The first era of sustainability, call it sustainability 1.0, focused on cleaning up the planet’s growing environmental mess. Federal legislation restricted air and water pollution, as well as hazardous waste, and businesses adapted to the new regulations. Sustainability 2.0 took a broader perspective, reducing not just toxic waste, but waste of all kinds. The business community realized that less waste meant less cost and pitched in, often increasing efficiency and boosting profits in the process.
But throughout this era of growing environmentalism, the linear business model, which has dominated the modern world since the industrial revolution, remained fundamentally unchanged. “Take, make and dispose,” is what Ken Webster, head of innovation at the Ellen MacArthur Foundation, calls it in his recent book, The Circular Economy: A Wealth of Flows.
What Webster and others are now advocating is something far more radical than recent efforts to reduce waste. In its purest form, Sustainability 3.0 — the circular economy — emulates the natural world. Allen Hershkowitz is a veteran recycling advocate at the Natural Resources Defense Council and co-founder/president emeritus of the Green Sports Alliance. He noted in his opening keynote address at the Wharton conference, The Circular Economy: From Concept to Business Reality, “In nature, there is no waste. One organism’s waste becomes nutrients for another organism.”
In the same way, the circular economy moves past the notion of consumable products, viewing manufactured goods that have outlived their usefulness as “nutrients” that help feed further production. The concept of waste disappears and irreplaceable natural assets are conserved as product lives are extended and new products are generated from the remains of old ones.
Gary Survis, a Wharton lecturer and IGEL fellow, moderated the Circular Economy conference. He noted in his opening remarks that this new approach “represents an incredible opportunity for business.” But Survis also pointed out that realizing this potential demands “disruptive innovation” — in technology, manufacturing, supply chains, and business models, as well as in business culture and society at large. “It is early days yet,” Survis said. But the momentum is building fast, as major corporations — including Dow Chemical, Caterpillar, H&M and Phillips — eagerly embrace the concept of the circular economy.
Preserving the Value of Manufactured Products
At its heart, the circular economy is about preserving value. Traditional recycling reduces waste but salvages only a small fraction of a manufactured product’s potential benefit. According to Helga Vanthournout, senior expert with McKinsey & Co.’s Center for Business and the Environment, when you recycle a product after a single use, “You lose all of the value-added — from the energy, labor and assembly — that were added through the manufacturing process.”
A 2013 report by the Circular Economy Task Force, “Resource Resilient UK,” offers a dramatic example. The study found that a reused iPhone retains around 48% of its original value whereas recycling its components retains just 0.24%. Less-complex manufactured products offer less dramatic, but still substantial returns. Reusing a ton of textiles, for instance, retains 9.6% of the original value compared to recycling (0.4%).
Recycling also comes too late in the process to address the environmental harm caused by manufacturing itself. As Hershkowitz notes, “More than 90% of a product’s impact happened before you opened the package.”
The business community is growing increasingly enthusiastic about the potential benefits of the circular economy, both for the environment and for the bottom line. Instead of limiting their sustainability efforts to increasing efficiency (i.e., reducing waste), more and more companies are focusing on ramping up productivity, the ability to produce more without using up more resources (or incurring more cost). As Survis pointed out, it is early in the process, but already circular-economy pioneers are succeeding on a number of fronts.
Remanufacturing. Companies that manufacture products with high intrinsic value, says Vanthournout, “realize that when a customer is finished with a product for whatever reason, it still has a lot of residual value.” She points to Phillips as a good example. “Phillips will take not just outdated, but also faulty or broken parts, and entire products — medical imaging equipment, for instance — restore them to good-as-new-condition, and then redeploy them to the market.” These remanufactured products appeal to smaller hospitals that cannot always afford the newest and best equipment but cannot accept anything that is not in good working order.
Caterpillar is another leader in remanufacturing: 65% of the company’s costs are generated by materials, giving it a strong incentive to fully embrace the concept. Through its profitable Cat Reman program, Caterpillar incentivizes the return of used parts by sharing the reduction in manufacturing costs with the consumer. Once restored to good-as-new condition, the salvaged parts are either used in manufacturing new equipment or sold as less expensive spare parts, opening up a new market for the company.
Remanufacturing is not only good for the bottom line, of course; it also has enormous benefits for the environment. Caterpillar, for instance, estimated that remanufacturing a cylinder head leads to 61% less greenhouse gases, a 93% reduction in water use, an 86% reduction in energy used, and a 99% reduction in waste sent to landfill.
Cascading. Important in its own right, remanufacturing is also part of a larger circular-economy concept. “Cascading” refers to the successive use of materials, component parts and whole products from one use-cycle to another. While there is typically some loss of value at each stage, over time the overall value extracted from the original product is significantly enhanced.
For instance, an old cotton sweater, instead of being discarded can continue to generate value in secondary or even tertiary markets (thrift shops historically, and more recently eBay and Craigslist). Once the garment is no longer suitable for wearing, experts say, its fibers can be used as fiber-fill in the furniture industry, after which the same fibers can be used yet again in stone wool insulation for construction. Even after that, anaerobic digestion can be used to extract fuel and fertilizer from the old cotton.
There are times when the cascade of uses actually increases the value of the original product in a process known as “upcycling.” When fashion company H&M uses polyester recycled from plastic polyethylene terephthalate (PET) bottles to make clothing, for example, it is upcycling the material to a more enduring use, and preventing the use of petroleum hydrocarbons to manufacture the fiber.
New business models. In the linear economy, consumers spend heavily on their own cars, which spend most of their product lives (more than 90%) sitting idle in garages and parking spaces. Uber, Lyft and other sharing economy companies suggest a different approach that, once again, extracts far more value from a single product.
Digital technology and “big data” make the sharing economy possible, and its growth has been dramatic in virtually every industry, most notably, travel, consumer goods, services, taxis, bicycles and car rentals, finance, music, employment and waste reduction. And the rise of this new approach to business may permanently change consumers’ attitudes towards ownership. In a recent PwC study, 81% of people familiar with the sharing economy agreed that “it is less expensive to share goods than to own them individually” and 57% agreed with the statement: “Access is the new ownership.”
But sharing is just one of the new ownership models embraced by leaders of the circular economy. “Servitization” is another, a new business model that converts traditional products to services, either in conjunction with the sale of a traditional product or as a kind of leasing arrangement. Phillips, for instance, is now selling lighting as a service. According to the company, customers pay a service fee for a lighting system, while Phillips retains ownership. The company installs, maintains and upgrades the system as needed, and at the end of the agreement, recycles the equipment, sparing the customer the headaches of ownership and reducing energy bills by 55%.
Interface is another pioneer, selling the service of supplying carpet to businesses and households, contracting to replace and recycle worn tiles over time, rather than simply selling floor covering as a one-time disposable product. (The Wharton School now uses Interface carpet in all of its buildings.)
In the aviation industry, Rolls-Royce’s TotalCare airplane engine program exemplifies a 21st-century form of renting. Instead of buying an engine for a fixed price, customers pay to use it based on the number of hours the engine is actually powering a plane. But the engine is not all that customers are renting, because Rolls-Royce also monitors the engine remotely and maintains it, modifies it and replaces parts as needed. The engine maker generates more than 50% of its revenue through this program, while maintaining long-term customer commitment and dramatically increasing the lifetime value of the original product.
Renault’s electric cars offer yet another approach to servitization. Instead of including the battery in the purchase price of the car, the company leases it to French customers. That allows Renault to replace the battery as needed. The used pack can be re-engineered or recycled to extract more value — without any service delays for the customer.
Preserving the Value of Biological Nutrients
When they wrote their 2002 seminal book, Cradle to Cradle: Remaking the Way We Make Things, William McDonough and Michael Braungart talked about technical and biological cycles and nutrients.
Nature, of course, is the model for a circular economy, and as long as the population in certain areas doesn’t grow too dense, nature makes good use of biological nutrients. Three hundred years ago, for instance, natural processes kept the water flowing down the Delaware River clean enough to drink, notes Patrick Cairo, retired senior vice president for corporate development at Suez North America. But by the 1960s, he says, “There was so much waste being dumped into the Delaware that bacteria, which grew to attack the organic material, consumed all the oxygen, so you had areas where there was zero oxygen in the water.”
To reduce such environmental degradation, cities throughout the world built wastewater treatment plants, which helped reduce pollution, but did little to capture any of the value in the original clean water. Cairo explains that Hyperion, the enormous treatment plant in Los Angeles that receives 80% of the city’s wastewater, “for a long time was discharging the effluent into the Pacific.”
Today, about 15% of the wastewater from Hyperion is piped to the nearby West Basin plant, managed by Suez, where the secondary waste stream is treated to five different levels of purity and piped to customers who can use that particular grade of water. In another plant managed by Suez in Edmonton, Canada, biogas is being extracted from the waste that is processed.
Food waste, too, is being reused in numerous ways. At the highest level, uneaten food cascades to people without enough to eat. Elsewhere, compost is taking a growing share of the food waste that used to simply rot in landfills. But according to Nate Morris, founder and CEO of Rubicon Global (a global leader in sustainable waste and recycling solutions), anaerobic digestion, which extracts added value from the organic waste by converting it into energy or fuel, maximizes the use of the material and is “one of the most environmentally sound and energy efficient solutions.”
Collaboration with Suppliers is Key
The circular economy is also redefining the traditional relationship among manufacturers, suppliers and consumers. In a circular economy, both consumers who recycle products and distributors who take back used goods become suppliers. And suppliers can sometimes play a key role in remanufacturing. Vanthournout notes that Foxconn, which makes smartphones and other products for Apple and many other companies, “is in a better position than the OEMs to check the [returned] phones for quality, clean them up if necessary, put proper labels on them, put some software on the chip and put them back on the market.”
At its refurbishing plant near Seattle, Phillips offers a concrete example of this kind of close collaboration. One of the company’s medical equipment suppliers now works on site at the Phillips facility, helping to refurbish key components. Vanthournout explains: “They found that this model created the best margins for both companies, while maintaining a very high quality level.” The arrangement also helps resolve any concern about intellectual property, an issue raised whenever there’s collaboration on one company’s product.
To make this kind of role realignment and collaboration work along the supply chain, it’s important to consider each player’s motivation. One approach is to share the value created by remanufacturing with the suppliers who contribute to the effort, while ensuring that the manufacturer initiating the collaboration gets enough of the added value to justify its investment.
Vanthournout used another car manufacturer’s experiences as an example of how the right motivation can drive a win-win solution. Renault had been purchasing its cutting oil from a supplier on a volume basis. The more oil the car company used, the more money the supplier made. Renault worked out an agreement with the supplier that shifted maintenance and service involving the oil to the supplier and changed the purchase agreement from volume-based to transaction-based. In this new scheme, the supplier would prosper by making improvements that allowed the oil to be reused multiple times. And that’s exactly what happened. By implementing design changes, the supplier dramatically extended the usage period for the oil, and in the process was able to improve its margin by 125%. And Renault’s total cost of ownership for cutting fluids fell by about 20%.
There’s Still a Long Way To Go
Rethinking supply chains and business models, forging new collaborative relationships, finding ways to extract value from manufactured and biological materials — none of this is easy, and many of the elements being radically transformed are interconnected. The linear economy is beginning to curve, but there’s still a long way to go.
“The reason I say it’s early days is because this is so complex,” says Survis. But the huge commitment made by major corporations is promising. “It’s incredibly powerful,” adds Survis, “but it’s not like we’re now, today, in the circular economy. We talk a lot about it, there’s a lot of buzz about it, but we haven’t made it yet.” ∞