When the European Union (EU) announced it would ban the use of lead and five other substances from electronics equipment, many industry executives said the law would cost the electronics industry billions of dollars.

It turns out they were right.

In fact, the Restriction of Hazardous Substances (RoHS) directive cost the global electronics industry more than $32 billion for initial compliance and about $3 billion annually to maintain compliance, according to a study done for the Consumer Electronics Association (CEA) by researcher Technology Forecasters Inc. (TFI).

TFI conducted a survey that found the average cost per company was $2,640,000 to achieve initial RoHS compliance and another $482,000 for annual maintenance.

For the investment, some companies said they improved their supply chain processes, while others pruned their product offerings and a few even gained market share. The environmental benefits were less clear, however.

RoHS went into effect July 1, 2006. It restricts the use of lead, mercury, cadmium and three other substances from being used in electronics equipment sold into the European Union (EU). Although the RoHS compliance deadline has long passed, the cost impact of RoHS will be felt for years.

"Everyone thinks RoHS came and went, but RoHS has only started," says Jim Simpson, director of supply chain management and engineering services for electronics manufacturing services (EMS) firm Celestica, based in Toronto. "We are busier than ever with Green services."

Celestica and other EMS providers that offer services and expertise to OEMs concerning RoHS will stay busy because RoHS is evolving.

More substances will likely be added to RoHS. The EU is currently considering adding 46 other substances to RoHS, including nickel, beryllium, gallium arsenide, and liquid crystals, among others. In addition, there are currently 29 exemptions to RoHS, but those exemptions are temporary and many could be withdrawn over the next several years. Removal of exemptions will increase cost for many companies.

RoHS impacts cost in several ways. For example, RoHS resulted in higher inventory and product costs. Fifty-seven percent of the companies surveyed reported a rise in inventory levels. Many companies had to stockpile both RoHS-compliant and noncompliant parts leading up to the deadline. In addition some got stuck with noncompliant parts after the deadline.

The average increase in inventory was 21% and the average reported cost for carrying the inventory was $688,000, according to the study.

Seventy-seven percent reported increased component, module and manufacturing costs because of RoHS. The average cost increase was 11.6%. Manufacturing process and equipment often had to be changed to accommodate the new lead-free parts and lead-free solder.

Many companies also had to redeploy employees to work on RoHS compliance. Companies dedicated five to 10 full-time equivalent employees to RoHS. Few companies hired additional employees for RoHS compliance, says TFI.

About 29% of companies surveyed reported lost sales due to RoHS with the average loss being $1.84 million. Sales losses were due to delay in new product sales and discontinued business in the EU.

The cost of compliance was higher for large companies than small ones. Larger companies have more products and more manufacturing lines that had to be modified to comply with the law. The average cost of compliance for companies with greater than $1 billion in sales was $6.5 million. For companies with annual revenue of between $100 million and $1 billion, the initial cost of compliance averaged $2.9 million, according to the study.

"RoHS was costly to everyone in the supply chain," says John Paterson, chief procurement officer for IBM. "We had to qualify a whole bunch of different components to meet RoHS requirements. Some RoHS-compliant manufacturing processes produced parts that were more expensive than the predecessor parts," he says.

RoHS also caused the price of some noncompliant parts to rise because many components manufacturers cut back or stopped making parts with lead even though there was still demand for such parts. Equipment such as servers and medical equipment are exempt from RoHS and use leaded components.

Simpson of Celestica says while there was not a "dramatic" price increase for RoHS-compliant parts, "we saw challenges with the legacy parts."

While RoHs has cost the industry billions, the benefit to the environment is not obvious, at least not yet, says Michael Kirschner, president of Design Chain Associates in San Francisco. Kirschner is a consultant who has helped electronics companies meet RoHS requirements.

"The goal of RoHS was to get substances out of production stream to benefit the environment. We are waiting to see if that actually happened," he says.

He says lead was replaced by tin in many components and applications. "You still have to mine tin and what is the impact of that on the environment?"

"On the other hand, RoHS got us warmed-up for REACH," he says. REACH is an EU chemical regulation that requires chemical substances that are manufactured for use or imported into the EU to be registered. (See story p.24E10)

While the benefit to the environment may not be obvious, almost half of companies surveyed said there was at least one advantage to RoHS. Nearly 25% said an advantage was the company improved its supply chain process. About 20% said an advantage was that the company reduced its number of products. And 15% said their companies gained market share because of RoHS.

Kirschner said there were some advantages to some companies, but the benefits were minimal. "Certain segments have benefited. It gave component manufacturers and finished-goods manufacturers an excuse to cull their product lines," he says. "Contract manufacturers saw a nice spike in business. It was good for them." Some OEMs who got to market early with new RoHS-compliant products saw some extra business, he says.

While there may have been some benefits, RoHS and other RoHS-like laws in Asia have proven to be challenging to purchasers making sourcing decisions.

"Different countries have different laws and there is a lot of inconsistency," says Paterson. For instance while EU RoHS and China RoHS cover the same substances, EU has 29 exemptions while China RoHS has none.

"So the environmental standards that you need in one location are not necessarily the same as other locations. It makes life a little more complicated for everybody," he says.

He says the RoHS and other environmental regulations mean that purchasers have to choose suppliers wisely, factoring the environment into their sourcing decisions.

"Not only does the product we ship have to be environmentally correct, but we have to think about the environmental conditions of our supply chain. We don't need IBM's reputation to be sullied by environmental issues from the supply chain. It is playing a significant role in our sourcing," says Paterson

He says IBM has changed suppliers because some aren't as environmentally conscious as they need to be. However, IBM will help suppliers meet environmental requirements. "But if they are not up to it, we are not going to be buying from them," he says.