Wednesday

19th Sep 2018

Opinion

Europe’s Kodak moment and the circular economy

  • The price of natural resources has increased at twice the rate of wage growth over the past decade (Photo: Valentina Pop)

Famously, Kodak only belatedly realised that digital photography would do away with the venerable company. Online streaming services have demolished Blockbuster in short order. Hosts of other companies have suffered similar fates over the years, and more await.

While historically, disruptive technologies took time to develop and disseminate, today they come about in an instant. Thousands of companies that we consider sound and strong may soon to face ”Kodak moments” of their own, even as if they may still be blind to the looming challenge.

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  • In the coming years, billions more will assume a middle class life style with cars, refrigerators, meats and other resource-intensive consumer goods that most Europeans take for granted (Photo: chiang_benjamin)

One cannot defensively guard oneself against competition, but rather move forward to stay competitive. This goes for companies as it does for nations, as it does for Europe. And one major global trend is already rapidly changing what makes for a competitive business model in the future: The accelerating scarcity of natural resources.

Just consider these basic facts: Our planet’s population is roughly 7 billion already, and within just 25 years, we are projected to reach 9 or 10 billion. Billions more than today will assume a middle class life style with cars, refrigerators, meats and other resource-intensive consumer goods that most Europeans take for granted.

Population growth plus rising living standards equals exponential growth in consumption and, in turn, even higher demand for natural resources. Accordingly, the price of natural resources has increased at twice the rate of wage growth over the past decade. This represents a tremendous historic shift compared with the entire 20th century, when the price of resources would reliably fall as wages rose.

The circular economy

The circular economy, therefore, is on the rise. A trend in business that has the potential to change significantly how companies successfully compete in Europe and the world. It is the basic idea that materials and components may truly circulate in and out of production, rather than incinerated or dumped as waste after use.

This may immediately resemble good, old-fashioned recycling, but it actually has a genuinely new element to it. The circular economy sees product designs that facilitate effective recovery and reutilisation of components, in ways that minimise loss of value. Accordingly, companies adjust their business models to better protect their investments in valuable materials.

Take for instance German carmaker BMW. Top managers decided to recycle plastic and metal from used cars in new cars. The programme secured the company a 10-percent saving per vehicle produced. A relatively large saving on materials, amounting to a significant improvement in competitive power. Another carmaker, Rolls Royce, not only recycles materials but redeploys entire engines and catalytic converters.

Since material costs account for more than half of expenditures in manufacturing businesses, substantial savings on raw materials can enable competitive production even in areas with relatively high wages. Such as in Europe.

New business models

As companies realise how much value can be retrieved from raw materials in their products and processes, many change their mode of thinking. Preserving the value and reusability of components becomes a central concern in the design of products, and even of entire business models.

Consider the example of Danish shipping giant Maersk Line. When its large new container vessel, Emma Maersk, is retired from the fleet, it will not be scrapped on a remote beach in India – at both considerable financial costs to the shipping company and severe costs to the health and safety of workers. Rather, it will constitute thousands of tonnes of valuable materials for reuse, as it was designed to maximize the retrieval of valuable components and materials including steel, iron, and plastic.

Xerox, the American manufacturer of photocopiers and printers, has radically changed its business model in line with the same logic. Rather than selling their printers and copiers, they increasingly lease them to customers.

Leasing entails certain advantages to the customer. For example, my son’s nursery school would not have to find €3,500 in a single fiscal year if their copier malfunctioned. Instead, the nursery could do with allocating a relatively small sum of money for copies in the annual budget.

As for the company’s advantage, leasing means maintaining ownership of the machine, allowing the company to retrieve all components and raw materials when the machine is retired from use. Xerox recycles 98 percent of materials from old machines in the production of new ones, significantly reducing material costs for the company. Meanwhile, its business model increases the company’s incentives to develop more durable and reliable products that are also easy to dissemble in ways that allows for maximum retention of value.

Subscription based rental

Other features of the circular economy are made possible by technological breakthroughs that allow for the sharing of bits and bytes without the exchange of physical products. Compact Discs, VHS video tapes, and even BluRays and DVDs are cleared from living rooms everywhere, as streaming over the Internet becomes available on attractive terms. E-books replace print on paper, and Internet media is rapidly reducing circulation of traditional newspapers while also changing the world of broadcasting.

When content streaming provider Netflix first challenged Blockbuster, it was not yet a streaming service, but a web- and mail-based DVD rental. In essence, it was a video rental store without the staff and rent expenditures or limitations to availability that come with brick-and-mortar stores full of VHS tapes or DVDs.

It is easy to imagine a similar company for other consumer goods. The leasing model that Xerox has already employed for printers to business customers, someone may likely emulate for household appliances to private households. Subscription-based rental is already a reality in pioneering parts of the apparel industry, and it is bound to expand to other sectors of the economy.

In airports in San Francisco and Amsterdam, passengers have an intriguing alternative to expensive airport parking: Leave your vehicle with car rental, who will clean it and rent it to other travellers while you are gone, sharing proceeds with you.

Taxing shared goods?

When my paternal grandmother was born, 95 years ago, materials were expensive and used with care. She was raised to save and repair everything that could be saved or repaired. Throughout her life, she saw materials get cheaper and cheaper. At the turn of the millennium, it was cheaper for her to buy a new printer than to pay someone to change the cartridge in the old one.

But she has lived long enough to see this development finally reversed. Since 2000 – in only 14 years – the price of natural resources, globally, has risen more than it fell in the previous 100 years.

This is why today, in any city, you are likely to find a shop happy to repair or replace parts of your electronic devices, power tools or clothing.

Business leaders who do not realise the gravity of these shifts may very well be approaching their Kodak moment.

And yet, political discussions about the competitiveness of companies or nations rarely get beyond simplistic arguments over wages, taxes, or very narrow definitions of productivity. Obviously, any discussion of competitiveness should also include the question of resources.

The dramatic shift in availability and price of resources poses a number of important questions to not only businesses, but also to governments:

How may authorities best foster and nurture companies that will develop and introduce new solutions and jobs?

How can you fairly tax the sharing of goods and services to allow for a sustained level of welfare? What models of insurance are required for car sharing or clothes rental?

How to settle conflicts regarding ownership and accountability? Where may jobs be lost in the new economy, and where are new ones likely to emerge?

Opportunities

Evidently, as politicians, we are obliged to do our part. We must approach these shifts not as a threat, but as an opportunity.

But what, specifically, can elected officials do?

We can project a strong vision of a better future. The benefits of the circular economy is a powerful part of such a vision.

We can set targets for recycling, and we can underpin the transformation of companies and business models with timely advice and economic incentives.

We can develop an infrastructure centered on recycling rather than incineration. We can promote the circular economy through education and research.

The future belongs to the circular economy, and I firmly believe we have only seen the beginning. European companies and institutions ought to be fully aware of the development and properly prepare for it.

Let us not be the region of cassette tapes, correction fluid, or photographic film.

Let Europeans enter the future with confidence, properly educated and with the courage to test new solutions and opportunities to further improve both our own lives and those of our soon-to-be 9 billion cohabitants of the earth.

Ida Auken is former Danish minister of environment and a Liberal member of the Danish parliament.

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