Rounding the Corner Towards the Circular Economy

Rounding the Corner Towards the Circular Economy

A circular economy keeps products at their highest utility and value at all times, but what does that mean for CEOs?

A couple years ago, French automaker Renault launched a business refurbishing engine components such as pumps and gearboxes, then reselling them at a 30-50 percent discount.

“It is one of the most profitable service lines Renault has established in recent years,” says Markus Zils, managing director of Returnity Partners, a German company focused on helping clients participate in the so-called circular economy.

Is circular economics just another term for recycling or refurbishing?

Proponents contend that it’s much more than that. Rather than merely recovering and finding new value in every component, the goal of a circular economy is to generate jobs and profits while reducing waste. It’s as much about growth—and rethinking how you run the business—as it is about conservation. “Many circular-economy opportunities rely on adopting new business models,” Ken Webster tells Connected Futures.

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Webster is the author of The Circular Economy: A Wealth of Flows and head of innovation at the Ellen MacArthur Foundation, an organization that works with businesses, government agencies, and academic institutions to help transition toward an “economy that is restorative and regenerative by design.”

One company could sell performance-oriented services for their products rather than selling just the products themselves, he says. Another could design “products for disassembly, refurbishment, and resale.”

Frans van Houten, CEO of Royal Philips, sees both approaches working. “In a circular-economy business model, I would like products to come back to me, at the end of their life cycle, as the original designer and manufacturer,” he says in a video produced by the World Economic Forum.

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“Once you get your head around that, why would I actually sell you the product, when you are interested in the benefit of the product? Maybe I stay the owner of the product and just sell you the benefit as a service,” says Houten.

Building a circular business

CEOs have plenty of incentives to move their companies in this direction, pundits and practitioners say. The immediate motivating force for private-sector companies lies in finding new sources of savings and revenue. Executive teams must find opportunities to build a circular business, then figure out what it would take to seize those opportunities.

“The Digital Age brings more and more feedback loops,” Webster says, “to monitor asset use, materials, and product flows.”

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Start by checking those feedback loops—including customer communications, customer behavior data, and supply chain data—to understand how your products are consumed and what happens to them at the end of their life cycle.

In a circular economy article for consulting giant McKinsey, Returnity Partners’ Zils outlines four general ways companies can retain or recapture the value of their products, thus participating in the circular economy:

  • Sell maintenance contracts to extend product life
  • Reuse or redistribute
  • Refurbish or remanufacture
  • Recycle components and materials

Zils’ framework suggests that the business of collecting end-of-cycle products will grow at the expense of extraction of raw materials and disposal of waste.

A circular economy also implies the growth of the service sector and use of labor, at the expense of traditional manufacturing. However, the Renault example illustrates how traditional companies can shift their approach in sync with these changes and continue to succeed in the market.

Once you’ve spotted potential for a circular approach in your own sector, experts say you should expect more changes and challenges to your business methods, including your product and service designs. With long product life, reuse, and refurbishment as goals, a company might manufacture easy-to-disassemble products made of highly recyclable or durable materials.

“The initial price [of materials] can actually be a little higher,” Philip’s van Houten says. But you need to measure profitability over an eight or even 15-year time frame. “If a product is five percent more expensive to produce,” he adds, “but I get 30 percent of the value of the materials back after eight years, then that’s a great proposition.”

Webster also stresses the importance of creating a favorable policy environment for circular business models. For example, “if taxes and subsidies favor the use of non-renewables rather than increased labor,” then incentives are misaligned, he says. Webster encourages businesses to actively support circular-friendly legislation and to partner with financial institutions that recognize the different value proposition of circular business models.

Embracing a circular business model takes time, Webster notes. CEOs must recognize profitable opportunities and move toward them one step at a time. “Explore early,” he advises. “Get involved in seeing what some of the new business models might mean in practice. Get some experience and data.”

Derek Slater has written about business and technology for more than 20 years and is based in San Francisco.

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