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SUSTAINABILITY

How Businesses Can

Support a Circular
Economy
by Terence Tse, Mark Esposito, and Khaled Soufani
FEBRUARY 01, 2016

Since the industrial revolution, we have been able to get away with relying on
natural resources to raise our standard of living. But as these resources become
scarcer and more expensive, we need to find new ways to create a more
sustainable environment.

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This was the focal point of the recent Paris Climate Summit. While most of the
discussion revolved around reducing emissions targets, global leaders also
discussed the need for a circular economy, which essentially involves decoupling
economic growth from the extraction and consumption of scarce resources with
negative footprints and making existing resources productive for as long as
possible. In his speech at COP21 European Union Commissioner for Environment,
Maritime Affairs, and Fisheries Karmenu Vella stressed the need to switch to a
more circular economy. He said that the EU had set aside €650 million to fund
innovative ways to change consumers’ usage of raw materials, reduce electronic
and food waste, develop new recycling techniques, come up with new
construction materials and new ways of using old ones, and create new energy
sources out of waste.

Employing a circular supply chain would help make processes, such as product
design, procurement, and waste management, more efficient and productive. We
see three ways businesses can start: 1) recycle more and better, 2) rent goods, and
3) lengthen the longevity of products.

1. Practice more closed-loop recycling. There are two main forms of recycling:
closed and open loop. They’re not equal. Closed loop involves reusing materials
such as glass, steel, and aluminium that can be recycled continually. Open loop, or
“downcycling,” takes into account the fact that materials (e.g. paper) downgrade
to lower quality with each recycling, so this involves either only recycling
materials that won’t deteriorate over time or extending the lifespan of materials
before recycling them.

Companies like Dell have started establishing closed-loop supply chains to get
more value out of the materials in its products. Plastics, like paper, tend to lose
their inherent value after each recycling, so companies are less likely to reuse them
over time. Along with its business partners (such as Wistron GreenTech), Dell has
developed ways to prevent some of the plastics it uses from deteriorating, so it can
continue to recycle these materials.  This saves Dell money, reduces carbon

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emissions by 11% compared to creating the same products with new plastics, and
appeals to the increasing number of customers who want environmental friendly
products that are high quality while not more expensive.

Another example is France’s MTB-Recycling. The company recovers copper wiring

from retired vehicles and re-processes it to produce 99.9% pure copper that can
make better-performing wiring. This is one of the reasons it is the preferred
supplier of Renault, a car manufacturer that is committed to the circular economy.

2. Rent instead of sell. Recycling, no matter how good, is not enough, because
businesses are ultimately depending on the end users to recycle their unwanted
goods. So some companies, instead of selling products to customers, have turned
to renting or leasing them instead. In this type of “servitization,” or selling the use
of goods instead of the goods themselves, companies effectively retain the
ownership of the goods throughout their life cycle, as customers must return the
product to the sellers. Take Renault’s electric cars as an example. Instead of selling
the batteries to its customers, the company leases them. This means that when the
batteries no longer work, the manufacturer can re-engineer or recycle them for
future use.

Another example of servitization is Mudjeans. In this case, when the customers no

longer want a pair of jeans, they are asked to return them, at which point Mudjeans
will reuse the material to make new jeans or turn them into vintage pairs. The
company saves money on sourcing materials, wastes less, and attracts a new
segment of environmentally conscious customers.

3. Offer ways to lengthen and widen the use of products. Instead of just melting
unwanted products down, many physical goods can undergo “remanufacturing”
to extend their longevity. This means that they can be re-utilized for secondary or
emerging markets with a less sophisticated infrastructure. A good example of this

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comes from UK-based Fonebank: it buys old smart phones to refurbish them and
sell them as smart phones, giving the older technology a second life. Apple, too,
sells refurbished products for a cheaper price.

Many companies have been refurbishing and replacing worn-out product parts so
that they’re “new,” perform better, and continue to be useful. The U.S. machinery
company Caterpillar has been remanufacturing their machines and equipment
since 1973. Since 65% of the company’s costs involve materials, salvaging
materials for remanufacturing equals a lot of savings – restoring old existing parts
is always cheaper than producing new ones. The savings are also passed on to its
customers to ensure that they turn in their used parts to Caterpillar. The gains are
not only accrued to businesses.  It is estimated that remanufacturing a cylinder
head leads to 61% less greenhouse gases, a 93% reduction in the use of water, and
an 86% reduction in energy used compared to producing a new one.

Renault, on the other hand, recovers some 43% of car parts for remanufacturing.
Annually, it now refurbishes some 30,000 engines, 20,000 gearboxes, and 16,000
fuel injection systems. The result: parts are 30 to 50% cheaper for customers, and
save 80% more energy, water, chemical products, and waste that would otherwise
result from producing new parts.

At the Paris Climate Summit, 196 countries signed an agreement to create a better
future. But this won’t happen without innovative solutions from businesses and
consumers. The sooner we build a circular economy, the better it will be for all of
us.

Terence Tse is an associate professor of finance at ESCP Europe and the head of
competitiveness studies at i7 Institute for Innovation and Competitiveness. Follow him on Twitter
@terencecmtse.

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Mark Esposito is a member of the teaching faculty at Harvard University Extension School, a
senior professor of business and economics at Grenoble Graduate School of Business in France, and a
senior associate at the University of Cambridge-CISL in the UK. He has been inducted into the
Thinkers50 Radar for the 30 most influential business thinkers on the rise. Follow him on Twitter
@Exp_Mark.

Khaled Soufani is a Senior Faculty in Management Practice (Finance) at the Judge Business
School at the University of Cambridge and Director of the Executive MBA Program and Director of the
Middle East Research Center,

This article is about SUSTAINABILITY

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Roanne Monte a month ago

Given that carbon neutrality is no longer simply a hot-button issue reserved for industry-specific
“green” entities, the authors make strong arguments for the adoption of a circular economy as a
possible solution to post-Second Industrial Revolution challenges. Increasing the life cycle of
goods through cradle-to-cradle ownership by manufacturers reduces waste and makes more
sense as resources become increasingly scarce. As such, this does instigate the need for new
economic models that do not follow a traditional linear economic trajectory.

Overall, a highly relevant and forward-thinking piece.

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