Viable business models with the circular economy

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Global ecology binary background with plant surrounding Earth

Every New Year’s Day, a virtual 30-tonne lorry stops outside my front door filled to bursting with raw materials for the coming year. It visits you, as well. It visits every one of our 16.9 million neighbours. In all, it drops off 600 billion kilograms of materials: a gargantuan quantity, and one which may cause problems. At least it will if we do nothing about it.

Together we are focusing on new technology in a bid to become a ‘Circular Hotspot’: a leading operator in the economy of the future. Richard Kooloos Richard Kooloos Head of Sustainable Banking

Major consumer of raw materials

A lorry load per person per year: the figures published by Statistics Netherlands come as quite a wake-up call. The shock becomes bigger if you consider that this figure of 600 billion kilograms only represents the raw materials intended for the Dutch industry. It does not include the finished goods that are imported and delivered to our homes later. While obviously the lorry is a fiction, sadly the problems surrounding our use of raw materials are not. We are producing more than ever before, and CO2 emissions are rising accordingly. We are suffering from materials obesity.

The source of the problem: consumerism

This explosive demand for materials has only one reason, and a simple one: our prosperity. We belong to a middle class that possesses the means to buy goods – piles and piles of goods. And that prosperity is still growing globally. The middle class will more than double in size over the next fifteen years, increasing from just over two billion people now to almost five billion by 2030. Besides the increasing awareness of the ecological consequences – higher emissions of greenhouse gases and their negative environmental impact – we are also understanding the economic and political implications more and more.

Settlers of Catan, but without the rules

The rising demand for materials is not only forcing up basic price levels, it is also causing prices to fluctuate more. This creates problems for businesses, whose margins suffer when prices change significantly. They sometimes misjudge their stock management, with potential consequences for their operations. Dutch airline company KLM, for example, took a considerable hit last year when it spent 255 million euros more on fuel during Q2 than Q1.

Playing with political intent

At the same time, the growing demand for goods is jeopardising the availability of raw materials. The sources are simply running dry. Not only does this growing consumption give off an alarming ecologic message, it is also creating political issues. Scarcity of raw materials will depress growth and might cause tension in international relations – the outlines are just beginning to emerge. For example, China is already seeking to secure its future sources of materials by buying up mining areas in Africa. This gives them full control of export lines: a considerable coup in the politics of raw materials. Like the international politics of energy, trade and industry, this is another theme that is set to become increasingly important and ABN AMRO places it high on its agenda.

The solution: a circular economy

The time has come to think about the future. This is given added weight by the court judgement on the national climate policy of the Netherlands. More efficient use of materials, food, freshwater and energy is a step in the right direction, not only restoring a natural balance to the environment but also reducing international tensions. The growing demand for food and goods is impossible to halt. As such, we need to find a more structural solution, one that goes hand-in-hand with wellbeing and growth. ‘Less’ has its limits. This does not hold true for the circular economy (CE): in its ideal form its reuses raw materials, water and energy infinitely.

In this system, we also design goods in such a manner that the valuable materials that are ‘leaked’ during production, use and eventual reuse are kept to an absolute minimum. This serves to limit the harmful ecological impact and reduces our dependence on suppliers of the materials. One person’s waste becomes the next person’s high-grade raw materials. This concept is completely unlike the current linear economy, which is based on a mentality of produce-use-throw away. While efficiency is the first step, the next is to make production chains circular.

New business models, alternative value chains

The circular economy is becoming less and less a utopian concept: large numbers of companies are modifying their business models according to circular principles. Only recently Dutch company Fairphone presented an Android smartphone that has a largely modular build: it can be almost entirely disassembled to enable simple reuse of its parts. This is a good illustration of the environmentally friendly and circular production approach that the whole world will need to adopt. The same principle is also reflected by these four circular-proof business models:

  1. From product to pay-per-use
    Rather than selling a product, you can offer it as a service. This approach has been taken by white goods goliath Miele. The consumer no longer buys a washing machine, but instead takes a ‘laundry subscription’ that covers the total costs of the laundry: not just the machine, but also water, detergent and electricity. Naturally Miele’s machines are designed to minimise the all-in cost. After use the white goods are ultimately returned to the company, which gives the metals a second life in new machines.
  2. Alternative constructions to standard loans
    Instead of taking out a standard loan for your company, you can finance your sustainable production by means of a lease, factoring, peer-2-peer lending or supply chain finance. For example, ABN AMRO set up a company that enabled Wieckse Witte to brew its beer using solar energy. The company purchased solar panels, financed entirely with borrowed capital, and installed them on the roof of the brewery.
  3. Trade receivables as security
    Your portfolio of trade receivables will become your company’s most important form of security. In this way, the future payments by your customers safeguard the business continuity. With this in mind, it will become even more important to check your customers’ creditworthiness.
  4. Products to become ‘material banks’ with residual value
    In the circular vision, a product that has reached the end of its useful life is not waste, but instead a complex of components and materials. You reuse them in their original form as much as possible, until you can only recycle the basic raw materials. Your product possesses considerable residual value that is never entirely lost. This residual value will become valuable as security as long as the market for reusable materials, components and products continues to function. The better the product is designed, the higher its residual value will be.

ABN AMRO: catalyst for the circular economy

We all need to do our bit. Our clients, our suppliers, our partners, external knowledge institutes and government circles: together we are focusing on new technology in a bid to become a ‘Circular Hotspot’: a leading player in the economy of the future. Precisely how the Netherlands can lead the way will be discussed in a later blog. We have plenty of possibilities, with ample interesting trends that will accelerate the transition.

As a financial service provider we not only have ideas about the transition to a circular economy, but also about how we can facilitate and accelerate this transition. Companies that switch to a circular business model need financing. Our bank can help them. If we put our heads together and dare to look beyond the familiarity of our linear system, we are sure to find innovative solutions to help bring about the circular economy. We still have plenty to say about it, and the more everyone knows about it, the more likely it will be that in fifty years or so our outlook will be much rosier – or greener.

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