Rising costs, commodity prices squeeze business

McKinsey estimates that net material savings in a Circular Economy on a global scale could reach US$1 trillion by 2025. The benefit would be highest in the automotive sector, followed by machinery and equipment . . .

Global business consultant McKinsey & Co makes a strong business case for
companies to move into the circular economy in its research paper, Remaking the Industrial Economy. Why the need to change?
McKinsey says: “Visualise, for a moment, the industrial economy as a massive system of
conveyor belts – one that directs materials and energy from resource-rich countries to manufacturing powerhouses, such as China, and then spirits the resulting products onward to the United States, Europe and other
destinations, where they are used, discarded and replaced.”
In the paper, first published in 2014, McKinsey says that, increasingly, the linear approach to industrialisation has come under strain.
Some three million consumers from the
developing world will enter the middle class by 2030. “The unprecedented size and impact of this shift is squeezing companies between
rising costs on one hand and less predictable commodity prices on the other,” McKinsey says, pointing out that the turn of the millennium marked a point when a rise in real prices of natural resources began erasing a century’s worth of real price declines.
“In the light of volatile markets for resources, and even worries about their depletion, the call for a new economic model is getting louder,” the paper says.
A small handful of companies are taking the road to the circular economy.
These include some in Australia, especially in the construction sector. Resource-poor
countries like Japan are among those in the vanguard of recycling waste.
McKinsey looks at companies which have ventured into the world of the circular economy and are starting to see economic benefits — apart from public good.
A regenerative economic model, the circular economy is starting to help companies create more value while reducing their dependence on scarce resources.
McKinsey cites several examples from companies it selected to tell their stories. The bottom line is that they are able to make better profits regenerating waste products. It looks at Renault, the French car manufacturer, Japan’s Ricoh, the world’s leading office machine
maker, British clothing retailer H&M, and B&Q,
another UK retailer, specialising in DIY and home improvement.
Renault remanufactures automotive engines, transmissions, injection pumps and other
components for resale from its plant in Choisy-le-Roi, near Paris. The plant’s remanufacturing operations use 80 per cent less energy and almost 90 per cent less water than does comparable new production.
The French carmaker has entered joint
ventures with a steel recycler and a waste-management company to bring end-of-use
expertise into product design.
McKinsey says that, in a circular economy, companies can maximise the number of consecutive product cycles (cycles of reuse, repair or remanufacture), the time products spend in each of these cycles, or both.
“If designed appropriately, each additional cycle eliminates some measure of the new
material, energy, and labour costs of creating a new product or component,” the paper says.  “For example, Renault leases its batteries for electric cars, in large part to recover them more easily so that they can be reengineered or recycled for additional duty.”
The car industry has long been engaged in recycling. One example is tyre maker Michelin, which takes back tyres when they wear out. It has developed new technology to retread and regroove them for reuse. Michelin estimates that retreads require half of the raw materials that new tyres need — but deliver up to 90 per cent of new tyre performance.
The Japanese office machine giant, Ricoh, has designed its GreenLine brand of office copiers and printers, supported by a sophisticated take back system, to re-use most components — and reduce the need to use virgin material.
Greenline products are now on sale in six mature European markets, where they account for between 10 and 20 per cent of Ricoh’s sales by volume. Greenline products generate margins that are as much as two times higher than those of the company’s comparable new products — without a reduction in quality, according to McKinsey.
For products that can’t be remanufactured, refurbished or upgraded, Ricoh harvests the components and recycles them at local facilities. The company is currently considering a plan to return some recycled materials to its manufacturing plants in Asia for use in making new components.
After factoring in the price difference
between virgin and recycled materials, together with the cost of Asia-bound container shipping, Ricoh estimates it could save up to 30 per cent on material costs. Overall, Ricoh says it is on track to reduce the input of new resources in its products to a level 25 per cent below the 2007 level by no later than 2020.
McKinsey says Britain’s H&M has launched an in-store collection programme encouraging customers to bring in old clothes in exchange for discount vouchers on new H&M clothing.The retailer sees this as the first step in the company’s longer-term goal of recycling all of its textile fibres — using yarns made from collected textiles in its new products.
Similarly, B&Q told McKinsey that it is piloting a take-back programme for its power tools. The company plans to refurbish the tools it collects in Europe for local resale, or to recycle them to recover raw materials for use in making new power tools at its facilities in China.
The company says its cordless drills contain up to 80 components derived from 14 raw materials sourced in as many seven countries.
McKinsey says that, in some instances, tangible results have already been achieved from products now in production using new materials and a new approach incorporating the principles of the circular economy.
In the fast-moving consumer goods industry, about 80 per cent of the US$3.2 trillion worth of materials used each year are not recovered.
McKinsey estimates that net material savings on a global scale could reach US$1 trillion a year by 2025. In the European Union alone,
annual savings for durable products with moderate lifespans could reach US$630 billion. The benefit would be highest in the automotive
sector (US$200 billion a year), followed by machinery and equipment.
McKinsey says the circular economy replaces one assumption — disposability — with another — restoration.  The circular economy aims to eradicate waste in a systematic way through the various life cycles and uses of products and their components.
Then, often what might be otherwise called waste becomes valuable feedstock for successive usage steps.
As McKinsey sees it, the real payoff will come when multiple players across the business and research communities, supported by policymakers and investors, come together to reconceive key manufacturing processes and the flows of materials and products.
If applied to steel consumption in the automotive, machining and transport sectors, a circular transformation could achieve global net materials savings equivalent to between 110 million and 170 million metric tonnes of iron ore annually by 2025.
McKinsey says: “The take, make and dispose model of production has long relied on cheap resources to maintain growth and stability. That world no longer exists.
“By applying the principles of a circular economy — a system that is regenerative by design — forward-looking companies can seize growth opportunities while laying the groundwork for a new industrial era that benefits companies and economies alike.
“Capitalising on the opportunities will
require new ways of working, but the
benefits are well worth the cost.”