New Horizons: The circular economy

This article first appeared in Unlisted & Unlimited, The Edge Malaysia Weekly, on March 14, 2016 - March 20, 2016.
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The developed world is actively embracing the concept of a “circular economy” — one that is purposely restorative and regenerative by design and aims to keep products, components and materials at their highest utility and value at all times.

Retired British sailor Dame Ellen Macarthur founded the Ellen Macarthur Foundation in 2010 to help accelerate the transition to a circular economy, especially in Europe, which is a prime mover in this space.

In an interview with a magazine, Macarthur offered what may be the simplest explanation of what a circular economy is. “Our current economic model is a linear one: we take something out of the ground, make something out of it and ultimately throw it away — or sometimes, we recycle it. With the circular economy, from the beginning you design for disassembly, you design for remanufacture, you design so that the product can fit within a flow.

“To be able to reuse or recycle a certain material that went into a product, you will need to know where that material is. Let’s say there is a bar code on your phone and if you scan it, you will know exactly what went into it — the age and details of the components. That will enable huge opportunities for reusing or recycling materials. It is about changing the whole system.”

It is not just about recycling materials, but the smarter use of resources. According to a publication released by Macarthur’s foundation, Towards a circular economy: Business rationale for an accelerated transition, the current economy is surprisingly wasteful in its model of value creation.

“In Europe, material recycling and waste-based energy recovery captures only 5% of the original raw material value. Analysis has also found significant structural waste in sectors that many would consider mature and optimised. For example, in Europe, the average car is parked 92% of the time, 31% of food is wasted along the value chain and the average office is used only 35% to 50% of the time, even during working hours,” it says.

Recognising this waste, a new model of transaction has started to emerge. “Individuals are starting to embrace business models that enable them to access services rather than owning the products that deliver them, thus becoming users. This has been demonstrated in some markets: rental, performance-based and sharing models, enabled by new technologies, are already finding ready customers and experiencing exponential growth,” says the report.

And this model is being applied to vastly diverse products, from washing machines (see side story) to lighting.

The idea of a “performance economy” was developed by Walter Stahel in the 1970s. He insisted on the importance of selling services rather than products. Through this, manufacturers would retain greater control over the items they produced and the embodied energy and materials, thus enabling better maintenance, reconditioning and recovery.

Customers would also benefit because they would only pay for the service they use. And often, they would receive better service as the manufacturer has a greater interest in providing a product that lasts. 

Take how lighting company Philips came up with light as a service model. One of its customers, architect Thomas Rau, wanted to fit out his Amsterdam office but didn’t want to bother about what type of lighting to select. So, he told the company that he needed so many hours of light in his premises every year, but it was up to the company to choose the fixtures. “I told them I was not interested in the product, just the performance. I want to buy light and nothing else,” he recalls.

RAU Architects worked with Philips to develop a system that could work within this new way of thinking and ended up creating a minimalist light plan that made as much use of the building’s natural sunlight as possible to avoid providing a surplus of fixtures that would waste both materials and electricity.

Basically, companies are still figuring out the business models that will work. But the smarter ones, which have already done so, have first mover advantage and are reaping the benefits. Although nobody can quite agree on just how much of a market there is to tap, they all seem to agree that it runs into trillions of dollars. It could be one of the biggest market opportunities yet.

In Waste to Wealth: Creating Advantage in a Circular Economy, authors Peter Lacy and Jakob Rutqvist, who define and thrash out the economic opportunity, are not conservative in their estimates. “Our research indicates a US$4.5 trillion reward for turning current waste into wealth by 2030. That is not just waste in the traditional sense of rubbish, but the enormous underutilisation of natural resources, products and assets. It is about eliminating the very concept of ‘waste’ and recognising everything has a value,” they say. 

For instance, they ask, what about creating a US$10 billion business renting property without using any energy, metal or other resources to build a single house? Or increasing a company’s gross profit by 50% while reducing material use by 90% — all by recovering and remanufacturing used components? Or unlocking US$1 billion in previously wasted value by transforming material management in manufacturing? Or using a country’s underutilised biomass resources to tap into a US$80 billion market for advanced chemicals and energy?

“Global industry leaders as well as innovative start-ups are already beginning to reap huge rewards by tapping into these opportunities,” Lacy and Rutqvist, who are global managing director and senior manager of sustainability services at Accenture Strategy respectively, point out.

Basically, the circular economy rests on three principles. The first is to preserve and enhance natural capital by controlling finite stocks and balancing renewable resource flows. This starts by delivering utility virtually, whenever possible. When resources are needed, the circular system selects them wisely and chooses technologies and processes that use renewable or better-performing resources, where possible. A circular economy also enhances natural capital by, for example, encouraging the flow of nutrients within a system and creating the conditions for soil regeneration.

The second has to with optimising resources by circulating products, components and materials at the highest utility at all times in technical and biological cycles. This means designing for remanufacturing, refurbishing and recycling to keep technical components and materials circulating and contributing to the economy.

Circular systems use tighter, inner loops (for example, maintenance rather than recycling) whenever possible, thereby preserving more embedded energy and other value. Embedded energy is the energy consumed by all the processes associated with the production of something, from mining and processing of natural resources to manufacturing, transport and product delivery.

These systems maximise the number of consecutive cycles as well as the time spent in each cycle by extending product life and optimising reuse. For example, cotton clothing is reused first as second-hand apparel before crossing into the furniture industry as fibrefill in upholstery. And later, the fibrefill is reused in stone wool insulation for construction before the cotton fibres are safely returned to the biosphere. In each case, the process is a substitute for an inflow of virgin materials into the economy.

Sharing, in turn, increases product utilisation. Circular systems encourage biological nutrients to re-enter the biosphere safely for decomposition to become valuable feedstock for a new cycle.

In the biological cycle, products are intentionally designed to be consumed or metabolised by the economy and regenerate new resource value. For biological materials, the essence of value creation lies in the opportunity to extract additional value from the products and materials by cascading them through other applications. 

The third principle has to do with fostering system effectiveness by revealing and designing out negative externalities. This includes reducing damage to systems and areas such as food, mobility, shelter, education, health and entertainment, and managing externalities such as land use, water and noise pollution, and the release of toxic substances.

While many companies and local governments in Europe and the US see the necessity for and have embraced the principles of the circular economy, the concept has barely registered in Asia. Many CEOs surveyed, including those related to R&D in some capacity or other, had not heard of the concept.

Royal Philips chief executive Franz van Houten and Cisco Systems chief executive Chuck Robbins say in their joint foreword to Intelligent Assets: 

Unlocking the circular economy potential, which was released last month, that while the principles of a large-scale circular economy are being embraced in industrialised countries, no greater potential for circular operating models can be seen than in emerging markets. 

“The opportunity to transition towards new modes of industrialisation is profound. This has the potential to improve billions of lives while minimising intensive use of natural resources. We must manage our rapidly growing global population with this in mind,” they point out.

So, where do the opportunities lie? The Ellen MacArthur Foundation has identified four building blocks that will foster a more circular economy. 

First, circular product design and production. “A key feature of a circular economy is to be restorative and regenerative by design. The recovery of materials and products is not only addressed at end of use, but is enabled at the design level [such as choice of materials or design for disassembly],” it says.

Circular product and process design requires advanced skills, information sets and working methods that are not readily available today, it adds. Manufacturers should specify the purpose and performance of the end-products, more than those of input materials. They should also favour pure materials in their production process since they are easier to sort out at end of life.

Other areas important for economically successful circular design are standardised components, designed-to-last products, design for easy end-of-life sorting, separation or reuse of products and materials, and design-for-manufacturing criteria that take into account possible useful applications of by-products and waste. 

Feedback mechanisms should be developed between design and end-of-use activities. Business models that move from ownership to performance-based payment models are instrumental in translating products designed for reuse into attractive value propositions, the foundation says.

By prioritising access over ownership, these models drive the shift from consumers to users. Companies with significant market share and capabilities along several vertical steps of the linear value chain could play a major role in driving circularity into the mainstream by leveraging their scale and vertical integration. 

To create value from materials and products after use, they need to be collected and brought back. Reverse logistics and treatment methods allow those materials to get back into the market. They will include delivery chain logistics, sorting, warehousing, risk management, power generation, and even molecular biology and polymer chemistry. 

With cost-efficient, better quality collection and treatment systems, and effective segmentation of end-of-life products, the leakage of materials out of the system will decrease, hence supporting the economics of circular design.

Collection systems must be user-friendly and located in areas accessible to customers. End-of-life specialists must be capable of maintaining the quality of the materials so they can cascade through diverse applications. The “downstream” applications should, for example, cascade in ways that optimise nutrients and value recovery before finally returning the nutrients to the soil.

 

From the cradle to the cradle

Cradle to Cradle, a term coined by Walter Stahel in the 1970s and popularised by William McDonough and Michael Braungart in their 2002 book of the same name, refers to a method of production where all inputs are seen as either technical or biological nutrients. Technical nutrients can be recycled or reused with no loss of quality, while biological nutrients can be composted or consumed. Here are some examples of Cradle-to-Cradle companies

 

Desso
Dutch carpet company Desso is one of the pioneers of the Cradle-to-Cradle approach. It started out in 1930 as a producer of woven carpets for residential and commercial use. Today, it sells carpet tiles, broadloom and artificial grass pitches in more than 100 countries. 

Desso started its journey towards the circular economy in 2008 under the watch of Stef Kranendijk, who was CEO between April 2007 and October 2012. He said the idea was to turn the company from a retailer of flooring options into a service company that relied on a leasing system. “In this way, you don’t buy the product, you only pay for its use, which means materials remain our responsibility. And of course, it is not in our interests to see them wasted.”

On its website, Desso explains that its products are designed to be disassembled at the end of their life cycle and the materials reused or recycled. This, it says, will make it more profitable and resilient to resource scarcity in the long term.

Kranendijk asserted that the business model worked, as Desso gained a competitive edge while making better products. In 2009, it was one of only two carpet manufacturers to do well while the others recorded considerable losses. “The idea is not for me to brag, but to show that the Cradle-to-Cradle concept is highly credible,” he said.

Desso identified the business-to-business (B2B) market as being more readily open to the performance model. “We started with the carpet tiles for offices and industry. Then, we will make our sports systems Cradle to Cradle, and move on to our woollen carpets. In that field, we are working on a biodegradable base made out of the corn by-products. Then we will tackle the consumer market.”

Designers and materials experts have experimented in the biosphere, for instance, taking yarn from bamboo. What this means is that once the carpet is worn, it can be safety returned to the food-farming cycle. “We still have to improve the product though, notably to enhance its durability,” says Desso.

The circular economy is not just about products and materials, but doing everything in a sustainable manner. Thus, the company aims to use renewable energy in all stages of the cycle. 

“All the electricity we use in our Holland and Belgian plants comes from hydropower. We do not use any fossil-fuel generated electricity there. Our energy providers have certified that, and we have double-checked, via an independent firm, that they were being honest about it,” it says.

 

Bundles
Bundles is an innovative young start-up that offers washing machines to clients at home. These machines are connected to the internet and the client pays for the actual use. The company supports monitoring, maintenance and lifetime management of the embedded materials.

Company founder Marcel Peters was working at a utilities company and was part of the emergence of the Internet of Things — objects, systems or processes that exchange information through the internet. He was working on a smart meter to monitor domestic energy use. 

Within this industry, Peters began to notice that this new connectivity was primarily being applied to remote control or monitoring, and for smart devices such as an oven that can download recipes and refrigerator that tells its owner that he needs to buy milk.

This potentially groundbreaking technology was being used to provide additional features to products that were sold in the traditional way. The technology had not been applied to the pay-per-use model in a way that supported the maintenance and lifetime management of materials. 

So, in 2014, Peters established Bundles to offer clean clothes on a pay-per-wash basis — customers pay for the performance, not the product. Customers go to its website and select their machine requirements and expected frequency of use, which allows the company to suggest a monthly fee.

After paying a deposit and first monthly fee, the appliance is installed. Once it is connected to the internet, the user is ready to go. After the first month, the user receives an overview of how often he has used the machine and can have his tariff adjusted retroactively.

One important difference from the mobile phone model, however, is that users can end their relationship with Bundles at any time and the company has ensured that terminating the contract is as easy as possible.

While the technology involves effectively “retrofitting” a standard washing machine available on the market today, the choice of machine has still been crucial for Peters in selecting a provider for Bundles. He says Miele is the only remaining manufacturer that uses 100% reusable or recyclable materials.

Open up one of today’s washing machines from other manufacturers, and you will often find materials chosen for their lower cost rather than long-term durability or recyclability. For instance, stainless steel has been increasingly exchanged for plastics and cast iron for concrete. This has taken the average lifetime from 10,000 hours for a high-quality machine down to 2,500 hours for a low-quality unit. So, when an appliance is returned to Bundles, it can be repaired or remanufactured, ready for the next user.

The leasing scheme transforms a long-term investment in a 10,000-cycle machine into multiple cash flows and the right to use the machine for a certain period of time. This results in an economic win-win situation and yields positive material and energy implications through prolonged lifetime of the products.

The company also uses the data it gathers in terms of personal usage to enable customised performance tweaks and continuous improvements, such as optimising machine load, cycle duration, temperature and detergent use — variables that can waste the user’s money and damage appliances. 

In this way, not only do customers get household jobs done in an easy and affordable manner but there are also wider economic benefits. In addition to energy savings, the ability to monitor, maintain, repair and refurbish the higher quality machine preserves product integrity for multiple cycles, breaking away from the current resource-intensive linear model.

 

Re-Tek
For the past 20 years, Re-Tek has concentrated on making the disposal of IT products and electronics easy by repairing those that are functional and then selling them. The company practises “incentivised return”, a circular economy business that offers a financial or alternative incentive for the return of used products which are refurbished and resold. With an annual turnover of £3.3 million, it is clear that there is money to be made from this model.

Set up initially to work with large original equipment manufacturers, the company now processes 7,000 information and communications technology items per month in a custom-built 22,000ft facility, which is 70% powered by renewable energy. 

The company has kept it lean in all aspects. It employs only 32 people, who have repair and refurbishment expertise and sales channels across all types of IT equipment, including networking and storage as well as handheld devices, laptops, personal computers and monitors.

Re-Tek currently sources most of its products from medium to large organisations in the UK and Europe and has major clients in all industries as well as public sector bodies such as local authorities, universities and the UK’s National Health Service.

Of all the equipment received, about 80% is remarketed. Only equipment that is completely non-functional or has no market value goes to conventional recycling partners. Whenever possible, a non-functioning item is harvested for spare parts, thus the resulting landfill is just 1%.

This approach also means that good quality, high-specification assets are available to be sold on or redeployed to secondary emerging markets, charities and underprivileged UK communities that are the target of its government’s digital inclusion strategy.

This circular economy business model adopted by Re-Tek has been recognised by the Institute for Environment and Sustainability of the European Commission Joint Research Centre, which recently conducted a visit to Re-Tek’s premises and identified the processes and systems as being best practice.

Donating old IT equipment for reuse offers potential energy savings of 5 to 20 times those gained by recycling. And obviously, extending the life of electrical items is by far the best way to maximise a product’s economic value.

According to Zero Waste Scotland, Scotland’s resource efficiency and circular economy expert, the average desktop computer and monitor requires at least 10 times its weight in fossil fuel and chemicals to manufacture. By comparison, a new car or fridge needs only twice its weight. 

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