Analysis: Impacts of Public Perceptions of Conflict Minerals on Consumer Electronics Sales ( )

Transcription

1 United States - Mexico - Brazil - Argentina - Columbia - Peru - Indonesia - New Zealand - China Analysis: Impacts of Public Perceptions of Conflict Minerals on Consumer Electronics Sales ( ) Human rights abuses in the resource-rich Democratic Republic of Congo (DRC) have prompted businesses, governments and consumer groups to launch initiatives aimed at reducing the flow of money from DRC s natural resource commerce to armed groups. These initiatives compel companies to investigate supplier relationships and publicly disclose the origin of ores from which tin, tantalum, tungsten and gold are produced - commonly called conflict minerals. The initiatives bring with them an array of potential business risks. Contractual requirements for conflict-free materials are emerging in commercial relationships, where the risks are clear. For companies subject to upcoming US Securities and Exchange Commission (SEC) regulations required by Section 1502 of the US Dodd-Frank Wall Street Reform and Consumer Protection Act, potential enforcement by SEC of those requirements looms. A basic premise of Section 1502 is reputational risk. The law anticipates conflict-free purchasing standards will develop between supply chain partners to avoid possibly being associated with funding DRC s militias via purchasing decisions. But there are difficulties in tracing supply chains and material sources. Information gaps and other challenges are inevitable. From our early work with conflict minerals programs, we noted 1 that corporate concern about a lack of absolute certainty in ore traceability appeared to be contributing to what many now consider as severe unintended economic consequences in DRC, recently confirmed by The UN Group of Experts 2. In light of these uncertainties in traceability information and expectations, difficult questions are raised, such as: Have consumers made buying decisions based on conflict minerals disclosures and programs? Will consumers punish companies disclosing - in an attempt to be transparent and reflect uncertainties in ore traceability - that material from militia-controlled DRC sources may exist in their supply chain? This paper looks into possible financial impacts of the questions, which are rooted in the perception and activism on the part of the general public rather than commercial relationships. Relying on existing but limited information already in the public domain for the electronics manufacturing sector, the goal of this analysis was to assess the data to see what if any generalized trends could be distinguished.

2 Approach 3 The goal was to assess and analyze relevant, but limited, existing information for discernible and financially measurable trends. The intent was not to conduct a definitive academic study, develop new market surveys/data or assess the validity/accuracy of consumer perceptions on the subject. This paper focuses on electronics manufacturers because consumer perception indicators are readily available. In compiling the publicly available financial data, it became clear that divergent corporate structures, business segment scopes and accounting requirements complicated data gathering and consistency 4. As the intent of the analysis relates to consumer response, the analysis is restricted to revenues from consumer products 5. Fiscal years 2010 and 2011 were reviewed, with 2011 being the first full year that the consumer perception indicators (discussed below) were publicly available. Further, we assumed: Consumer perceptions convert to purchasing decisions consistent with the sentiment represented by the rankings; Negative perception/activism results in sales below the financial performance scale midpoint; Positive perception/activism results in sales above the financial performance scale midpoint; and Aggregated results of consumer perception/activism are financially material. Consumer Perception Indicators The Enough Project and their Raise Hope for Congo initiative Getting to Conflict Free 6, published in December 2010, is the most popular ranking framework for electronics manufacturers and conflict minerals specifically, frequently referenced in 2011 in social and traditional media. These rankings serve as the indicator for consumer perception and their actions, Grouping 1 indicating negative perception/action and Grouping 3 as positive perception/action 7. From the list of 21 companies in the rankings, IBM and Intel were excluded because they do not offer consumer products. Motorola was excluded because the company s recent split made revenue comparisons impossible for purposes of this review. Lastly, Acer and LG were excluded because they will report calendar year 2011 revenues later in the year in accordance with their fiscal period. The remaining sixteen companies represent 76% of the original list. Financial Performance Scale Financial reports for the sixteen companies were reviewed to obtain fiscal year 2010 and 2011 sales for consumer products segments, and the percent year-over-year change was calculated (ranging from -29% to +66%). Quartiles were then established as the financial indicator scale, with Grouping 1 as the lowest performers and Grouping 4 as the highest. The Data 2010 Consumer Revenues* 2011 Consumer Revenues* Financial Performance Group Enough Rating Group % Company Change HP % 2 3 Nokia % 2 3 Microsoft % 2 3 Dell % 2 3 RIM % 3 2 Apple % 4 2 Philips % 2 2 Samsung 74, , % 4 2 Sony Ericsson % 1 2 Lenovo % 3 2 legal, accounting and technical subject matter advice should be obtained for any specific matters. 2

3 Analysis SanDisk % 2 1 Toshiba % 2 1 Panasonic 6, , % 2 1 Canon 1, % 1 1 Sharp % 2 1 Nintendo 1,434 1, % 1 1 * Consumer products only, in billions, currency used for corporate financial reporting (US dollars, Euros, Japanese yen, new Taiwan dollars and Korean won). This analysis relies on percentages, making currency conversions unnecessary. In some cases, sales figures originate from unaudited financial releases. Correlation of Financial Performance and Consumer Perception Number in bubble indicates number of companies with matching indicator data. Enough'Ranking'Group' 3" 2" Sony"Ericsson" Nintendo" Canon" 2" HP" MicrosoA" Nokia" Dell" 4" 4" Philips" SanDisk" Toshiba" Panasonic" Sharp" Red:"Strong"indicaJon"of" no"correlajon." " Yellow:"Weak"indicaJon"of" potenjal"correlajon." " Blue:""Strong"indicaJon"of" potenjal"correlajon." "" Apple" 3" RIM" Samsung" Lenovo" 0" 0" 2" 3" 4" Financial'Performance'Group' Copyright 2012 The Elm Consulting Group International LLC A Notable Contrast Apple, in Enough s second tier, faced intense consumer-based criticism in social media venues over its perceived conflict minerals status (as well as other corporate social responsibility matters) through Yet Apple s financials 8 show dramatic growth in the iphone and ipad - arguably the company s most visible, consumer-centric and theoretically most reputation-sensitive offerings. Given the financial data and its product context, consumer decisions regarding Apple do not appear driven by sentiments about conflict minerals. In contrast, HP was number one in Enough Project s ranking and faced far less criticism, yet combined revenues from HP s consumer products segments in 2011 retreated compared to HP s perceived legal, accounting and technical subject matter advice should be obtained for any specific matters. 3

4 leadership position did not prevent negative financial performance in its consumer products segments for Conclusions 10 From this brief analysis, no obvious connectivity was identified between perceptions of conflict minerals and financially material consumer sales performance. A strong indication of connectivity was seen in only 19% of the sample, with 25% indicating weak connectivity and 56% indicating no relationship of the factors analyzed. Different matters appear to have defined consumer buying behavior in Based on the findings from this small sample, consumers are not likely to differentially punish or reward companies (in financially material sales figures) in response to conflict minerals disclosures or programs, at least in the near term 11. Insight concerning the apparent decoupling of consumer opinion from spending behavior may be instructive to companies planning their conflict minerals management and public messaging programs. Our knowledge of conflict minerals and global health, safety, environmental and sustainability (HSES) management makes ELM uniquely qualified in conflict minerals program development and support. ELM has conducted audits under the Conflict-Free Smelter (CFS) program for tantalum and was the only HSES consultancy selected by the US Securities and Exchange Commission as an expert panelist in the Conflict Minerals Roundtable convened to assist the Commission in developing its final regulation. We are also the creator of the Self-Implemented Conflict Minerals Audit Preparation (SICMAP ) tool, an interactive roadmap to developing and reviewing conflict minerals management/due diligence programs. For additional information, contact Lawrence Heim, CPEA at or at lheim@elmgroup.com. We also invite you to visit our blog at Founded in 2001, is a specialty health, safety, environmental and sustainability management firm with 14 offices in the United States, Mexico, Brazil, Argentina, Columbia, Peru, New Zealand, Indonesia, China and a network of over 100 hand-selected affiliates in 22 other countries. Endnotes: Information used and relied on includes the electronics manufacturer rankings from the Enough Project s Raise Hope for Congo initiative Getting to Conflict Free and publicly available financial reports from the companies. ELM is not responsible for information from those sources on which we relied. 4 Samsung in particular presented challenges due to their business segment structure, the interrelationship of consumer and commercial products within those segments, and the method used to report segment financials. 5 Some of the companies manufacture products such as capacitors and other electronic components that are sold directly to consumers; however those were not considered to be consumer products and where possible, revenues from those were excluded from the analysis. Corporate functions, investment/divestiture income and business-to-business segment revenues were also excluded from consideration legal, accounting and technical subject matter advice should be obtained for any specific matters. 4

5 7 Inclusion within this analysis is not an endorsement of the Enough Project or the rankings, nor do we imply the rankings are valid, credible or accurate. Use of the rankings herein only reflects (a) the limitation that no other specifically-targeted indicators or rankings currently exist and (b) that they are intended for the general public/consumers. 8 The company also set market capitalization, total revenue, profitability and unit sales records in 2011, and achieved 252% total revenue growth from Apple s financials for the most recent quarter (1Q12, ended Dec. 31, 2011) continued this trend: quarterly revenue doubled over 1Q11 to $46.33B, with iphone and ipad sales up 128% and 111% respectively. These numbers were not included this analysis; even if they had, the company s financial performance group rating would be unchanged. 9 It is possible that the positive consumer perception prevented an otherwise larger revenue differential, but that cannot be determined or estimated. 10 Limitations/Disclaimers: This brief data review is not an exhaustive financial analysis. Many other factors are embedded in the financial data presented above and it is not possible to isolate any single factor. There may be contingent financial risks stemming from third party legal actions not reflected or anticipated in this review. Operational cost savings resulting from supply chain initiatives are also not reflected in this review. Companies may measure reputational risk/impact in ways other than discussed above. We are not financial experts or advisors and this analysis is not to be used or relied on as financial/investment advice. Past performance may not reflect future conditions, especially considering emerging conflict minerals certification programs, the upcoming final SEC regulations and increasing public awareness/activism. 11 Other reasonable conclusions include: the perceptions/activism reflected in social media are not converting to purchasing decisions; the credibility (as viewed by consumers) or public awareness of the Enough Project s rankings is not high; and the financial impact of perception-based purchasing that is occurring is not material. The conclusions of this analysis should not be taken out of context of the stated assumptions and small sample focused in one industry and is not intended to minimize the importance of complying with the final SEC rule or of corporate social responsibility programs. legal, accounting and technical subject matter advice should be obtained for any specific matters. 5