Advanced Packaging - The Riley Report

The $38 Billion Blunder
By George A. Riley, Ph.D., contributing editor
Lead-free compliance has cost the electronics industry more than $38 billion to date, a total increasing by $3.7 billion annually, according to a survey of the economic impact of the RoHS directive on the electronics industry. This is nearly double the estimate of $20 billion commonly quoted by non-enthusiasts, and minimized by proponents.

Survey
Technology Forecasters Inc. conducted a comprehensive survey and detailed data analysis, sponsored by the Consumer Electronics Association. TFI obtained web survey data from more than 200 companies world-wide, with a representative distribution of geographic locations, seven categories of products and services, and six revenue categories. Follow-up telephone interviews with selected survey respondents obtained more details and qualitative inputs.

Analysis
Results were compared by location, industry sector, company types and sizes, and other measures.
The cost analysis cross correlated key data to categorized company types and revenues. Industry cost estimates are extrapolations within the categories for 90,000 companies globally, based upon the 2002 industry census: 50,000 OEMs, 36,000 component suppliers, 3,000 EMS, and 1,000 others. The result is a total cost of $38.25 billion to date.

Labor Costs
The major accounting costs of compliance were labor, inventory changes, and lost sales. Reaching compliance required an average of 5 to 10 full-time-equivalent employees per company. Contract manufacturers spent the most on business process and system updates, while component manufacturers and OEMs spent the most on redesigns and BOM reviews

Inventory Costs
Inventory costs of compliance included both carrying costs and scrap. Inventory increases due to RoHS were reported by 57% of respondents. The average inventory rise for compliance was 21% at a carrying cost of $688,000. Scrapped inventory value averaged $698,000.

Lost Sales
Respondents reported lost sales averaging $1.84 million. Delayed new product introductions and discontinued EU sales were common causes. Lost sales were exacerbated from delays by suppliers unprepared to support the manufacturers when needed, partially because requirements for proving conforming products were found to be vague and unclear.

Manufacturing Costs
Higher manufacturing costs after conversion to lead-free were reported by 77% of participants. The average cost increase reported by OEM or added by contract manufacturers is 11.6%. Increases may result from higher lead-free materials costs, processing costs, reduced throughputs, and lower yields.

Continuing Costs
The survey identifies the average annual costs per company of maintaining compliance at $482,000 per year, and a total industry cost of $3.7 billion annually. Note that this includes only the costs of maintaining compliance, not the higher manufacturing and materials costs of lead-free products discussed below.

Opportunity Costs
Opportunity costs are difficult to quantify. However, the foregone productivity of hundreds of thousands of technical people devoting their efforts to a political project, rather than a productive one, is significant. The total accounting costs of becoming compliant averaged 1.1% of industry revenue, about a third of average annual industry R&D spending. Thus, the lost opportunity cost is the equivalent of the foregone benefits of a 33% increase in industry R & D spending.

Windfall Profits
As the old saying goes, "It's an ill wind that blows nobody good." The squandered $38 billion did not disappear into thin air. In fact, much of it fills the coffers of those who profited from the political decision to "solve" a non-problem by discarding a proven technology for an untried one.

Beneficiaries might include, for example, consultants, trainers, and instant experts of all stripes who quickly created a lead-free advising sub-industry. It certainly includes the manufacturers of equipment that required replacement or upgrading to meet lead-free needs. It perhaps includes even the trade press who saw a lead-free spike in advertising revenue.

But these one-shot beneficiaries are paupers compared to those who now have a lead-free annuity in an on-going stream of increased revenue. Perhaps this explains how materials suppliers, such as solder manufacturers, continue to preach lead-free benefits and minimize the faults, including the increased environmental hazards, of lead-free solders.

The EU classified their decision to proceed with RoHS as a political, not a scientific one. We all know that politicians frequently squander large amounts of other people's money on chimeras. Unfortunately, the cost, quality, and environmental negatives of the $38 billion lead-free wind may yet blow us more ills than benefits.

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