Perception versus Reality: The Circular Economy

Perception: It’s a radical, unproven concept.

Reality: An alternative to the traditional linear model of industrial consumption—make, use, dispose—emerged in 1972 in Kalundborg, a small industrial town on the coast of Zealand, in Denmark. An oil refinery began piping excess gas to a nearby gypsum board manufacturer, creating a loop in which one company’s waste became another’s raw material input. Today 13 different companies around Kalundborg exchange 30 different flows of material, water, and energy, saving the companies over US$95 million per year.

Meanwhile, automaker Renault, which in 1949 began selling refurbished gear boxes and other parts from a plant outside of Paris, has taken the circular concept further by incorporating quicker disassembly into part designs to facilitate remanufacturing. The Ellen McArthur Foundation, which coined the term circular economy in 2009, reports that Renault has reduced its energy and water use and waste by 80 percent, 88 percent, and 70 percent, respectively.

Perception: It’s just a trendy name for recycling.

Reality: Recycling is an essential part of a circular economy business strategy, but business models are also built around reuse. Even world-champion recyclers Austria and Germany manage to recycle only a little more than 60 percent of their waste, according to environmental organization Planet Aid. In a circular economy, waste—rather than being expected and tolerated—is considered a failure.

To optimize their use of resources and reduce waste, product designers choose materials that can be easily reused, reconditioned, or composted. Consider HP’s Instant Ink program: Customers pay for ink by the number of pages printed through a subscription program. New ink cartridges are shipped automatically when old ones are running low. Customers ship old cartridges back to HP for free, and the company then recycles them for reuse.

Perception: There’s little incentive to change.

Reality: The requirement that companies be physically near one another and tightly integrate their operations forms a major barrier to adoption of circular business models, according to author and consultant Peter Hesseldahl. Ideally, participating companies become dependent upon each other for delivering on promises to customers. That takes a lot of trust and investment. But advances in technology, such as the Internet of Things (IoT), cloud computing, Big Data, blockchain, and analytics, are allowing even far-flung companies to become more networked and interdependent—and at lower cost—which will drive them toward a more circular model.

Indeed, some of today’s most valuable businesses do not require asset ownership or physical proximity to partners. Uber and Airbnb encourage conservation and reuse of resources by taking advantage of existing vehicles and homes. As companies learn to equate reducing waste with increasing profits, circular business models will have a better chance to flourish.

Christopher Koch is the editorial director of the SAP Center for Business Insight. Dan Wellers is the Digital Futures global lead and senior analyst at SAP Insights.

This story originally appeared on the Digitalist.