Pooling expertise for the Fairphone circular business model

The starting point is a sustainable product design. The device itself is made of durable, honest materials. The units are produced in an environment that promotes well-being. And, as you'd expect from a circular product, the focus is on reuse and recycling. Users don't purchase a device - instead, they sign a contract allowing them to take advantage of an extensive service package. This exciting initiative has sparked a lot of interest. But how do you translate a circular vision like Fairphone's into a long-term, profitable business model? A number of stakeholders recently put their heads together to do just that.

Most business models are ownership-based. After deciding to buy a particular product, you pay for it, and it belongs to you. But there are alternatives to this model which focus not on ownership but on other things, like use and service. That shift means taking a different view of opportunities and risks, and requires tailored financing. The challenge is that success stories of this sort have been few and far between in the circular economy. Up to now, that is. Sustainable Finance Lab, Circle Economy, Fairphone, PGGM, ING, NBA, Allen & Overy, Circularise and ABN AMRO recently joined forces to tackle the challenge and have since published a white paper on legal, operational and financial solutions for a product-as-a-service business model for Fairphone.

It made perfect sense for ABN AMRO to take part in the project. Not only is circularity one of its top priorities, but the bank has also formulated a number of clear goals to help move the circular economy forward. Together with its clients, the bank aims to have financed EUR 1 billion in circular assets, granted 100 circular financing packages and reduced carbon emissions by 1 million tons - all by 2020. Co-authorship of the white paper also presented an excellent opportunity for the bank to contribute its knowledge and expertise, and to benefit from the new insights of the other stakeholders. In addition, all this knowledge can be used in future discussions about similar business models with clients.

Making headway together

Robert Peterson of ABN AMRO Lease attended the consortium meeting on behalf of ABN AMRO. "It was a unique opportunity for collaboration," he says. "We all agreed to be transparent from day one. That's very important, particularly since we all wanted to strike a new balance, so to speak. The only way that could happen is if we were open and honest. All of us brought our own expertise to the table and explored opportunities, horizons and obstacles. My own input largely focused on my knowledge of, and experience with, sustainable lease contracts and the financing of circular business models. Leasing involves everything from solar panels for SMEs to LED lighting for industrial firms. Our aim was to strike a balance between the robustness of leasing and the flexibility of a current account. It was a very positive journey."

Five key takeaways

  1. Learning by doing
    In making the transition to a circular economy, it's important to experiment with new business models. Multidisciplinary experiments contribute to the development of effective business models. Openness and transparency promote optimal synergy. 
  2. Modularity and a sustainable mission
    Fairphone's modular components can all be upgraded, repaired, overhauled or recycled separately. These separate modules actually add value for consumers and extend the economic life of the overall product. 
  3. Service offering and the distribution of risk
    Fairphone is about striking a balance between state-of-the-art technology and a circular vision. The contract has to allow for both flexibility and continuity, which in turn calls for a detailed description of the service offering.
  4. New operational processes
    For consumers, it's all about maximising ease of use, the level of service and circular value. Operational processes should be compatible with Fairphone's core business, type of product and level of service. Hardware management is a critical success factor. 
  5. A new financial model
    The combination of leasing with the flexibility of a current account seems best suited to the product-as-a-service concept. Financing is secured on the basis of three principles: a high-quality product, a stable customer base and a robust type of contract with a guaranteed cash flow.

Circular white paper offers guidelines

The white paper focuses on a number of models which other circular companies can take advantage of. Robert says, "The service contract model is a useful document for any company that's moving towards a product-as-a-service business model. We've also developed a cash flow model highlighting the relatively low capital requirement, the value of the proposition and the need to secure financial guarantees. In the case of Fairphone, these consist of a high-quality, varied business customer base, an outstanding basic product made up of efficient modules, and a service contract that helps generate a steady cash flow. The thing to remember is that there's no one-size-fits-all solution. Every product-as-a-service model is unique, and financing will always have to reflect that. Leasing is often a suitable refinancing tool for this type of model." 

No matter how promising a business model looks on paper, it ultimately has to prove itself in real life. That's why Fairphone will be launching a pilot project with PGGM later this year. During this phase, Fairphone will be testing the business model and looking at ways to leverage the circular value of its sustainable phone. Fully in line with the circular idea, the call to action spelled out in the white paper concludes with the statement that the knowledge contained in the report is intended to be shared, improved on and experimented with. "Knowledge is power" used to be the catchphrase - now it's "sharing is power".

The role of government

Arnoud Boot, a professor of corporate finance and financial markets at the University of Amsterdam, also sees an important role for government in the transition from a linear to a circular economy. At the fourth NRC Live Seminar at Circl, he set out how the circular economy can become the new financial reality. An account of the well-attended seminar at Circl, at which the Fairphone business case was also discussed, can be found here (Dutch only).