Conflict minerals the real link between games and violence

Massacres, child soldiers, mass rape, razed villages, summary executions... It's all been happening the Democratic Republic of the Congo as armed groups have torn the country apart for years, in part funded by the sale of locally mined resources like tantalum, tin, tungsten and gold, sometimes abbreviated as 3TG or more commonly referred to as conflict minerals.

Yesterday, I covered Activision's latest SEC filing on its sourcing of conflict minerals. The good news was that Activision has no reason to believe Skylanders or the other merchandise it sells are funding the violent conflict in DR Congo. The bad news is that it couldn't say the same thing last year. And as I discovered upon looking at filings from other big companies in the games industry, the worse news is that Activision's position--based on surveys completed by its supply partners and unspecified "independent research"--is about as good as it gets.

Microsoft received components from 357 suppliers during 2014. Of those, only 82 percent bothered to return the company's survey on conflict mineral sourcing.

Conflict minerals aren't an issue for most games industry companies. Game discs don't need conflict minerals, so the concern is generally limited to those making hardware or high-tech toys. For Activision, that means Skylanders and Blizzard merchandise. But for platform holders with a range of tangible products or multinational giants for whom gaming is just a small slice of their business, the problem of sourcing conflict minerals is a lot more pressing, and a lot further away from a solution.

Activision sent its conflict minerals questionnaire to a grand total of 16 suppliers, all of whom responded in full. Compare that to Microsoft, which received components from 357 suppliers during 2014. Of those, only 82 percent (291) bothered to return the company's survey on conflict mineral sourcing. Microsoft said those who didn't respond "will be identified for possible escalation," where the supplier is told to obtain their conflict minerals from alternative sources or have their partnership terminated. (To date, Microsoft has not terminated a single contract for this reason.)

Microsoft's direct suppliers are only one link in the supply chain, and the company said there can be many layers of sub-tier suppliers before one finally gets down to the smelters, refiners, and mines where the origin of the materials can be determined. Those supplier surveys identified a total of 327 different smelters or refiners in the Microsoft supply chain, 60 of which were completely unknown to the Conflict Free Sourcing Initiative (CFSI) trade group that was created in 2008 to help companies address conflict mineral issues in their supply chains. Of the 267 remaining outfits, only 148 were compliant. Many were in various stages that could lead to compliance, but Microsoft listed 42 facilities with a conflict-free status it simply described as "unknown."

For 2013, Microsoft identified 276 active suppliers (94 percent of which responded to its survey) and created a list of 352 refiners and smelters in the supply chain. 169 of those were unknown to the CFSI. Of the remaining 183, only 83 were compliant with CFSI standards, and 38 were listed with an "unknown" conflict-free status. While some of Microsoft's numbers were worse year-over-year, it bears mentioning that 2014 saw the addition of Nokia's operations into the Microsoft report, greatly increasing the number of suppliers in the mix.

"Due to the limited information from our suppliers, we were unable to verify the location of these smelters and refiners, or the country or mine of origin of the 3TG sourced from these smelters and refiners..."

Sony

Sony's conflict minerals report to the SEC showed a similarly patchy understanding of its own supply chain. The company didn't say how many direct suppliers it surveyed, but acknowledged a number of them didn't respond to the inquiry, responded in an incomplete manner, or simply said they didn't know the provenance of the conflict minerals they used. Those who did respond identified 214 smelters and refiners in the Sony supply chain, 171 of which were validated as a conflict-free smelter by the CFSI. Interestingly, 13 of those validated smelters had sourced conflict minerals from the Democratic Republic of the Congo or its adjoining countries, which is exactly what the US government was trying to curb when it required conflict mineral reporting to the SEC in the first place.

Sony's explanation for the remaining 43 vendors which had not been validated as conflict-free smelters did little to inspire confidence as to their legitimacy.

"Due to the limited information from our suppliers, we were unable to verify the location of these smelters and refiners, or the country or mine of origin of the [conflict minerals] sourced from these smelters and refiners, but none of these suppliers identified any smelters and refiners that they stated were located in or sourced from a Covered Country."

Shockingly, that's still a marked improvement for the company. In its 2013 report to the SEC, Sony said approximately 80 of the smelters and refiners in its supply chain were certified as conflict-free, with more than 500 vendors falling under the "unable to be verified" umbrella.

Nintendo rounds out the big three console makers in the "needs improvement" category. After being excoriated for its apparent apathy by an advocacy group in 2012, Nintendo has taken steps to improve its record. While Nintendo isn't publicly listed in the US and thus isn't subject to the SEC reporting guidelines, it has provided updates on the issue in an annual Corporate Social Responsibility report. In its most recent report (covering the company's fiscal 2014), Nintendo said it received a 100 percent response rate from suppliers using the CFSI-standard survey. As encouraging as that might be, the company still reported that only 168 of the 247 refiners and smelters in its supply chain were certified as conflict-free.

Apple terminated four contracts with smelters or refiners, and has given 22 more a mandate to move toward compliance by year's end.

While Apple has been sensitive to criticisms of where and how it gets the materials for its high-tech kit (it removed Phone Story from the App Store in 2011), the iPad maker has also been working to improve its sourcing. In its latest SEC filing on conflict minerals, the company said 135 of the 225 smelters and refiners in its supply chain were certified as conflict-free by the end of 2014, with another 64 undergoing an audit to gain that certification. Of the remaining 26 facilities, four of them had their contracts terminated and are no longer part of the Apple supply chain. The other 22 were new additions to the chain in 2014, and have been given until the end of this year to begin the audit process to become a verified conflict-free site.

So on the platform holder front, things are still bad but (generally) improving. I'm not sure the same could be said of The Walt Disney Company, which has carved out a nice foothold in the toys-to-life market with Disney Infinity. In its own filing with the SEC, the media giant surveyed its 1,365 suppliers of retail merchandise, and said it received responses from just 40 percent of them. Even if the vast majority of them are only going to say they don't use conflict minerals, it's embarrassing that a company the size of Disney can't even inspire a simple majority of its partners to respond to the survey as a requirement of doing business.

Based on that sad response rate and its own review of the merchandise it sells, Disney determined that 22 of its suppliers manufactured items containing conflict minerals for the company. Of those, only three could convincingly say they didn't source conflict materials from the covered countries. That's actually worse than in 2013, when Disney identified 23 suppliers of conflict mineral merchandise, and found four of them were responsibly sourcing their conflict minerals from outside the covered countries. (Although Disney's response rate from suppliers did improve from a wretched 31 percent in 2013.)

Ultimately, Disney identified 122 smelters and refiners who provided conflict minerals to its suppliers. Of those, 16 were not compliant with CFSI standards, and another 10 who were deemed compliant had been identified as sourcing materials from the covered countries. It's impossible to say if those numbers represent any kind of improvement, because Disney's 2013 report essentially said the company had almost no idea how many smelters or refiners of conflict minerals were in its supply chain, or where they were located. It identified only three smelters and refiners (two in the United States, one in Canada, and one in Belgium), and offers the equivalent of a shoulder shrug as to the rest.

"Except for the products supplied by the three suppliers whose necessary 3TG was identified as originating from these smelters or refineries, we have not been able to determine the facilities used to process the necessary 3TG, the country of origin of the necessary 3TG, or the mine or location of origin of the necessary 3TG in our products," the company said.

For 2014, only three of Disney's 22 suppliers of products using conflict minerals could convincingly say they were properly sourced.

For 2014, Disney's efforts to improve on this front involved refining its internal systems to track supplier information and surveying its suppliers, a move it deemed appropriate "given the large number of suppliers from whom we procure retail merchandise, the relatively small portion of the Company's overall business involved in the sale of merchandise, the relatively small portion of business we believe we represent to many of our suppliers, and the multiple tiers we are removed from the origin of materials in the retail merchandise supplied to us..."

To be fair, that's functionally identical to what the company said it was doing the year before, even though 2014 saw Disney make the tremendous leap of identifying more smelters than Mickey Mouse has fingers. But as far as excuses for conflict minerals sourcing go, that one's shoddy on multiple levels.

For starters, I'm not sure how anyone could minimize the amount of Disney merchandise out there with a straight face. Keep in mind it's not just Mickey; Disney owns The Avengers, Pixar, Star Wars, pretty much our society's collective childhood at this point. It may only add up to 10 percent of the company's business, but when you're pulling in $48.8 billion a year, that still comes out to nearly $5 billion. And that money's importance to Disney's overall business is irrelevant here. A dollar buys just as much chaos, havoc and terror in DR Congo whether it represents all of Disney's revenue or virtually none of it.

On top of that, by downplaying the significance of conflict minerals to its business, Disney is downplaying the significance of the problem. It is saying it has bigger fish to fry, more pressing things to concern itself with than a multi-billion dollar business that might be destroying a country. I doubt Disney sees the people of DR Congo as a major market for its products, but it could do better to see them as people in need of help. Or failing that, people who don't need to be hurt any more.

Yes, this is a challenging task for companies that operate on this scale. But their scale is also the reason it's so important they take the matter seriously. An individual consumer choosing to boycott companies who can't be bothered to clean up their conflict minerals sourcing is an action easily ignored. The largest companies in the world making certain their billions in buying power aren't going to perpetuate a humanitarian crisis would be an action you couldn't ignore, and one worth celebrating.

Photo credit: Marcus Bleasdale