4 Myths of Circular Economies: Beyond a Fad into a Consumption Revolution

Most of us are familiar with the term SaaS, software as a service, and its counterpart, PaaS, platform as a service. While there is a fair bit of talk about the as-a-service model, thanks to circular economies, the model is set to become pervasive in our lives.

The last 60 years has seen a significant increase in the production and consumption of goods, particularly in the last ten as the global middle class expands. Products thus far have largely executed a take-make-dispose model of production, one that is linear and doesn’t consider the end-of-life or post-consumption part of the product’s complete lifecycle. The linear model depends on resource inputs, many of which are natural resources that are in limited supply. As we move into a period of reduced availability for never-before-used resources with growing consumption trends, product inputs in a linear model are becoming more expensive. Simultaneously, there’s a growing concern about climate change and the impact we’re having on the environment. Naturally, businesses are starting to consider circular economies to reduce their input costs and decrease their reliance on limited virgin resources.

4 Myths About Circular Economies

Before we jump in to look at how consumption patterns will change with circular economies, there are a few myths that need to be dispelled about circular economies.

Circular economies are product-specific: old phones become new phones.

Most people who haven’t familiarized themselves with circular economies tend to think that applying the concept of a circular economy to a product means how to create a circle of resources, production, and reuse just within that product. The reality is that circular economies expand way beyond a single product. Consider H&M and the fast fashion industry. H&M turns resources into clothes, sells them, and has begun accepting used clothes from consumers in order to address the post-consumption part of the clothing lifecycle. These clothes are either re-sold through partners if they’re in acceptable condition, or they are sent to recycling where they are converted into fibers that are used in housing insulation.

Circular economies are mostly local.

While local economies can be great examples of circular economies, at a commercial level, global circular economies are developing due in part to country specializations and location-specific activities in the supply chain and production process. There is a platform, Materials Marketplace dedicated to helping companies find previously-used materials or waste from other companies, but at a commercial level. For example, a brewer will have used grains that are waste for his business, but would make great manure for a farmer. This is quite literally one man’s trash, another man’s treasure. Another example is Timberland who recently produced a pair of boots made from plastic bottles captured in Haiti. On a similar scale, when we think about making electronics, raw inputs are shipped to Asia, mostly assembled products are then shipped to North America, Europe, and beyond. Products that have been “consumed” are disassembled and materials extracted, compacted, then sent back to Asia to become inputs again for new electronics.

Circular economy products are “green,” “sustainable,” “eco-friendly,” and thus expensive.

It’s true that when we think about buying recycled products, such as recycled toilet paper, we find that it is more expensive to buy than “normal” toilet paper that isn’t green, eco-friendly, or 100% recycled. However, not all products in circular economies are more expensive. In fact, Renault saved millions of euros in changing to a circular economy. Apple recently released new product models, some of which are circular economy products, only they aren’t branded as green or eco-friendly. Their Macbook Air is made from 100% recycled aluminum.

Circular economies are a fad.

Since we live in a world with limited resources, circular economies can’t be a fad. There’s a physical limit as to how far the world can push the take-make-dispose linear model until we run out of inputs: and that is the line we are approaching. We have no choice but to move away from the take-make-dispose or cradle-to-grave model. The question becomes how can we re-design product lifecycles in their entirety, reduce waste to zero, and move to a new normal such that product lifecycles are truly circular and intertwined globally and across industries?

Changing Consumption in Circular Economies

As a global economy, we’re pretty good at the forward, linear supply chain and being consumers. However, we’ve still got work to do to address the post-consumption part of the supply chain and how to create circular product lifecycles. One of the major requirements to addressing post-consumption and changing from a linear to a circular model is recuperating the product from the user after consumption has finished. Right now, we just throw most things away, or at best, donate them to a thrift store or sell online. There is little incentive outside of the human conscience and personal values to induce a person to address the post-consumption part of a product’s lifecycle, with exceptions for monetary incentives that are becoming more popular. Some companies will offer discounts on new mobile phones if you turn in your old phone: in short, there’s a monetary incentive provided to the consumer to help with product recuperation post consumption.

Consider a lightbulb: we buy it, install it, and when it stops producing light, we throw it away. Phillips set on a mission to recuperate lightbulbs so that it can reuse the materials to make new lightbulbs and reduce its input costs. Lighting accounts for 20% of all energy consumption globally, as the CEO of Phillips told me back in 2007. No surprise, then, that it introduced LaaS: lighting as a service, because the model is a great incentive for users to return the lightbulbs after they stop working, thus providing Phillips with its inputs for the next round of lightbulbs. The renting (or as-a-service) model incentivizes the user to return the product, enabling the producer to manage end-of-life products and facilitate a transition from a linear to a circular production model.

The question is, how far will the as-a-service model go? There are already examples of tires as a service, batteries as a service, mobile phones as a service, and more, but there’s a tension between the limits of the physical world of resources and consumers attitudes, habits, and perceived benefits of products. How comfortable would you be with beds as a service, toothbrush as a service, towels as a service, or underwear as a service? There are some products that consumers don’t want to think of as re-used or rentable, but instead find comfort, protection, and peace of mind in owning, knowing they are the only ones who’ve used a given product.

It turns out that while there are certainly challenges in changing product designs and figuring out global circular supply chains, the biggest challenge to moving to circular economies comes from consumers. We’re just so used to the linear model that we aren’t motivated to change our habits, perceptions, or attitudes about consumption and disposal. We’re also used to owning products, and ownership and use are part of self-expression, lifestyle, and our identity or our perceived identity.

Acceptance and Growth of the Sharing Economy

Interestingly, we’re making some strides to changing our consumption patterns thanks to the growth of sharing economies and well-known companies such as Uber (started by a UC alumni), Lyft (also started by a UC alumnus while at UC Santa Barbara), and AirBnb. Companies that facilitate collaborative consumption have increased the use of otherwise underutilized assets. Their main value has been providing accessibility to items owned by one person and used by another. This has introduced the non-ownership ideas into mainstream cultures and societies, a good first step towards impending changes coming with circular economies. The difference with circular economies is that the focus isn’t on increasing underutilized assets: it’s more holistic and aims to move all production and consumption to circular cycles rather than linear processes.

The Business Challenge: Consumer Perceptions and Habits

We will still be consuming and using products for many more years to come, but as consumers, we’re going to have to change our attitude to consumption, ownership, and post-consumption. Entrepreneurs have immense opportunities to recreate business models, and already, 25 different business models have been identified for circular production systems. Figuring out global interconnected supply chains will be a challenge, and undoubtedly one that involves rent capture, but the biggest challenge companies will face is changing consumer perception, attitude and behaviors. Arguably, the companies who figure out how to influence consumers the most are likely the ones who will also do well as businesses in a new circular economy.

Circular economies present an interesting opportunity for the economy as a whole: incumbents will have to shift their approaches, sourcing, strategies, and possibly competencies, as Phillips illustrates. Startups and new companies will enter with newly designed products and solutions: 3D printing offers a great example. Researchers have already cited the potential of 3D printing to disrupt the supply chains and becoming profitable businesses that challenge incumbents.

Unilever offers early insights into how companies might tackle consumer influence. They created five levers for change that they believe “can increase the likelihood of achieving sustained behavior change.” The five levers are: make it understood (education), make it easy, make it desirable, make it rewarding (incentives), and make it a habit. Unilever used local brands of hand soap to increase handwashing, changing people’s attitudes and beliefs about handwashing in order to decrease disease. Applying this to changing consumer habits and perceptions related to a circular economy, companies can apply the five principles to the post-consumption lifecycle. Millennials are likely less in need of education but require help with habit-formation. Also, how easy is it for them to return a product, recycle a product, or move to lighting as a service? If it’s not easy, they won’t do it. On the other hand, older generations may have no clue about the state of the world’s resources and need targeted education and incentives to help them form new habits, particularly later in life.

In the end, time will tell how markets play out in what is hailed to be a $4.5 trillion opportunity globally. New business models will emerge, disruptive technologies will change production and the supply chain, and we as consumers will shift to a different way of consuming. Who captures value when and where remains to be seen, but there’s no doubt that today and tomorrow’s CEOs face challenges with respects to resource control, market power, and business model innovation.