EMS Plays Green Card

"For any of the large OEMs [original equipment manufacturers] that are trying to capture the Chinese market, they're going to find themselves in a bit of a quandary," Shea said. "The Chinese government has made sure that many of the Chinese companies were well aware that this was coming."

With the European law about to take effect, "the EMS companies are facing a nightmare" of inventory and supply-chain headaches, says Jim Walker, a vice president of research for semiconductor manufacturing at Gartner.

But it won't affect the sector in the long term, he says. "This is just a phase-in issue, like unleaded gas -- we all accepted it, we all phased it in. Every time you introduce something new, there is some emotional and financial impact."

For the past several years, EMS providers have been busy testing more environmentally friendly solder formulas. While the reliability of lead has been proven for over 50 years, lead-free solders and components (resistors, capacitors and diodes) are relatively new and have required more testing, Shea said.

The new lead-free solder requires higher temperatures to melt the solder and assemble the components, and higher temperatures translate to higher energy costs, says Walker, who doesn't own shares of any of the companies mentioned.

And quality is still an issue, wrote analyst Richard Kugele of Needham & Co in a Monday note. Lead-free solder increases risk of short-circuiting, so until such technical issues are resolved, "the quality risk in medical equipment alone will support continued demand for many lead-based solder components for at least the next few years."

In addition, keeping leaded parts separate from the lead-free parts is a major challenge. Component companies need to relabel parts and certify those that are lead-free. Adding to the complexity, some printed circuit boards also have a mixture of leaded and non-leaded parts on the card.