Five disruptive business models for the transition to a circular economy
As climate change accelerates around the world, five circular business models will help companies transition to the circular economy.
With the Code Red for Humanity officially released by the latest IPCC report and the ticking world clock, it is time to accelerate relevant solutions. Another important early warning report was published around the world earlier this year – the Circularity Gap Report 2021. This report states that humanity has passed two major milestones in the past decade: The world uses 100 billion tons of materials and it is Got 1 degree warmer. As a result, the world is only 8.6% circular.
The silver lining and a key word for the solution – the mix of all production and consumption activities that cover the material-related needs of end consumers accounts for 70% of greenhouse gas emissions. For members of civil society, alarmed by the IPCC report, it is time to make the whole climate change campaign more inclusive and take an active role in serving the general public, consumers.
Fortunately, a global circular economy (CE) can help curb climate change as better resource management also reduces emissions. Circular strategies at the intersection of material and emissions hotspots increase value retention, contain excessive consumption and thus reduce emissions.
What does it take A complete change from the linear “take-make-waste” model that has been pursued since the industrial revolution. While this increased the living standards of many people worldwide through mass production and consumption, despite technological advances there were also clear disadvantages, including increased waste and pressures on finite resources.
What does circular economy mean? CE is based on three central principles: avoiding waste and pollution; Keep materials and products in use; regenerate natural systems. Accordingly, resources are repaired, reused, recycled or reprocessed and retain their value for as long as possible.
But as a consumer-oriented society, we want both new products and benefits on the demand side. Unfortunately, long-lasting products are not considered profitable on the supply side as they trigger a drop in consumption. It is then believed that this will curb spending across the economy, which will affect jobs and ultimately the standard of living.
Cell phones are the biggest example – used and thrown away, then bought back several times, creating a huge demand for resources and material extraction while creating huge piles of rubbish.
Is there a way out and can CE be profitable? The good news: CE can be profitable with multiple business drivers to ensure profitability. For example, it helps to hedge against risks related to uncertain future raw material supplies and price volatility. The move to selling services instead of products helps manufacturers control and reuse raw materials and other components used to make goods as corporate assets.
Consider a simple case. Refurbishing auto parts is 30-50% cheaper and produces 70% less waste compared to manufacturing new parts. Companies that are unable to recycle / reuse their waste, products or by-products could offer them to those who can to promote a circular symbiotic partnership. This creates a robust circular business model that avoids waste management costs and opens up new sources of income.
The automobile manufacturer Renault has successfully demonstrated this with its recycling program. Various materials such as steel, copper, plastics and textiles are obtained from end-of-life vehicles (ELVs) and used in new vehicles that offer similar services to new goods. In Europe, 36% of all newly manufactured vehicles are made from recycled materials and 85% of Renault’s end-of-life vehicles are recyclable.
There are five examples of circular business models:
1. Performance model
Here the provider remains responsible, since the users are interested in the quality of service – not in the product that offers it. The provider decides on the machines or products used to fulfill the required tasks. Here is the best example of Philips selling light as a service. Instead of selling lights at a one-time price, the subscription model allows users to pay recurring costs based on the lumens used.
2. Access model
Here money is made by providing access to the product while its property remains with the access provider. Excellent examples – all bike sharing or rental models worldwide. Some cities in India offer the PBS (Public Bike-Sharing) system that allows users to rent bicycles for a short period of time. This is an affordable, socially distant, and sustainable way to commute.
New age start-ups such as Furlenco and Flyrobe are other rental examples. Furlenco is India’s first home furniture rental company that rents furniture such as sofas, tables, beds and more at affordable prices. The minimum subscription period varies between three and six months for different products. Likewise, Flyrobe is an online forum that allows users – men and women – to rent handmade ethnic clothing. Customers rent clothes for a specified period of time and pay a certain amount for it. The delivery and collection options are free of charge. Flyrobe is for those who do not want to buy clothes but want high quality clothing at reasonable rental prices that vary depending on the period of use.
3. Gap exploiter model
It does not create anything new, but rather feeds gaps in value in the existing system of used equipment sellers from the workshop to the shoe shine, including the reconditioning of old machines. This is now happening with laptops and cell phones. By simply harvesting parts, old products are offered “like new”. Another example is the healthcare technology industry, where companies like Philips sell remanufactured models of MRI and other diagnostic equipment creating a new offering and a recurring revenue stream.
4. Hybrid model
This is based on the profit from repeated sales of relatively cheap goods or parts with a short lifespan that only work in conjunction with a dedicated but durable quality product. HP is the best example.
In 2005, HP used polyethylene terephthalate (PET), recovered from its ink cartridges, as a raw material to make new ink cartridges. His program disassembled returned ink cartridges and separated them into plastics, metals, and other parts. The plastics were then mixed and processed with those from other sources, including plastic hangers and bottles, to make plastic for the new cartridges. As of 2016, HP had manufactured more than three billion ink and toner cartridges using more than 177 million pounds of recycled materials. As a result, 682 million cartridges, 3.3 billion used plastic bottles and 50 million clothes hangers have been kept out of landfills and recycled for sustainable use.
5. Classic long-lasting model
Starting from a high-quality product with a long lifespan, sales serve as a classic source of income. While not cheap, it is sure to be value for money. Examples are Fairphone and MUD jeans. Fairphone offers improved repairability by allowing consumers to purchase replacement parts to have their phones repaired. At MUD Jeans, consumers buy a pair for 119 euros. When you return the jeans, you will receive a € 30 discount on your next MUD jeans purchase. The returned jeans become new products such as hats and sweaters.
As the impacts of climate change such as landslides, flash floods and sudden storms increase worldwide, adopting a circular economy is critical for all businesses across the spectrum. In addition to new markets and business opportunities, CE promotes job creation. This is mainly due to higher expenses due to lower prices, labor intensive recycling activities, and the higher required reconditioning skills. In addition, more innovation, entrepreneurship and an emerging service-oriented economy are creating new roles in various industrial segments, including SMEs.
In India we already have a sharing economy and a culture of repairability. But we have to take these models into account throughout, because circularity is the future that we have to embrace in order to achieve our climate protection goals.
Disclaimer of liability
The views expressed above are the author’s own.
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