Why innovation is a double-edged sword for the circular economy

What do stone-age hunter gatherers, weavers from the 18th century, and 21st-century chip manufacturers have in common?

Each experienced large increases in productivity due to innovative advances in technology. And they are not alone: innovation has been renewing the world for a long time and new ways of doing and making things have been changing the ways humans live since time immemorial.

Manufacturing innovation: good for consumers, not so good for the environment

One of the most pronounced innovation-driven changes of the past century has been the decrease in the cost of manufacturing. Huge advances in raw material extraction and production technology (powered by fossil fuels), accompanied by the rise of global supply chains, which have often moved manufacturing from the West (e.g., USA/Western Europe) towards the East (e.g., Eastern Europe/Asia), have brought the price of manufactured goods down significantly. All of this has contributed to an increasing consumer surplus which has spread to many parts of the globe.

This is great news for consumers who are now able to afford much more than they could 50 years ago (especially in low-income countries), but it has contributed to high GHG emissions and waste streams as more and more materials are extracted and processed.

A lot of stuff, but no incentive to keep it

Put simply, we (humans) produce a lot more stuff than we used to, and we no longer use it for very long. In the past, high prices for manufactured goods (e.g. electronics/white goods) ensured long life spans (you do not get rid of something expensive without a very good reason) and value for the materials used in these goods. As the price of extracting and processing raw materials fell, the incentive to maintain a product for a long time decreased, as did the material value of its components. This means that manufactured goods in high-income countries are typically used for a shorter period of time compared with 50 years ago.

These lower material extraction and manufacturing prices have had a strong effect on today’s manufacturers, retailers, and consumers.


White goods image. SOURCE: shutterstock_1668941434
In the past, high prices for manufactured goods (e.g. electronics/white goods) ensured long life spans (you do not get rid of something expensive without a very good reason) and value for the materials used in these goods

Today’s products: built for convenience, not for durability

In the not-so-distant past (e.g. 1970s), white goods/electronics parts were very sturdy and price correlated strongly with quality (marketing departments typically used ‘cost-pricing’, where a margin is added to the cost of production to create a sales price, meaning end price reflected product cost).

Consumers were used to buying with the expectation that products were repairable, would last a long time, and would not soon be overtaken by a newer model. These goods were often purchased locally and would be serviced and repaired by the local business which sold the appliance, with the price of repair much lower than replacing appliances altogether.

As the cost of manufacturing decreased, and new business models emerged, manufacturers began to focus more on repeat purchases (i.e. instead of selling one machine for $800 which is replaced every 20 years, sell two machines for $500 each every ten years). This model typically required less sturdy parts (cheaper for the manufacture) and less need for repair services (easier for the consumer).

However, this increased waste streams tremendously and typically also contributed to higher levels of associated GHG emissions (although it should be noted that increases in energy efficiency mean that in some cases, emissions could have gone down). Increased planned obsolescence, which is not a new phenomenon, was often also a part of this process.

A broken link between cost and value

As manufacturing costs declined, marketing departments moved away from cost-pricing and started using ‘value-pricing’, where products and services are priced at the highest price which consumers will pay for them. Particularly for high-end goods with wealthy buyers, huge markups were charged, whilst some basic products sold for their cost price. This type of pricing is evident today in a variety of markets (think of vegan food, which requires cheap ingredients, often being more expensive than meat-based options in restaurants), but essentially means that the link between the cost of producing something, and the price at which it is sold, has been broken. This has quite serious consequences.

This broken link means there has been little incentive for most manufacturers to incorporate ‘circularity’ into their product lifecycles. For low-margin products which compete on price, circular principles (e.g., durability, ease of repair, recyclability) are too expensive to integrate. For high-margin products, the value of the product’s materials can be irrelevant to its end price. The cost to produce a white goods appliance which sells for $1,000 can be as low as $100 or less, and material value can be less than $50.

Given this disparity, incorporating circular principles becomes part of a product’s marketing appeal rather than an integral way of doing business: when the production cost is so low, creating a circular solution which is cheaper than simply extracting and processing materials traditionally is very difficult. Marketing departments typically require a lot of persuasion to change because collecting reliable consumer data is difficult and therefore, many have opted to stick with their current models. This trend is evident from the fact that the world is becoming less circular, as both consumption and waste streams increase across geographies.


recycling electronic waste
Electronic waste or e-waste describes discarded electrical or electronic devices. Used electronics which are destined for refurbishment, reuse, resale, salvage recycling through material recovery, or disposal are also considered e-waste.California continues to lead the nation in electronic waste policy as the only state that has successfully curbed both the illegal disposal and export of the largest category toxic electronics, which includes TVs, computer monitors, and laptops through CA’s SB 20

Innovation: a double-edged sword?

Innovation got us into this mess…can it get us out?… Partially.

On the manufacturer side, more durable, repairable, and recyclable products with higher levels of recycled content are needed to extend the life span of products, drive the market for secondary materials, and stem the flow of waste streams.

Achieving this will indeed require innovation, but it will no longer be voluntary, at least for many products sold in the EU. In 2022 new EU rules will come into effect which mandate certain conditions relating to the above categories for electronics: non-compliance will lead to hefty fines. In France, a repairability index has already been in use for over a year, and as of 1 January 2022, manufacturers also have to declare the minimum level of recycled content in many appliances.

Producing more circular products will constitute one side of the innovation piece. The other will be maintaining access to products. This is because reusing products in a profitable way after the first life is complete (e.g., through refurbish/repair/reuse of parts/closed-loop recycling) will be necessary to protect margins as repeat purchases fall. This can be done through incentivising leasing/product-as-a-service models, and optimising reverse logistics back to producers.

Consumers will need to change too: keeping products longer and understanding the total costs of ownership associated with different products will ensure they get more bang for their buck and can consume more sustainably. A recent study pointed out that renting a washing machine is 18-24% cheaper than buying one; spreads the cost over a longer period, making top-end, energy-efficient machines accessible to a wider range of the population; and can decarbonize the washing process by 24%-35%. This is all well and good, but getting the general populace to understand (and act upon) this is no easy task. Similarly, consumers need access to (and awareness of) timely and high-quality repair services, which can fix appliances quickly and efficiently, ensuring that repair is more convenient than purchasing anew.

It is said that human ingenuity has no bounds. This is doubtless true, but it is not always directed towards mutually beneficial outcomes. Today, humans’ ability to innovate is required more than ever, and at a speed which has rarely been seen before. On the carbon emissions side, the world needs to find a way to kick their reliance on fossil fuels, and on the waste streams side, the world needs to find a way to keep resources in use for as long as possible. Innovation has the potential to help achieve this, it just needs to be set in the right direction.

Carsten Gerhardt image Carsten Gerhardt, is a Partner in the Energy Practice and Sustainability Team of global consultancy partnership of Kearney, based in their Dusseldorf office. He is a leading expert on sustainable business strategy for the manufacturing sector, and co-founded the German circular start-up accelerator Circular Valley.

 

 

Mo Chatterji, Consultant at KearneyMo Chatterji, Manager at Kearney, works across various sustainability projects, with a focus on chemicals, electronics, plastics and agriculture. He is a Fellow at the World Economic Forum, where he is a member of the Circular Economy Team, and leads the ‘Pro-long electronics’ campaign for Circular Valley.