Green Legislation: Implications For The Electronics Supply Chain Understanding Your Exposure, Planning For Mitigation, Preparing For Competitive Advantage

Glenn Bassett VP, Strategic Business DevelopmentAvnet Electronics Marketing Americas

Agenda

Green Legislation Multiple regionsFirst Understand WEEE/RoHSRoHS Implications

What The Industry Is DoingSurvey

Customer Issues & OpportunitiesPlanning

Avnet CapabilitiesCall To Action

Why LeadWhy Lead--Free? Why Green?Free? Why Green?

When lead or other hazardous materials within electrical and When lead or other hazardous materials within electrical and electronic equipment is discarded into landfills it can leach electronic equipment is discarded into landfills it can leach into the soil and contaminate drinking water supplies. And into the soil and contaminate drinking water supplies. And

supplier of drinking water are limited…supplier of drinking water are limited…

Creates Sever Health Issues:Creates Sever Health Issues:

Brain & NeurologicalBrain & Neurological

Immune SystemImmune System

Multiple Essential Body SystemsMultiple Essential Body Systems

Effects everyone but Children are at Effects everyone but Children are at

Greatest RiskGreatest Risk

Green Legislation – Get ReadyDriving Issues

Drinkable Water Supply Needs Are Increasing Beyond AvailabilityWater Supplies Being PollutedMany Countries Now Regulating Pollutants

Implications Polluting Substances Are Being RegulatedStand By For Added Effort & ExpenseThis Train Is Leaving The Station

Don’t Hope For A Push Out

Environmental RegulationsA paradigm shift for design and manufacturing

RegulationsRestrict use of hazardous

materials In productsRequire material disclosure

(electronic products)Vary by region

CA SB 20/50

NAS 411ISO-14001

ELVELV

IEC Guide 113JapanJapan

RoHSRoHS

weeeweee

Engineering & Purchasing mustDesign for environmentDesign for new manufacturing

processesProcure & Certify

2004 2005 2006 2007July 1, 2006 E-Day

“Dutch customs and the state's health inspection service had discovered the consoles and 800,000 accessories -- estimated to be worth around $162 million -- during an inspection of a distribution center in the Netherlands.” CNN

WEEE & RoHS: The Main Event Everything Begins With WEEE/RoHSWEEE

Law in place to govern financing and obligations around return of assemblies to depots for safe disassembly

Clear Issue for “Producers” In Selling In EU

RoHSLaw in place to limit hazardous substances in manufacturing which would be later be dealt with at a WEEE disassembly depot.

The Major Supply Chain Issue

The RoHS DirectiveRestriction of the Use of Certain Hazardous Substances in Electrical and Electronic Equipment (2002/95/EC)

Limits the following substances in Electrical and Electronic Equipment (EEE) to 1000 PPM In “Homogeneous Material”

Lead Cadmium (100 PPM)Mercury Hexavalent ChromiumPolybrominated Biphenyl - PBB Polybrominated Diphenyl Ether – PBDE

Substances must be limited in all “product put on market” after 7/1/2006

More Substances Coming Joint Industry Guide A & B

EEE: Electrical & Electronic EquipmentScope

Large Household AppliancesSmall Household AppliancesIT & Telecommunications EquipmentConsumer EquipmentLighting EquipmentElectrical and Electronic Tools

With exception of large scale stationary industrial tools

Toys, Leisure & Sports EquipmentMedical Equipment

WEEE now, RoHS review 2/13/2005 With exception of implanted or infected products

Monitoring and Control Equipment WEEE Now, RoHS review 2/13/2005

Automatic Dispensers

ExemptionsDefense And Security Equipment

Not Dual Use – Military or Security Specific OnlyAirbus 400 vs. Airbus 380

High Voltage Equipment 1000V (DC) and 1500V (AC)

As noted on previous pageMedical & Control Equipment – Feb 2005 Review

Many Exemptions Under ConsiderationMany Limitations Are UnclearBest To Think Worst Case And Be Pleasantly Surprised

Exemptions Continuedmercury in straight fluorescent lamps for special purposes lead in solders for servers, storage and storage array systems, network infrastructure equipment for switching, signalling, transmission as well as network management for telecommunications (with a view to setting a specific time limit for this exemption) light bulbs compliant pin & press fit connector systems lead as a coating material for thermal conduction module C-ring lead and cadmium in optical and filter glass optical transceivers for industrial applications lead in solders consisting of more than two elements for the connection between the pins and the package of microprocessors with a lead content of more than 85 per cent in the proportion to the proportion to the tin-lead content (exemption until 2010) lead in high melting temperature type solders (i.e. tin-lead solder alloys containing more than 85 per cent lead) and any lower melting temperature solder required to be used with high melting temperature solder to complete a viable electrical connection lead in solders to complete a viable electrical connection internal to certain IC packages (flip chips) (exemptions until 2010) safety equipment for fire and rescue services

Regulations Aren’t PreciseRoHS—Directive 2002/95/EC

More than a year after passage of RoHS, the details are still being worked outSubstance threshold values are not clearReporting level (product, component, material) is not clearCompanies and industry groups have been interpreting on their ownThe Technical Adaptation Committee is proposing clarifications; but these aren’t clear either (for example: “homogeneous” material)

Due to the evolutionally nature of hazardous substance Due to the evolutionally nature of hazardous substance regulations and manufacturers ability to report them, regulations and manufacturers ability to report them, continually updated quantitative data is a mustcontinually updated quantitative data is a must

Demonstration Of Compliance

OptionsGathering Of Ad Hoc Data From Various SourcesReliance On Legally Binding Data From SuppliersGrind It Up

Carry Out Spot ChecksAnalyze Everything

Due DiligenceHomogeneous Material – How Low Do You Go

ProblemsSupplier Data AccuracyGrind Up Expense

Compliance Rollup for RoHS

Assemblies

Components

Finished Product

Requires DataRequires DataAggregation at allAggregation at all

Levels of theLevels of theFinished ProductFinished Product

Not A Spreadsheet Problem Not A Spreadsheet Problem –– Get Ready For IT Investment Get Ready For IT Investment

Lead / Lead Free DilemmaLead / Lead Free Dilemma

High Reliability Parts will Not Change to Tin (Sn). However, Commercial Parts are widely used for Cost Purposes

Tin Whiskers

Lead Part Procurement

Mixed Inventory

Tin WhiskersTin Whiskers

Manufacturing Processes Change

230°C 260°C

Manufacturing IncompatibilitiesCannot necessarily mix lead-based

and lead-free parts on same boardLead-free alternative solders require

higher temperaturesMany lead-based parts cannot

withstand higher temps

Manufacturing change from lead-based to lead-free

Regulations affect lead-finish on terminals and board soldering

Manufacturing lines and processes must change to accommodate

Expensive and time-consuming transition period between 2004-2006

Supply DiscontinuityChangeover occurs asynchronously

across all suppliers, all partsDemand and supply curves fluctuate

Shortage of lead-free and excess of lead-based (and visa versa)

Varies over time, by part

Manufacturing ImplicationsDifferent Solders

Numerous compounds being reviewedIPC, SMT Web Sites – White Papers

Process change overchange over expense may be high

ReliabilityLead Solder Joint Reliability Well Understood

50 years of experienceLead-Free Not Well Understood

Summary of RoHS RequirementsCurrent State

Restrict usage of 6 substancesApplies to certain categories of

productsLead, mercury, cadmium,

chromium VI, PBB, PBDECurrent guidance

Threshold on cadmium is 100 ppm, rest are 1000 ppmMeasurement is at

homogeneous material level, which is defined at lowest material level (cannot be mechanically disjointed)Measurement not at device or

assembly levelMaterials cannot be

intentionally added

Other impacts

Many OEMs are restricting usage of additional substances beyond the 6 mandated by RoHS

OEMs may be subject to other requirements from their customers, or other regulatory requirements from other regions

ManufacturabilityLead Free/Mixed Issues

Certain exemptions applyExemptions may only be

temporary, and do not necessarily apply to WEEE

WEEE reporting

So What Is Happening Now?Confusing Guidance, Leading To…

Country By Country Interpretation

Manufacturer By Manufacturer Interpretation

OEM By OEM Interpretation

CM By CM Interpretation

Department By Department InterpretationOpinions Abound

So We Commissioned A Survey…

Meaningful Standards for Part Numbering in Light of Substance-Restriction Requirements

A 2004 Study sponsored jointly by Avnet and TFI

(Abbreviated summary for webcast)

Pamela J. Gordon, CMC

President, Technology Forecasters Inc.Information, Insight, Interaction for Effective Manufacturing

Relationships

Study Methodology

Research conducted in July and August 2004. Objective:Understand component suppliers’ part numbering plans for products free of restricted substances (RoHS, other requirements)See what OEMs and contract manufacturers want and needRecommend to the industry viable and cost-effective practices

Funded jointly by Avnet and TFI’s Quarterly Forum for Electronics Manufacturing Outsourcing and Supply Chain, Sept. 30, 2004TFI interviewed in person and by telephone:

53 component suppliers13 contract manufacturersAbout 120 more contract manufacturer and OEM respondents from Electronic Supply & Manufacturing web survey, co-sponsored by Avnet

Analysis and report by TFI, for independent and objective view

Component Suppliers Interviewed by TFI

AavidAMDAmphenol-TuchelAmphenolAerospaceAnalogAromatArtesynAtmelAustin SemiconductorAVXC&KCherryComairCondor

ConfidentialCypressElcoteqFCIFreescaleFujitsuInfineonIntersilITT (Switches)KemetLamdaLatticeLeachMaxim

MicrosemiMurataNational SeminconductorNSC (division)NECNICNichiconOmronOn SemiOsramPanasonicPanduitPower OnePulse

QuickLogicSamtecSandiskSharpSTMSunonTIToshiba AmericaTyco Electronics IncTyco Electronics PowerYageo

How Component Suppliers Plan to Designate Compliance

21

2

21

27

31

37

52

0 20 40 60 80 100

Percentage of Suppliers (%)

New pb-free part #'s

Info on packaging

Date of manufacture

Mark on component

New RoHS part #'s

RFID technology

Other

Suppliers that will not change part numbers: 42%

Demand Component Suppliers Receive for Lead-Free Components

"Less than 5 percent"

26%

"5 to 15 percent"

33%

"15 to 25 percent"

13%

"More than 25

percent"28%

n=53

When Suppliers Expect More than 50% of Customer Orders to be Lead-Free

By 20076%After 2007

4%

Don't know or N/A

6%

Within 200612%

Within 200556%

Within 200416%

n=53

How will Component Suppliers Communicate Compliancy?

31

10

12

35

39

46

79

0 20 40 60 80 100Percentage of Suppliers (%)

Data accessible online

By request only

Paper catalogues

Report other substances

RosetteNet PIPs

Access code required

Other

n=53

Effect on Lead Times

Don't know or N/A23% Will not affect

delivery75%

Will extend delivery

2%

n=53

Effect on Price

Don't know or N/A12%

No change in price53%

Potential

increase35%

price

n=53

CM’s that expect to be fully Compliant by July 2006

Will not be compliant

31%Will be compliant

69%

n=13

How CMs Want Component Suppliers to Designate Compliancy

15

23

31

46

54

54

85

0 20 40 60 80 100Percentage of CMs (%)

New pb-free part #'s

Mark on component

New RoHS part #'s

Info on packaging

RFID technology

Date of manufacture

Other

n=13

Will Designation of Compliancy Affect Buying Decisions?

Will not affect buying

decision25%

Type of designation will affect

buying75%

n=12

Study Conclusions

•Confusion abounds within the supply chain

•Lack of Standardization

•Part Numbers Not Changing = Nightmare

•Lead-Free product demand will pick up dramatically in 2005

•RoHS material reporting will be a challenge

•Many firms are underestimating the task

•Many firms will be caught by surprise

Now We Know The Problems…So What Does All This Mean?

New Pervasive Legislation With Major Supply and Manufacturing Impacts On Financial Performance

Who Should Be Concerned?Anyone With Electronic Component Related Revenue Dependant On EU Sales

With follow-on concerns in Asia and AmericasAnyone Concerned About Lead Based Component Supply Discontinuity

Head in sand = future cost & producibility problems

Hazmat: Financial ImpactsCost & Risk MitigationCost & Risk Mitigation

Ensure continuity of EU/Asian Sales (regulations start 7/1/06)

Applies to sales of affected products

Other regions likely will follow suit (California, China, etc.) with their own regulations

Comply with customer requirements

Often more strict than RoHSBid and comply with Defense

contracts that require NAS 411Hazardous materials mgmt

programCompetitive marketing

advantageBeat competitors to market

with environmentally-friendly products that comply with regulations (first to market advantage)

Avoid fines and excess inventory for non-compliant products

Better manage supply base to make intelligent sourcing decisions

Continually track supplier status & roadmap

Cost and time-to-market advantage of 3rd party solutions make sense

Internal “make” costs very highLarge front end spike in resources

on non recurring level of effortNo time to waste – must act now

Proactive visibility to component obsolescence issues

CEO & CFOCEO & CFO -- Sarbanes Oxley Disclosure: SEC 10Q / 10KSarbanes Oxley Disclosure: SEC 10Q / 10KLack Of Preparedness Could Lack Of Preparedness Could Materially Impact Stock PriceMaterially Impact Stock Price

RevenueRevenue

AMR Research Report

Planning For RoHSRoHS – Planning

19 months to GO LIVE!Exemptions not solid

Supply Chain/ProcurementBOM Evaluation: Lead or lead free mfg

process and part crossing as appropriateLeaded part sourcing evaluationPlan for added E&O ExpenseSourcing of certification data

Engineering & Design New designs must be compliant Old designs need to be re-qualifiedPlan for Productivity Decline - Double WorkTools to leverage compliance data

Information TechnologyTools For Tracking & Proving ComplianceIntegration of data into systems

Sales & Marketing Kill off certain products/product linesLeverage compliance against competitorsReturns Planning

ManufacturingOutsourcing - Evaluate EMS ProvidersSet up parallel Lead Free and Lead LinesMillions in expense – Time to Outsource?

Warehouse/LogisticsIncoming Inspection – No Part # ChangeDual Inventory Planning – IT SupportRight part, right place, right line – How?Physical Inventory, Returns Management

ReliabilitySystem Retest, UL, FDA, FAA, approvals Tin Whiskering and other failure modes

ExportSystems to Manage CertificationsAmerican and Asian companies may be

purposefully challengedFinance

Expense budget of 2% of sales per year for 2005/2006

CEO/CFO Sarbanes-Oxley10-K/Q protection of revenue stream

June2004

Dec2004

June2005

Dec2005

Plans, budget, organization in place. Manufacturing approach and limitations determined. Manufacturing requirementsdefined and communicated to design, sourcing, EMS. Supplier requirements defined. Green procurement policy andplans in place. Sourcing requirements communicated to suppliers. Supplier questionnaires initiated.

July 2004

Ongoing internal and supplier communications and collaboration. Executive awareness and support is also critical.

80% suppliers

compliant.

Products analyzed. Issues and alternate supply sources identified & qualified. BOMs & AMLs updated

as required to bring products into compliance.

Additional IT system upgrades and content sourcing, as required.

90% suppliers

compliant.

Updated supply chain strategy/plans in place: planning, inventory, logistics, spares, etc.

100% suppliers

compliant.

Updated design & sourcing processes

implemented and in use.

Legal policies defined. Risk mitigation plans in

place.

Sales & marketing “green”programs defined,

communicated.

Production quantities available.

Final product issues addressed.

Update product repair procedures and

capability.

Green product shipments commence.

Purge non-green component stock and

product inventory.

Rollout of “green” sales and marketing

messaging, packaging.

Evaluate & select 3rd

parties

IT systems upgraded (includes 3rd party IT).

Hazmat content sourced.

Supplier roadmaps available & tracked.

Updated design & sourcing processes

defined.

Supplier/component risk mitigation plans defined.

Internal communic-

ation.

RoHS Compliance TimelineUrgency to Act Now is Real

Allproducts

green(7/1/06).

Sept2004

March2005

Sept2005

March2006

June2006

Material Disclosure for RoHS

Assemblies

Components

Finished Product

Requires DataRequires DataAggregation at allAggregation at all

Levels of theLevels of theFinished ProductFinished Product

Not A Spreadsheet Problem Not A Spreadsheet Problem –– Get Ready For IT Investment Get Ready For IT Investment

Avnet’s Solution Set

Avnet Capabilities…

RoHS Yes/No & Substance PPM levels for Franchised Components purchased in the last 6 months.

Access to world class Component data from I2 thru PrómierePrómiere Basic

– Basic Lead Free Manufacturing and RoHS Y/NPrómiere Advanced

– Six substance PPM and weight, Recommend RoHS alternatePrómiere Custom

– JIG A&B, Certifications, Expedited part creation, custom catalog

Overview of Promiere

Provide Supply Chain Visibility Insight and Solutions.Over 100 active customers using our various services

Size ranging from Fortune 100 to $20M in revenueServices from software to content to excess inventory

Partnered with i2, Agile, America II and AvnetAble to offer both Avnet franchised and non-franchised content to help you get the most data for your parts.

Promiere Green Basic –Attributes Included in Subscription

Parametric Search/Research EngineSide-by-Side Component Comparison

End-of-Life / Life Cycle ForecastingLead-Free & RoHS Basic Information

Lead free yes/noContact material (connectors)RoHS yes/noRoHS Compliant by virtue of thresholds or by virtue of exemptionTerminal / contact finishPeak reflow temperatureMSL @ peak reflow temperatureProduct Change Notices

Promiere Green Advanced

Attributes included with Promiere Subscription:Cadmium / Cadmium (Cd) compoundsChromium VI / Chromium VI (Cr VI) CompoundsLead / lead (Pb) compoundsPolybrominated Biphenyls (PBBs)Polybromninated Diphenylethers (PBDEs)Recommended RoHS-compliant replacement part (part number or date code)Method of distinguishing replacement part vs. originalJESD-97 codesPredicted End of Life

Promiere Green CustomAttributes included with Promiere Subscription:

11 Advanced Manufacturing Variables24 + Joint Industry Guide List A and List B VariablesMaterial Declaration sheetsExpedited Part Data CreationNon-electronic component data creation

Promiere Green CustomAttributes included with Promiere Subscription:

11 Advanced Manufacturing Variables24 + Joint Industry Guide List A and List B VariablesMaterial Declaration sheetsExpedited Part Data CreationNon-electronic component data creation

Make vs. BuyOutsourcing the responsibility offers numerous benefits (time, cost, people, risk)

Consider the following Content implications:Scope and timeline of content collection –

do a staffing analysisRealistic assessment of number of

resources requiredEven a medium-sized job can call for 25 full-time resources

This is an ongoing task, not a one-time effort?

Consider expertiseDoes your company have the tools,

process, experience and trained resources to do a better job than a content provider?

Consider quality levelsExtremely high quality is critical – does

your company have an ISO 9001 content process?

Cost and opportunity assessmentDo you have better economies of

scale than an off-shore dedicated content provider can offer?

Is content collection a core competency where you want to focus your limited resources?

Time-to-complianceDo you have the time and staff to

adequately build/expand your own IT applications, or would you benefit from a comprehensive, off-the-shelf maintained solution?

How many free IT resources do you have?

Recap of Promiere Service

Easy to navigate and use the systemHosted solution available Extensive data for parts to help find any problem parts and/or selecting the correct partsQuickly identify the parts at riskAllows you to easily determine which business options you have available with a discontinued or soon to be discontinued component:

Last Time BuyAlternate SourceRedesign of Board

RoHS Information – customized Green Product to meet the level of complexity as defined by you.

Call To Action1. Secure an Executive Sponsor

Management Focus / Attention, Budget and overall Alignment2. Determine an effective transition plan

EngineeringSupply ChainManufacturingCompliance/ExportDisclosure

3. Develop a Strategy that supports World Wide challengesRegulations will continue to change and evolve by region

4. Cross Function teams 5. Increase best practice participation with Industry

Consortiums like IPC, JEDEC, NEMI6. Procure tools to manage, access, and communicate data

Thank You

www.em.avnet.com/leadfree

Reporting RequirementsDue to the nature of reporting, many documents will need to be provided in a PDF format that cannot be altered versus in excel or other standardized file formats.OEMs will be responsible for preparing a Material Declaration regarding the compliance of their product(s).

Green Compliance Management IssuesLegislative and industry mandate

RoHS (including lead-free) and WEEE compliance not an option for most companies (discrete products containing electronics)

Why comply?Protect revenuesAvoid potential fines/penaltiesElectronics supply chain

mainstreamQuestion is how to best respond

1) Solve problem from within2) Leverage partners and 3rd

party solutions and consulting3) Hybrid (mix of above 2

options)

IT solution value prop driversAbility to achieve timely

complianceLook for opportunities to improve

product design/cost at same timeOptimize cost, risk and time of

available optionsIncludes resource availability

Compatibility with enterprise infrastructure (systems, data)

“Yes/No” compliance optionReasons why Yes/No is not enough

RoHS Directive not finalizedGuidance document still in flux

Interpretation of requirements like “intentionally added” and “homogeneous material”

Other requirements emerge that may differ from RoHS

Regional differences in environmental directives (China, Japan, U.S., etc.)

Example: may impact exemptions

Customers may mandate more stringent requirements

RoHS itself will likely change over time

A “yes” today may be invalid tomorrow

Defending an allegation

Material declarationCustomers or regulators may

require quantitative dataExample: along the lines of the

proposed Joint Industry GuideProduct testing/compliance

A material concentration near the threshold limit could fail a lab test

Testing has up to 20% varianceWEEE implications

May need to know amount of controlled substances so recyclers know what to recover at disposal

WEEE text: … keep records on the mass of WEEE, their components, materials or substances …

A Quantitative Data Approach is RequiredA Quantitative Data Approach is Required

Spreadsheet optionReasons why spreadsheet/paper is not enough

Risk/cost of error much higherNo centralized enterprise data

mgmtNo formal document/change

controlWould a company manage their

BOMs using spreadsheet?Consequence of 1 error is

extremely high

No traceability and due diligenceIf challenged, would a company

want to defend themselves with paper and spreadsheet?

Approach falls apart when changes occur

No automated alert notificationNo ability to do automated impact

assessment triggered by a change (part, BOM, regulation)

How to re-analyze BOMs, flag issue parts, do what-if analysis

No business process integrationSpreadsheets and paper not an

integral part of design & sourcing processes and systems

No enterprise decision supportHow to do analytics ?How would an engineer know if

they are selecting a part that is compliant and manufacturable?

An Enterprise Approach is RequiredAn Enterprise Approach is Required