Sustainability 2011/12

Supply Chain

Conflict Minerals

In the U.S., a new law passed by Congress and signed by President Obama in 2010 – the Dodd-Frank Wall Street Reform and Consumer Protection Act – included a provision relating to conflict minerals. The provision requires many manufacturers to report to the Securities and Exchange Commission (SEC) annually on whether their products contain metals derived from conflict minerals, and if those metals are necessary to the functionality and production of their products. The sourcing region subject to full reporting includes the Democratic Republic of Congo (DRC) and the nine surrounding countries. According to the federal legislation, columbite-tantalite, cassiterite, wolframite and gold ores – which are refined into tantalum, tin, tungsten and gold, respectively – are considered to be conflict minerals.

The term conflict minerals generally refers to those minerals originating from the DRC and neighboring countries that may have directly or indirectly contributed to the financing of armed groups. Such armed groups may be responsible for violence – often toward women and children – and human rights violations in the DRC. Armed groups may directly manage a given mine or tax the mine and/or the transport routes for the minerals. The minerals then typically change hands six to 10 times before they are incorporated into end products. (See the known supply chain stages associated with conflict minerals.) The metals ultimately derived from conflict minerals may be used in a variety of automotive applications, including onboard electronics, metal alloys, lubricity coatings, hot-dip coatings and trim components.

Ford is concerned with the potential connection between the automotive industry and conflict in the DRC region and is working with multiple stakeholders, including the automotive industry, to address these supply chain concerns. Initial research and engagement have demonstrated that the underlying causes of conflict in this region are complex. A multilateral approach to solutions will be required, and we believe that companies in the downstream supply chain for these minerals have a role to play. We intend to require suppliers to use only metals that have been procured through a validated supply chain, so as to ensure that they have not, at any point, financed conflict. The processes to support validation are in development by local governments, industry groups, international organizations and NGOs, with support from governments outside of Central Africa. While these processes are being developed and implemented, Ford is taking action to educate ourselves and our suppliers, initiate automotive industry activity and begin the necessary due diligence.

Ford’s Conflict Minerals Due Diligence Process

Ford has found the guidance provided by the Organisation for Economic Co-operation and Development (OECD) to be particularly useful in designing due diligence processes for the Company. This framework, which Ford helped to develop through multi-stakeholder dialogue, provides practical guidance to companies throughout the supply chain on a set of actions that can be taken to ensure responsible due diligence. We are currently working through the OECD’s five-step process while also participating directly in the pilot implementation phase of the framework with the OECD.

OECD Five Step Process

  • Step 1:Establish strong corporate management systems
  • Step 2:Identify and assess risk in the supply chain
  • Step 3:Design and implement a strategy to respond to identified risks
  • Step 4:Third-Party audit of Smelters/Refiners’ due diligence practices
  • Step 5:Report annually on supply chain due diligence

Ford’s Actions to Date

  • Step 1: Assigned accountability and cross-functional team; revised policy and supplier guides to address conflict mineral issues
  • Step 2: Require supplier material content reporting and assign prioritization of suppliers based on declared content
  • Step 3: Balanced strategy of Ford and industry action to ensure robust sourcing policies, practices, and reporting
  • Step 4: Participation in the Conflict Free Sourcing Program through AIAG
  • Step 5: Public Disclosure in Ford Sustainability Report, anticipated formal SEC report for 2013 FY

Multi-Stakeholder Collaboration

  • OECD: Ford provided input to the creation of the OECD Due Diligence Framework and participates directly in the pilot implementation phase with the OCED as well as indirectly through AIAG
  • Public Private Alliance (PPA): Ford sits on the Governance Committee for the Public Private Alliance for Responsible Minerals Trade
  • Multi-stakeholder Initiative: Ford participates in the multi-stakeholder group of investors, companies and NGOs to explore common positions and advocate realistic solutions to the conflict minerals challenge
  • AIAG: Ford chairs the Conflict Minerals Workgroup at the AIAG which pursues common solutions for the automotive industry
  • Ford’s actions
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  • Industry Collaboration
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  • Greater Global Impact

Establishing Corporate Management Systems

Ford has established a cross-functional team to address the challenge of conflict minerals in the supply chain. This team is led by the Supply Chain Sustainability function within Global Purchasing and is supported by the Materials Management, Corporate Sustainability, Government Affairs, Public Affairs and Legal teams. A clear target has been established for 2012 supplier due diligence reporting, which covers the majority of the identified material use in parts provided to Ford. The Purchasing organization is responsible for working with suppliers as well as tracking progress, reporting and achieving the target.

In 2012 we revised Ford’s Code of Human Rights, Basic Working Conditions and Corporate Responsibility. Since 2004, our contract terms with suppliers have expressly encouraged our suppliers to adopt and enforce a similar code of practice and to have their subcontractors do so. We have also provided very clear guidance on supply chain due diligence and sourcing from conflict-affected and high-risk areas in our Supplier Social Responsibility Web-Guide, which is incorporated into our Standard Terms and Conditions.

In addition to encouraging our suppliers to adopt and enforce a code of practice similar to Ford’s Code of Human Rights, Basic Working Conditions and Corporate Responsibility, we also include explicit human rights terms in all of our contracts with suppliers. We engage with our suppliers on the topics of policy and management systems through our strategic supplier framework (the Aligned Business Framework). Our ongoing work with these suppliers includes the development or enhancement of supply chain sustainability management. It is important that we fully align with our suppliers on the approach to responsible sourcing of raw materials so as to avoid, where possible, unintended consequences, such as absolute bans on sourcing from the 10 countries listed in the U.S. legislation.

Identifying and Assessing Risk in the Supply Chain

Starting in 2011, we have been asking our global production supply base to identify the use of tantalum, tin, tungsten, gold and their derivatives and report that use by material weight into an existing automotive industry database (the International Materials Database System or IMDS, which we use to track the material content of our vehicles). Though the database currently tracks material content to monitor for the presence of certain regulated substances, it does not indicate where materials originated. The results from 2011 have been used to assess risk in the supply base for the use of the materials and to prioritize follow-up with suppliers for further information. The expectation for 2012 is that suppliers will continue to track and improve material content reporting for conflict minerals while also identifying smelters used. A red flag system is applied based on materials reporting (or lack thereof), and the system will evolve as the scope of information collected from suppliers grows.

Responding to Identified Risks

We understand our assessment of risk to be an evolving process as more information is made available to our suppliers and to us from all parties involved in validation pilot projects in Central Africa and along the supply chain routes that may ultimately lead to our vehicles. Therefore, our strategy is purposely dynamic, to allow for continued development and improvement. Given the scope and complexity of the issue, it is also a balanced strategy that relies on both Ford and collective industry action to maximize impact. A key source of insight for us on trends and practices is the multi-stakeholder forum provided by the OECD for the pilot implementation phase of the due diligence framework.

Upon initial engagement with our global supply chain, it has become clear that there is a need for information, education, guidance and tools. We are filling this need in several ways:

  1. Ford is pursuing two-way communication with suppliers in face-to-face meetings, direct dialogue and surveys. We anticipate our communication with suppliers to be part of an iterative information-gathering process in which we collect information, evaluate the validity of that information and improve upon it with each cycle of reporting. This will contribute to a robust and complete picture of Ford’s efforts to ensure responsible mineral sourcing throughout our supply chain of 1,400+ production suppliers.
  2. Ford is leading the Conflict Minerals Workgroup at the AIAG. In addition to providing common guidance from our executives and an informational webinar to the automotive population on the subject, the Workgroup has hosted in-person events intended to provide information, guidance and dialogue on responsible sourcing and conflict minerals.
  3. As a leading member of the AIAG, Ford has advocated for and helped to establish formal cooperation with electronics and telecommunications industry groups so that the various sectors can commonize tools for suppliers. These tools include a reporting template as well as software and web-based tools that will enable robust reporting.
  4. Ford sits on the Governance Committee of the Public-Private Alliance for Responsible Minerals Trade (PPA), a new, joint initiative between governments, companies and civil society that seeks to support supply chain solutions to conflict minerals challenges in the DRC and the Great Lakes Region (GLR) of Central Africa. The PPA is being launched as a joint effort with U.S. State Department, the U.S. Agency for International Development, nongovernmental organizations and companies/industry organizations. We hope that our participation in this Alliance will contribute to scalable, responsible, self-sustaining minerals trade in the DRC and GLR.

This suite of activities will appropriately address the risks identified and anticipated.

Smelter Verification

To fully understand the possible presence of conflict minerals in products and processes, it is critical to identify upstream and downstream portions of the supply chain from the central “pinch point” – the smelter or processor. The OECD conflict minerals due diligence framework recommends that downstream companies such as Ford be responsible for identifying the smelters used in the supply chain and ensuring that those smelters are appropriately validated as sourcing minerals that have not financially supported conflict. Ford is actively participating in and supporting the Conflict Free Smelter Program as a representative of the AIAG Workgroup. It is our intention to require suppliers to use only metals that have been procured through a validated supply chain, so as to ensure that they have not, at any point, financed conflict.

Annual Reporting

We will continue to refine and improve our processes for implementing the necessary due diligence on conflict minerals. As we work with our suppliers, the automotive industry, and other key stakeholders on this issue, we will continue to implement the OECD’s Five-Step process. The final step in our due diligence process is reporting annually on our due diligence. We already report on our efforts in this Sustainability Report. In the future, we will also provide more specific data on our progress regarding material and smelter identification in formal SEC reporting.

Conflict Minerals: Known Supply Chain Stages

  • Mine
  • Negociant
  • Comptoir
  • Trader(s)
  • Smelter
  • Refiner/Processor
  • Product/Component Manufacturer(s)
  • End Product Manufacturer

In addition, illegal channels may operate in parallel to this known supply chain, either by leveraging these actors, or by smuggling and other means.