End-of-Year Recap on Major Regulations of 2023

The year 2022 was a landmark one for semiconductor supply chain regulations. In October, the U.S.’s Bureau of Industry and Security established a sweeping, largely unprecedented package of export controls on semiconductor technology and manufacturing equipment headed for the People’s Republic of China (PRC). While 2023 did not include the same type of bombshell regulation of major historical consequence—though it did feature significant rule changes to those 2022 controls—there were still a bundle of meaningful new laws and directives that were either entered into force or introduced to the public consciousness for the first time. 

Below, we’ll take a look at the regulations affecting the semiconductor supply chain that made the strongest impressions on industry professionals over the past 12 months. 

1. Regulation: EU Batteries Regulation 

Date Entered into Force: August 2023

Countries Affected: The European Union’s 27 member states 

What the Regulation Covers: Originally proposed by the European Commission in December 2020, the EU Batteries Regulation is part of the EU’s ambitious European Green Deal raft of initiatives. 

As we noted in our piece covering the EU Batteries Regulation, the European Commission passed this legislation in an effort to minimize the carbon footprint of batteries, reduce their dependence on toxic substances, and apply recycling and reuse standards that reflect the EU’s growing aspirations to become a more circular economy. 

To that end, the regulation imposes several new legal obligations on battery manufacturers. Among others, these include a carbon footprint declaration, CE marking requirements, due diligence policies, and end-of-life management targets in the form of something called the extended producer responsibility (EPR). The carbon footprint declaration, which applies to electric vehicle batteries, LMT batteries, and rechargeable industrial batteries with a capacity greater than 2 kWh, requires manufacturers to report the full life-cycle carbon emissions—excluding the use phase—for each battery model per manufacturing plant. 

The EU Batteries Regulation also adds five classes of batteries to the list of EU products that require a CE mark. These include portable, industrial, EV, LMT, and SLI. Because of the long-established CE marking requirements, manufacturers of these five battery classes must now carry out a CE conformity assessment. While the requirements for the conformity assessment vary depending on the battery classification, they generally include reporting data on the recycled content the batteries contain and creating a battery management system (BMS) that keeps track of the battery’s health and lifespan. 

Next, the EU Batteries Regulation sets forth new due diligence requirements for battery manufacturers and importers with a net turnover of at least 40 million EUR. Businesses that exceed that threshold and source specific raw materials for their products—particularly cobalt, lithium, nickel, and natural graphite—must adopt a due diligence policy adhering to international standards and implement a risk-mitigation system that identifies social and environmental threats along their supply chain. 

Finally, the new regulation establishes what the EU calls “extended producer responsibility” (EPR). EPR imposes two end-of-life management requirements on battery manufacturers. They must meet certain mandatory minimums for recycled content in their batteries, and they are responsible for collecting a certain percentage of waste batteries (thereby diverting them from landfills and waste management facilities). 

2. Regulation: ECHA Proposed Ban on PFAS

Date Entered into Force: A proposal was published in February for a ban that would take effect either after 18 months or through a phased approach. 

Countries Affected: The European Union’s 27 member states 

What the Regulation Covers: In February, the European Chemicals Agency (ECHA) published a proposal to ban thousands of per- and polyfluoroalkyl substances (PFAS). This proposal was authored and submitted by national authorities representing Sweden, Denmark, Norway, Germany, and the Netherlands. 

The proposed new restrictions seek to ban over 10,000 PFAS (there are currently around 15,000 total PFAS). The ECHA introduced two possible pathways to enacting these restrictions. In the first, a full ban would enter into force after an 18-month transition period. The second is more logistically complex, proposing a phased approach with specific time-limited derogations applying to particular uses. In addition, this second model stipulates that rare cases may qualify for time-unlimited derogations. 

The EHCA opened up the restrictions proposal to a six-month public consultation, which ran from March 22 to September 25. As one of our previous posts outlined, this period elicited some 5,600 public comments, including from 4,400 companies, individuals, and organizations. In many of these cases, industry professionals voiced reservations about the consequences of the proposed ban on their manufacturing processes. 

Now that the public comment period is officially closed, two ECHA committees will convene to review the comments and form their final opinions on the ban. The committee for Risk Assessment (RAC) will determine whether the proposal is an appropriate method for reducing risks to individuals and the environment, while the committee for Socio-Economic Analysis (SEAC) is tasked with gauging the potential socioeconomic impact of moving forward with the restrictions. Once these opinions are finalized and delivered to the European Commission, the ECHA and the EU’s member states will make a final determination on the ban. 

3. Regulation: German Supply Chain Due Diligence Act (SCDDA)

Date Entered into Force: The first phase of the act was entered into force on January 1, 2023. The second will come into effect on January 1, 2024. 

Countries Affected: Germany

What the Regulation Covers: The most logical place to start is with the scope of the regulations, and then move into specifically what the act entails for companies that fall within that scope. Beginning on January 1 of this year, enterprises that have their central administration, principal place of business, administrative headquarters, statutory seat or branch office in Germany—and that have at least 3,000 employees located in Germany—must comply with SCDDA. On January 1, 2024, SCDDA will be expanded to include companies with at least 1,000 employees based in Germany. (It’s worth noting that around 600 companies fell under the law’s remit as of January 1, 2023, and close to 3,000 will be within its scope in 2024.)

The German Supply Chain Due Diligence Act establishes a number of specific due diligence obligations on companies that fall within its purview. According to Germany’s Federal Ministry of Labour and Social Affairs, the act is based on 11 internationally recognized human rights conventions, which are “used to derive behavioural requirements or prohibitions for corporate action in order to prevent a violation of protected legal positions.” These human rights conventions concern, among others, slavery and child labor, occupational safety and working conditions, access to food and water, and wage discrimination.

In order to uphold these 11 human rights protected by the German Supply Chain Due Diligence Act, companies must adhere to eight obligations. These include:

1. The implementation of a risk management system that ensures a company’s compliance with the due diligence obligations and is “integrated into all relevant business processes.” 
2. Establishing a human rights officer or other personnel responsible for overseeing the risk management system. 
3. Carrying out an annual risk analysis into its own business operations and those of its direct suppliers to investigate any potential violations of the protected human rights areas. Additional analyses may be necessary if the enterprise foresees major changes to its supply chain and the potential for accompanying increases in risk levels. 
4. Producing a policy statement which outlines risk management procedures, details potential threats recognized by the risk analysis, and sets forth expectations placed on employees and suppliers. 
5. Executing preventative measures if and when a company identifies a specific risk, either within its own operations or within the operations of a direct supplier. 
6. Taking remedial action if a company recognizes that one of the protected human rights conventions is being violated, or if such a violation is imminent. 
7. Instituting a complaints procedure that allows employees to file complaints if they observe risks or violations. 
8. Conducting ongoing documentation and reporting reflecting the fulfillment of the due diligence obligations. This documentation must be collected in an annual report to be submitted to the German Federal Office for Economic Affairs and Export Control (BAFA), and publicly accessible on the company website.

Enterprises that fail to comply with these due diligence obligations are subject to legal fines by the German government. These can reach a maximum of 8 million EUR or 2% of annual global turnover. 

4. Regulation: Corporate Sustainability Due Diligence Directive (CS3D)

Date Entered into Force: The directive was initially proposed by the European Commission in February 2022. On December 14 of this year, European Parliament and the Council of the EU reached a provisional agreement on the language of the regulation. 

Countries Affected: The European Union’s 27 member states

What the Regulation Covers: The Corporate Sustainability Due Diligence Directive shares some common ground with The German Supply Chain Due Diligence Act, with some crucial differences regarding the directive’s specific obligations. The scope of CS3D, which was a major subject of negotiations over the course of this year, is intricately constructed and includes multiple groups. The main entities that will be affected are companies incorporated in the EU with more than 500 employees and net global turnover exceeding 150 million EUR, and non-EU companies that generate at least 150 million EUR in revenue in the European Union. 

The Corporate Sustainability Due Diligence Directive focuses on two sets of obligations:

• Due diligence policy for human rights and the environment: Companies that fall within the scope of CS3D must carry out measures to remedy any adverse impacts their operations and suppliers’ operations have on human rights and the environment. The European Commission explains that “the core elements of this duty are identifying, bringing to an end, preventing, mitigating, and accounting for” negative effects on these two protected categories. Specific impacted areas covered under the directive include—but are not limited to—slavery, labor exploitation, deforestation, and pollution. 
• Climate transition plan: CS3D also requires certain larger companies to develop and implement a comprehensive climate transition plan.​​ This plan should establish a framework for reducing their carbon emissions to an extent compatible with the Paris Agreement and its maximum temperature goals. 

Following the provisional agreement in December, the Corporate Sustainability Due Diligence Directive must now be endorsed, adopted, and signed by both European Parliament and the Council of the EU. This is likely to happen in the first half of 2024. After that, EU member states will have two years to adopt the directive and implement it into national law. Because of this protracted adoption process, most experts believe companies won’t need to fulfill their CS3D obligations until 2027. 

5. Regulation: The Bureau of Industry and Security’s updated export controls on China. 

Date Entered into Force: The United States’ initial set of export controls targeting the People’s Republic of China (PRC) were set forth on October 7, 2022. The updates went into effect on October 17, 2023. 

Countries Affected: The U.S., China, Macau and, to a lesser extent, 43 other countries in the Middle East, Africa, and Asia. 

What the Regulation Covers: As we detailed in a recent piece covering the semiconductor trade wars between the U.S. and China, the 2023 updates to the export controls focus on three key areas. First, they modify the parameters for what chips are subject to restrictions, using total processing performance (TPP) and performance density as thresholds for what semiconductors are regulated. Next, they significantly expand the list of controlled semiconductor manufacturing equipment (SME). Finally, the export control updates add 13 Chinese firms to the U.S. Entity List. 

Our recap on 2023’s most prevalent and noteworthy regulations is not intended to be exhaustive. Rather, it should offer a snapshot of the bans, restrictions, controls and directives—proposed, entered into force, or somewhere in between—that loomed largest for the semiconductor industry in 2023. 

It doesn’t take a meticulous analysis to recognize two major themes to these regulations. On the one hand, there is the ongoing trade war between the U.S. and China. On the other, there’s the EU’s multitude of directives aimed at prioritizing human health and the environment by imposing more stringent requirements on businesses that operate in the region. Of course, it’s far too early to say what 2024’s regulatory landscape will look like. It’s more than reasonable to assume, though, that these two deeply entrenched developments—each reflective of the present and future of technology and manufacturing in their own way—will continue to shape the way organizations in the semiconductor supply chain sphere operate in the 2020s.