Towards a Circular Economy rethinking value chains to boost resource productivity

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1 Towards a Circular Economy rethinking value chains to boost resource productivity Dr. Markus Zils Returnity Partners Brussels Environment, 29 th Mai 2015

2 Contents The resource revolution Circular economy as compelling answer How to get started? 1

3 Business leaders are faced with a world of rising and more volatile resource prices VERSION: FALL 2014 McKinsey Commodity Price Index 1 Index: 100 = years Volatility World War I s oil shock 180 World War II Postwar depression Great Depression Turning point in price trend Based on the arithmetic average of four commodity sub-indexes: food, non-food agricultural items, metals, and energy 2 Data for 2013 are calculated based on the average of the first three months of Quarterly standard deviation (relative to the mean) SOURCE: Grilli and Yang; Pfaffenzeller; World Bank; International Monetary Fund; Organisation for Economic Cooperation and Development (OECD) statistics; Food and Agriculture Organization of the United Nations (FAO); UN Comtrade; Ellen MacArthur Foundation; McKinsey Global Institute analysis 2

4 Incomes are rising in developing economies faster and on a greater scale than at any previous point in history Years to double per capita GDP * Year Country United Kingdom 154 Population at start of growth period Million 9 United States Germany Japan South Korea China 12 1,023 India * Time to increase per capita GDP (in PPP terms) from $1,300 to $2,600 Source: Angus Maddison; University of Groningen; McKinsey analysis 3

5 Many materials are forecasted to have very short availability in the future very few recycled at scale Remaining years until depletion of known reserves (years) Current rates of recycling 1 H Li Be B C N O F Ne 2 He 1 H Li 4 Be <1% 1-10% 10-25% 25-50% 5 B 6 C 7 N 8 O 9 F 2 He Ne Na Mg Al Si P S CI Ar Na Mg >50% No data Al Si P S CI Ar K Ca Sc Ti V Cr Mn Fe Co NI Cu Zn Ga Ge As Se Br Kr K Ca Sc Ti V Cr Mn Fe Co NI Cu Zn Ga Ge As Se Br Kr Rb Sr Y Zr Nb Mo Tc Ru Rh Pd Ag Cd In Sn Sb Te I Xe Rb Sr Y Zr Nb Mo Tc Ru Rh Pd Ag Cd In Sn Sb Te I Xe (98) (98) Cs Ba La* Hf Ta W Re Os Ir Pt Au Hg Ti Pb Bi Po At Rn Cs Ba La* Hf Ta W Re Os Ir Pt Au Hg Ti Pb Bi Po At Rn (209) (210) (222) (209) (210) (222) Fr Ra Ac Ī- Rf Db Sg Bh Hs Mt Ds Rq Uub Uut Uuq Uup Lv Uus Uuo Fr Ra Ac I Rf Db Sg Bh Hs Mt Ds Rq Uub Uut Uuq Uup Lv Uus Uuo (223) (227) (257) (260) (263) (262) (265) (271) (266) (272) (285) (284) (289) (288) (292) (223) (227) (257) (260) (263) (262) (265) (266) (271) (272) (285) (284) (289) (288) (292) Lanthanides Ce Pr Nd (145) Pm Sm Eu Gd Tb Dy Ho Er Tm Yb Lu Lanthanides Ce Pr Nd (145) Pm Sm Eu Gd Tb Dy Ho Er Tm Yb Lu Actinides I Th Pa U Np (237) 94 Pu (244) 95 Am (243) 96 Cm (247) 97 Bk (247) 98 Cf (251) 99 Es (252) 100 Fm (257) 101 Md (258) 102 No (259) 103 Lr (262) Actinides I Th Pa U Np (237) 94 Pu (244) 95 Am (243) 96 Cm (247) 97 Bk (247) 98 Cf (251) 99 Es (252) 100 Fm (257) 101 Md (258) 102 No (259) 103 Lr (262) 1 Based on current rates of extraction SOURCE: Professor James Clark, Green Chemistry, The University of York 4

6 Contents The resource revolution Circular economy as compelling answer How to get started? 5

7 Circular design could deliver resource performance far beyond incremental efficiency improvements Linear system Resource intensity Annual average change Market growth Annual average Carpet Fridge Furniture +3% -2% -2% +7% +8% +5% Circular system Assumed no. of lifecycles Material intensity Reduction potential 2-50% % -75% SOURCE: German System of Integrated Environmental and Economic Accounting; Euromonitor (2011); Centre for Industrial Studies (2011); Freedonia (2011); Ellen MacArthur Foundation circular economy team 6

8 So, the Ellen MacArthur Foundation wanted to find out whether a circular system is economically viable Does it really solve the resource question? Is it profitable for business? Is it good for the economy? SOURCE: Ellen MacArthur Foundation circular economy team 7

9 The circular economy framework provides many opportunities for closing the loop on products, components and materials Biological materials Mining/materials manufacturing Technical materials Restoration Biogas Farming/ collection 1 Anaerobic digestion/ composting Biochemical feedstock Cascades Parts manufacurer Product manufacturer Service provider Collection Collection Maintenance Recycle Refurbish/ remanufacture Reuse/redistribute Extraction of biochemical feedstock 2 Energy recovery Landfill Leakage to be minimized 1 Hunting and fishing 2 Can take both postharvest and postconsumer waste as an input SOURCE: Ellen MacArthur Foundation circular economy team drawing from Braungart & McDonough and Cradle to Cradle (C2C) 8

10 and how it is linked to economic value drivers The power of the inner circle circling longer cascaded use across industries pure/non-toxic/easier-toseparate inputs and designs $ $ $ SOURCE: Ellen MacArthur Foundation circular economy team 9

11 A circular economy would not just "buy time" it would reduce the amount of material consumed to a lower set point Effect of circular system on primary material demand in widget market Volume of annual material input required 1,500 1, Demand BAU ILLUSTRATIVE Virgin material substituted by circular material Demand under circularity Effect of circular system on material stock and landfills Cumulative volume of material used 25,000 20,000 15,000 10,000 5, In use BAU material stock BAU landfilled Material stock under circularity Landfill under circularity SOURCE: Ellen MacArthur Foundation circular economy team 10

12 Based on that, we analysed selected product markets in detail, discovering high potential for reusing of resources mobile phones End-of-life product flows based on 2010 EU figures Percentage of total end-of-life devices Status quo Transition scenario 1 ESTIMATES Mining Mining Parts manufacturer Parts manufacturer Product manufacturer 9 Recycle Product manufacturer 10 Recycle Service provider 0 Remanufacture 2 Service provider 21 Remanufacture 2 6 Reuse 19 Reuse 85 Unaccounted and landfill 15 Maintenance Collection Unaccounted and landfill Maintenance Collection 1 Transition scenario: conservative assumptions on improvements in circular design and the reverse cycle, within today's technical boundaries 2 Remanufacturing, here refers to the reuse of certain components and the recycling of residual materials SOURCE: Gartner; EPA; Eurostat; UNEP; Ellen MacArthur Foundation circular economy team 11

13 Design changes and investments in reverse infrastructure could greatly improve the circular business case mobile phone example USD per device ESTIMATES Reuse Remanufacture Recycle materials Do the right thing (effectiveness) Status quo Improvement Transition scenario Recoverable value Treatment costs Do it right (efficiency) Net benefit status quo 0 Circular design Cost improvement Value improvement Treatment process Net benefit improved SOURCE: Geyer & Doctori Blass (2008); Neto & Bloemhof-Ruwaard (2009); Neira et al. (2006); EPA; Umicore; LME; Metal Bulletin; recellular.com; amazon.com; recyclemobilephones.co.uk; Ellen MacArthur Foundation circular economy team 12

14 There are thriving circular business models, which attack critical points in scaling CE up quickly Building blocks Example Points of attack A Skills in circular product design and production Project ARA Allowing for ease of disassembly and components exchange Premature obsolescence Limited degree of modularisation Materials chemically contaminated B New business models Vodafone Red Hot Providing customers access to devices on a yearly basis Low customer incentives to return products after usage Limited control of manufacturers/retailers over post-sale value chain C Skills in building cascades/ reverse cycle ecoatm Return ATMs letting customers bringing in used devices in exchange for cash Subscale and thus expensive reverse operations Lack of quality (lots of dead on arrivals) D Enablers to improve cross-cycle and cross-sector performance Standardised USB Providing power supply for most mobile phones in Europe Misaligned incentives Lack of standards Lack of investments Lack of capabilities SOURCE: Ellen MacArthur Foundation circular economy team 13

15 Substantial savings are already possible with minor changes to the current setup TRANSITION SCENARIO Example Profit change in circular activity for USD 1 mn in sales 000' USD Net material cost savings for USD 1 mn in sales 000' USD Mobile phone remanufacturing Light commercial vehicle refurbishment Washing machine refurbishment An economic opportunity worth billions For medium-lived complex goods, cost savings of up to $630 billion in Europe Smartphone refurbishment Note: Transition scenario: Conservative assumptions, focusing on changes in product designs, reverse cycle capabilities Advanced scenario: Assuming more radical change especially in terms of further developed reverse-supply-chain competencies, and other enabling conditions like customer acceptance, cross-chain and cross-sector collaboration and legal frameworks SOURCE: World Economic Forum and Ellen MacArthur Foundation circular economy team 14

16 Shifting to inner loops creates significant economic benefits in excess of 1 trillion US-Dollars annually Biological materials Mining/materials manufacturing Technical materials Restoration Farming/ collection 1 Biochemical feedstock Parts manufacurer Product manufacturer Biogas Cascades Service provider Maintenance Recycle Refurbish/ remanufacture Reuse/redistribute Anaerobic digestion/ composting 2 Collection Collection Extraction of biochemical feedstock 2 For fast moving consumer goods: cost savings potential of $700 bn p.a. globally Energy recovery Landfill Leakage to be minimized For medium-lived complex goods: cost savings of up to $630 bn in Europe 1 Hunting and fishing 2 Can take both postharvest and postconsumer waste as an input SOURCE: Ellen MacArthur Foundation circular economy team drawing from Braungart & McDonough and Cradle to Cradle (C2C) 15

17 Revamping industry, reducing material bottlenecks, and creating tertiary sector opportunities would benefit labour, capital, and innovation Labour intensity Labour spending per unit of GDP output, EU-27 economies 0.30 Innovation index¹ IBM/Melbourne Institute Index 321,0 Capital intensity Total expenditures / labour expenditures, EU-27 economies , , Primary Secondary Tertiary Primary Secondary Tertiary Primary Secondary Tertiary 1 Components of index include: R&D intensity; patent, trademark and design intensity; organization/managerial innovation; and productivity SOURCE: Labour intensity calculated using data taken from Eurostat Input-Output tables for EU-27; Innovation data from IBM/Melbourne Institute Innovation Index (covering Australian Industry),

18 Contents The resource revolution Circular economy as compelling answer How to get started? 17

19 What are the challenges to accelerate the transition towards the circular economy across supply chains? Linear lock-ins Misalignment of incentives Lack of markets at scale Lack of reverse capabilities and infrastructure Missing enablers in the transition Geographical dispersion Today s products have global footprints Disjoint supply chains Geographical leakage Material complexity Increase in material complexity due to built-in functionality and material-based differentiation increasing difficulty to identify and separate materials SOURCE: World Economic Forum and Ellen MacArthur Foundation circular economy team 18

20 Ability to orchestrate complex, multi-layer, reverse networks is an important value creation driver CE - ORHESTRATORS Raw material Black metal TPE ABS Black metal Copper Steel CONCEPTUAL Production Subcomponent Chuck base Chuck key Chuck jaw Chuck Grip housing Grip Switch Casing Motor Gear body Component Usage product Power drill Maintain/ reuse/ refurbish Remanufacture Recycle Component Chuck Grip Gear body Post-Usaage Subcomponent Chuck base Chuck key Chuck jaw Grip housing Switch Casing Motor Raw material Black metal TPE ABS Black metal Copper Steel Substantial arbitrage opportunities already today possible Companies along the value cycle best positioned to capture them SOURCE: Expert interviews; World Economic Forum and Ellen MacArthur Foundation circular economy team 19

21 Desso gaining market share and boosting profit margin by offeriong better (Cradle to Cradle) products CE-TRANSFORMER Market share in percent 23 Desso systematically redesigned it s business along Cicrular Economy building blocks Design Business model C2C backing, fully recycleable and saleable to 3rd party applications (e.g. bitumen to road construction) Use of nylon 6 which is 100% recycleable in coopetation with Aquafil Reduction of coloring dies to few non-toxic versions Co-development of carpets with customers for special needs e.g. Airmaster carpet, aircrafts and marine applications) Pilot cases for leasing of carpets Enabling value creation Reduced material costs Reduced complexity costs Innovation as market differentiator Better value proposition Increase in market share Price premium Profit margin in percent 9 Reverse Cycle Established take back scheme Invested in own recycling facility integration of supply chain partners (e.g. Better economies of scale and scope Decoupling of resource prices Reduced collection and treatment costs SOURCE: Desso; Ellen MacArthur Foundation circular economy team, press clippings, University case studies, Amadeus 20

22 ifixit provides a platform for growing repair services in consumer products Circular Business Model CE-ENABLER Impressive growth trajectory in bootstrap mode 223% n/a Core idea Crowed-source repair manuals Create platform and video tutorials for exchanging manuals Create revenues and funding from Sales of parts Sales of tool-sets Current Footprint Operational since 2003 ~ 50 employees in two main hubs San Louis, CA (headquarter, fullfillment Americas) Stuttgart, Germany (fullfillment center rest of world) Privately owned, no outside investors Impressive reach and enabler for circula business model More than 3 Mio. unique users per day Enabled launch of repair schops and chains (e.g. UBreakItIFixIt) Frequent coverage in leading media, e.g. Business Week, BBC SOURCE: ifixit Webpage 31/10/13; Ellen MacArthur Foundation circular economy team, Amadeus, Press clippings, CEO interview 21

23 Regional collaboration to cross-valorize feedstocks can boost resource productivity CE-COLLABORATORS SOURCE: government web site 22

24 To practically get started a large number of options seems accessible to the Brussels region OUTSIDE -IN NOT EXHAUSTIVE Focal lenses Large, local, easy accessible and re-usable material streams Potential ideas for boosting circularity office paper supplier communities CO2 and food waste valorization Construction, inert waste, office equipment In-situ industrial symbiosis (material exchange platforms) Leveraging regional core competencies Fostering awareness and building capabilities Finance Funding the CE-transition ICT Internet of Things, asset tracking and management Governance shaping enablers, standard setting, shifting incentives Legal new contractual performance models Education CE-skills at schools, universities and vocational training units R&D FabLabs, 3D printing, Bio-based materials Campaigning CE mindset, Light house projects 23

25 -Herman Mulder, Chairman of the Global Reporting Initiative 24

26 Points of attack for new industrial revolution New materials and noleakage industry design Impact on economy New materials economy E.g., bio-based, 3D Opportunity for regional initiatives Shared resources in global supply chains Regional material regeneration New shared resource economy E.g., PE, PP, "clean paper" New regional economy E.g., CO 2 / food waste, valorization Company specific Closed loop solutions Time to impact SOURCE: Ellen MacArthur Foundation circular economy team 25

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