performance requirements in place and even more are slated for the future.

Yet many CEOs remain naïve about evolving environmental concerns in the global market coming from both governments and from leading companies. They have acted as though these market demands would go away, or get delayed, or that they would somehow be exempted. They have assumed that compliance would add costs, rather than provide an opportunity to deliver better a price/performance ratio to customers and to defend or even gain market share.

And they have failed to charge high-level executives to at least keep up with the pack, if not to create what we call — running your company so well, so clean, and so exceptionally beyond what any regulator in the world may expect of you, that regulations become an afterthought and compliance becomes a side effect of business success, not a hindrance.

This “train wreck” was not only both foreseeable and avoidable — and potentially avoidable at a profit — it is not unique to the electronics industry. The electronics industry is just one more example of companies failing to keep up with increasing global requirements for environmental protection — turning an “environmental” issue into a significant business issue.

There are other potential train wrecks on the horizon — such as responses (or lack thereof) to global warming, with warning signs that could range from sharply rising energy prices to declines in SUV sales (and the bond ratings of Ford and GM) to market-grabbing design innovation (a la Prius) to political response in the potential event of dramatic climate change. (A sentence written two weeks ahead of Hurricane Katrina.)

The challenge to senior executives and boards: how to steer away from the collision course with a set of global trends that many have evaluated incorrectly.

The challenge to all of us — as managers, investors, voters and just plain folks: how to overcome the all-too-human tendency to avoid inconvenient information in favor of wishful thinking and to take action in the face of risks that may seem to carry small odds, but large consequences.

# # #

What can be done about the potential train wreck? Here are four steps to consider, excerpted from It Began With a Dot.

1. Understand the drivers.
The European directives — both past and future — are predictable, not random. Those who understand what’s driving the EU directives could have seen WEEE/RoHS coming, and can start aligning their future design trajectory with the future regulatory trajectory, eliminate a random factor in their product development cycle, and shift budget from lawyers and lobbyists to engineers and marketers.

2. Drop the assumptions. Face the facts.
The notion that better environmental performance necessarily reduces financial performance is all too often rooted in habit, not evidence. It’s easy to make design improvements that cost more. It’s more challenging — and more profitable — to integrate “green” into the design process, by including stakeholder expectations and sustainability requirements into the design specification from the very beginning.

3. Design what works – before it’s demanded.
It will happen eventually; industrial systems are pliable than the biochemical requirements of living systems. The only question is how quickly, and how painfully. It may seem unreasonable. It may be very hard. But it will come – and what if your competitors figure out how to get there first? (How many more industries will the US have to lose?)

4. Steer by the logic, not the thresholds
Much of environmental regulatory policy has focused on a political/scientific process of setting acceptable thresholds for problematic materials – always a compromise, usually a painful one; always uncertain and unsettled, and ripe for litigation. Some companies have figured out that managing to a single regulatory regime – the highest standards anywhere, applied everywhere – is a simpler, and more powerful way to run a business. The smartest companies will “answer to a higher authority” – the physics and evolutionary biology that constitute the unrepealable laws of nature – and one that can make compelling business sense as well. Just ask Dupont’s CEO – and CFO – about the business implications of Dupont’s “unreasonable” commitment to “zero waste.”

(c) 2005 Gil Friend. All rights reserved.

New Bottom Line is published periodically by Natural Logic, offering decision support software and strategic consulting that help companies and communities prosper by embedding the laws of nature at the heart of enterprise.

Gil Friend, systems ecologist and business strategist, is President and CEO of Natural Logic, Inc.

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