As the world grapples with climate change and other challenges, accelerating the transition to a Circular Economy will reduce waste, mitigate business risks, boost profitability and enhance the quality of life.
In their 2015 book, ‘Waste to Wealth – The Circular Economy Advantage’, authors Peter Lacy and Jakob Rutqvist said that their research indicated a $4.5 trillion reward for turning current waste into wealth by 2030. To put this number in perspective, this is more than the GDP of all nations except for the US, China and Japan.
If the business, societal and environmental case for transitioning to a circular economy was strong in 2015, it is much stronger today as the world grapples with climate change, mass hunger, poverty and supply chain disruptions.
The Old Economic Model
Since the dawn of the industrial revolution, manufacturing processes have followed a linear route with a beginning and an end. Take raw materials from the environment and turn them into new products. Once the product reaches the end of its life cycle, it is disposed of off into the environment.
This mode of production assumed that resources were infinite, and with the enhancement of technologies, their extraction from Earth could only become cheaper. It is a model based on exploitation, and it worked because so much of the industrial age overlapped with colonisation. This meant that colonial powers, which were also economic superpowers, could get their resources cheaply from the nations they colonised.
However, the fact is that Earth’s resources are limited, in fact severely so, if one considers that the human population now touches the eight billion mark. Given the consumer explosion worldwide, even resources like air, water and forests, while technically renewable, are stressed.
Additionally, the current linear production model treats the waste it generates as a problem for ‘someone else’ or ‘sometime in the future.’ As a result, industrial waste –chemicals, plastics and gaseous pollutants – is choking land, air, seas and waterways.
The current mass-production model is simply not sustainable. There is increasing pressure from global agencies like the United Nations, national governments, and civil society for businesses to transform and transition to an economic model that is more sustainable and equitable. The answer lies in the Circular Economy.
What is a Circular Economy ?
According to the Ellen MacArthur Foundation, the circular economy is based on three main principles:
What this means is that the Circular Economy is a model of production and consumption that aims to replace the currently prevalent “take-make-waste” linear model with one based on the four ‘R’s – Reduce, Refurbish/Repair, Reuse and Recover. The primary goal is extending product lifecycles and reducing and eventually eliminating waste.
There are five elements in a typical circular economy value chain.
This element focuses on the components that go into the design, sourcing, and manufacturing stages. By using these renewable or recyclable resources, the idea is to eliminate wasted resources (including toxic and single-use materials). As the transition to a circular economy accelerates, Circular Inputs can go beyond being zero-waste to be actually being resource additive where waste streams are processed into material streams.
While renewable energy is now becoming mainstream, materials present a stiffer challenge. Materials have to be circular and satisfy quality, safety, and cost standards.
Some companies are making remarkable progress in circular inputs. For example, almost 38% of the polyester used by the sports shoe and apparel giant Nike is recycled. The company also collects manufacturing scrap and materials from end-of-life footwear like rubber, foam, fibre and textiles and channels it into its Nike Grind program to be made into new products like phone accessories and flooring by partner companies.
Rather than a product being thrown away, this element seeks to enhance its life through a combination of repairs, component reconditioning, upgrades, and resale on secondary markets. An advantage of Product Use Extension is that it does not require a wholesale change to a company’s existing business model. In fact, it is an extension of existing business capabilities and market channels and can generate additional revenue streams.
There are several examples of Product Use Extension, especially for large products. For example, most large automobile companies operate programs to buy, refurbish and sell ‘certified used cars’. Schneider Electric, the giant energy management company, operates a retrofitting program for its switchgear customers. By replacing or upgrading components, and adding new functionalities it is able to save 65% of the cost of new installations for its customers. It is also enormously beneficial in terms of reducing the emission of greenhouse gases.
The challenge in Product Use Extension lies in potential changes to product design to enhance the modularity of components and coming up with new financial models to offset concerns about reduced product sales.
This is also the reason we don’t often see Product Use Extension being used for low-value products.
Once a product reaches the end of its lifecycle, Resource Recovery is critical to returning the embedded materials or energy back into the production cycle. This cradle-to-cradle approach seeks to close the loop from sourcing to usage and back to sourcing.
This is an element that is already in use, in one form or another, by most large companies as a part of their waste management programs – be it melting scrap steel to make new steel or recycling plastic from packaging. Reliance Industries, India’s oil and petrochemical giant, for example, is doubling its recycling facility to five billion PET bottles to convert them into polyester staple fibre.
Reliance has been able to do that because India has a robust ecosystem of reverse logistics chains where expired products are picked up from the consumer and sent back to the producer. It is more expensive to build such chains in more developed economies. However new Extended Producer Responsibility (EPR) levies being imposed by many national governments are forcing companies to invest in such chains.
While all the three elements cited above target the production end of an economy, the last two are aimed at the consumption side and the relationship between the product and consumer.
In recent years, we have seen the rise of the sharing economy with several platforms emerging to provide access to products that is convenient and affordable to users. Just think of companies like Airbnb and Uber. Most of these examples, however, are in the B2C (Business to Consumer) space and inevitably built by start-ups.
It has been more difficult for established businesses because building Sharing Platforms often requires substantially altering the business model, experimentation before they can get a fix on strategy and functionality.
As a result there are very few current examples of Sharing Platforms in the B2B (Business-to-Business) space. I am however confident that as the transition to a Circular Economy gathers pace, newer business models will emerge.
‘Product as a Service’ is an immensely popular concept in the Information Technology (IT) space where it is known as SaaS (Software as a Service) at both the retail and corporate user level. Think of storage services like Google Drive or Dropbox or the large cloud-based IT infrastructure offered by companies like Amazon, Google and Microsoft.
The Product as a Service model allows companies to generate additional value by developing long-term relationships with customers, selling additional services (cross-selling or upselling) and monetizing user data.
In the physical space (as opposed to the IT space), companies have found shifting to the Product as a Service business model challenging. This is because it requires a fundamental shift in design, planning, and roll-out of multiple additional capabilities, from customer-service desks and account managers to the collection and reverse logistics systems.
The experience of Michelin, the tyre giant, is an example of this. In 2000, it launched Michelin Fleet Solutions to transition from just being a tyre manufacturer to a service provider. The idea was that for large fleet operators, Michelin would share the risk of tyre damage at a nominal monthly cost. The project was, however, a failure because of several factors, including the company’s failure to effectively communicate the value proposition to customers.
In 2013, the company created a separate division to design, develop and market services for commercial vehicles. By leveraging the Internet of Things (IoT) technologies, it began using sensors inside vehicles to collect data, like fuel consumption, tire pressure, temperature, speed, and location. This data is then processed in a cloud solution and analysed by Michelin experts, who provide recommendations and training in eco-driving techniques.
The result of these efforts is that the company has been able to achieve a 2.1% reduction in the total cost of ownership for its customers besides significantly improving the fuel efficiency of their fleets.
As is evident from the foregoing, for businesses to transition to a circular economy requires innovations at multiple levels – from their business models, processes and products. The good news is that increasingly businesses globally are transitioning to circular economy thinking.
Besides increasing regulatory and civil society pressures, one reason for the accelerating shift to a circular economic model is risk mitigation. Businesses today face enhanced risk from resource scarcity, price volatility and supply chain disruptions. Each of these can have a severe impact on profitability. An accelerated transition to a circular economy will help mitigate many of these risks.
A survey by the World Business Council for Sustainable Development and Boston Consulting Group found that 97% of respondents said that the circular economy drives innovation to help make the company more efficient and competitive in areas such as sourcing, product development and production processes. Almost a similar percentage believe that a circular economy is crucial for the success of their companies and over half of them said that their businesses had profited from such thinking.
At TÜV SÜD, we are doing our bit to help companies transition to a Circular Economy by offering them a variety of services. These range from advisory services in waste management, process optimization, Product Life Cycle Assessment, and Sustainability Assessment. We also offer auditing testing product and system certification that helps our clients assure their stakeholders of their commitment to the circular economy and regulatory compliance. Finally, our experts help train our clients’ personnel in enhancing their competencies in some of these areas.
Know how we can support in your journey towards Circular Economy.