By Raphael Fasko, 20.04.2016
By Raphael Fasko, 20.04.2016
Around 25 years ago, a vision of products that do not end up in the trash at the end of their service life was launched under the “Cradle to Cradle” concept. Since then, a great deal of research and development has taken place and thousands of circular economy products have been introduced on the market. It has been demonstrated that the raw materials cycle can also be closed for modern, industrial products in many product groups. Unfortunately, this form of production has not yet become widespread. What needs to happen to make the circular economy design an economic success?
The role of business models
One key prohibitive factor is the still pervasive linear sales model, where manufacturers relinquish ownership of their product to their customers. If manufacturers chose to invest in a circular economy design, they would create added value but not benefit directly from it because it arises further down the value chain. For instance, if manufacturers used circular materials, recyclers would benefit from this, while owners and servicers would be thrilled with how easily the product can be repaired. Manufacturers themselves rarely benefit directly from the circular economy design, which is it why it is difficult to justify investments in such a design from an economic point of view.
Strong economic incentives and new ways of thinking are required too. Circular business models can offer both. Rytec AG was commissioned by the Swiss foundation for sustainable development, known as "sanu durabilitas", to conduct a study on business models that promote a circular economy, and received assistance for that purpose from the Federal Office for the Environment (FOEN). Using the following case studies, we were able to illustrate which business models profit businesses in the circular economy and where obstacles and funding opportunities for such business models can be found.
Rental and leasing models
Desso, a Dutch company, includes circular materials in its carpets that can be fully reused to produce the next carpets. Its carpets are leased and then recycled. Desso also keeps ownership of the carpets, which means that its customers essentially store the raw materials for it. The added value in the used materials and the cost savings resulting from their easy disassembly benefit the business directly. Desso is also freed from the volatile commodity prices, which allows it to benefit from predictable material costs.
Philips offers “light as a service”. Customers select the brightness they need for their workplace, and Philips covers the lights, their arrangement, installation, maintenance and the electricity costs. Thanks to top-notch lighting planning, a selection of efficient light fixtures and the incorporated occupancy sensors, Philips is able to cut its electricity consumption by up to 70%. Philips benefits directly from this improvement. In a total cost comparison, its service offer is even more attractive than if customers bought lights and operated them themselves.
It is even possible to integrate the added value of the circular economy design in sales models. For instance, Caterpillar, a construction machine manufacturer, charges a deposit on the core components of its machines, such as engine blocks. The recovered parts are reconditioned until they are basically as good as new and sold for up to 40% to 60% of the price of new replacement parts. With the reconditioned components, Caterpillar achieves a higher margin than by producing new parts!
Integration of the value chain
These examples show that businesses can integrate vertically throughout the value chain by changing their business models. In doing so, manufacturers can convert (circular) product characteristics directly into additional income. Manufacturers can activate the unused residual value of their products by retaining ownership. In fact, such offers can be more attractive to customers than the total cost of ownership and be packaged as an integrated service.
The circular economy will be a sure-fire success
The examples show that circular economy products are especially interesting to manufacturers from an economic perspective, provided they adapt their business model: Leasing a product automatically creates an interest in its longevity and serviceability. Following business logic, investments are made in a circular economy design and new resource-efficient products are introduced on the market. This stimulates the use of a circular economy design and the development of a circular economy as a whole, simply because lease and service models ally economic success with a circular economy design.
Public procurement and greater legal security
In addition to setting up competency and research centres, another effective approach to promoting the circular economy business model in Switzerland would be to explicitly call for and even give priority to tenders such as light as a service in competitive bidding processes for public contracts. Furthermore, the legal framework for liability and ownership, such as in bankruptcy cases, should be improved in rental and leasing models, and legal security should be heightened.
The circular economy as an opportunity
As a knowledge and technology hub, Switzerland has an excellent opportunity to join the global wave of innovation toward the circular economy and secure market segments. However, this issue must be perceived more as an opportunity for growth in Switzerland, and businesses must have the courage to experiment with more than just the classic sales model. The time for being a pioneer in this area will soon be over and the window of opportunity will not remain open forever.
Last modification 29.04.2016