It has been estimated that the long-term benefits of the circular economy is within materials - intensive automotive, machinery and equipment industries (Ellen MacArthur Foundation, 2014). The automotive and machinery sectors along with the railway sector are examples of steel-intensive sectors. Together they represent around 45 % of the global steel demand (Ellen MacArthur Foundation, 2012).
Moreover, steel metal scrap from machinery and equipment along with vehicles and big household appliances produce approximately 30% of steel scrap globally, representing 10% of all steel produced. The typical lifespan of machinery, equipment and components in customer use is 5-25 years where maintenance plays a central role accounting for 30-50% of many companies’ total turnover (Sitra, 2015).
It is estimated that the circular economy improves competitiveness in the machinery and equipment industry, as it creates a major opportunity for companies to boost their growth and to better meet customer needs. The circular economy is expected to bring a growth potential of EUR 300–450 million for the industry, which is based on additional sales generated by new business models using the circular economy approach. Such a change can already be seen in companies such as Caterpillar, Rolls-Royce, Renault and Kingfisher (Sitra, 2015).
The main input of the machinery and equipment sector mainly consist of labour, mostly engineers, as well as components, services and steel. In terms of resources the key raw material is steel. The market for steel material is well-developed, thus the cycle is almost closed. In the circular economy, the most important issue is leading back to the OEM (original equipment manufacturer). In addition, it is important to remember the potential role of subcontractors in the refurbishing of components or in scrap metal flows (Sitra, 2015).
The machinery and equipment industry focuses on capital assets, i.e., the manufacture of production equipment. Such assets have longer service lives and innovation cycles than consumable products, which lead to a much lower volume of products and materials, also posing a challenge to the creation of tighter loops. However, a longer service life would increase the opportunities offered by modularity and leasing. At the end-of-life stage, there is still plenty of value to capture by selling machinery and equipment, but currently only few companies have started to benefit from this opportunity. One reason for this is the lack of existing platforms for second hand machinery.
Circular design is the first step towards closing the loop
The decisions taken in the product design phase are crucial, as they set the foundation for the possibilities of circularity of a product. Material that otherwise would be wasted is maintained or even improved through remanufacturing, repairing, upgrading or re-marketing. By extending the lifespan of the product for as long as possible, companies can keep material out of the landfill and discover new sources of revenue.
Circular design includes enabling the recovery of materials and products, e.g. by the choice of materials or a design for disassembly, as well as improving the modularity of a product to enhance the efficiency of remanufacturing. Other areas important for economically successful circular design are standardised components, designed-to-last products, design for easy end-of-life sorting, separation or reuse of products and materials and design-for-manufacturing criteria that take into account possible useful applications of by-products and wastes. Products need to be recycled as efficiently and safely as possible at the end of life, and therefore the circular economy will require user-centred service and product design, from raw materials to service concepts and from use to disposal. This will require new core competencies in circular design to facilitate product reuse, recycling and cascading in companies. However, it needs to be emphasised that remanufacturing is possible only if the equipment in question returns to the OEM (Ellen MacArthur Foundation, 2013; Antikainen et al., 2016).
Case example: Caterpillar
Case example - Valtra:
The sales of remanufactured gearboxes is a very profitable business. Refurbishing makes the life cycle of the product longer, and helps cut manufacturing costs as well as material and energy consumption when compared to manufacturing of new gearboxes: remanufacturing uses approximately 95 % less energy than manufacturing a new product. Since 2012, the turnover for Reman gearboxes has increased by an annual rate of 25-30 %. For customer, a remanufactured gearbox costs 30-40 % less than a new gearbox.
Customers are committed to return used gearboxes by a deposit scheme, i.e., when ordering a Reman gearbox, they pay a deposit which is approximately 50% of the gearbox price. The deposit is returned when the customer returns the used gearbox. For a customer the Reman service is carefree as Valtra covers the delivery costs and also offers a warranty for the proper function of the remanufactured gearboxes (Sitra, 2017).
Case example – Valmet:
Increasing the use utilisation rate by sharing
Related concepts with the circular economy are a sharing economy and collaborative consumption defined as the peer-to-peer-based activity of obtaining, giving, or sharing the access to goods and services, coordinated through community-based online services (Sundararajan, 2016; Albinsson & Perera, 2012; Botsman & Rogers, 2010). In manufacturing industry the benefits can be related to sharing of production capacity, resources, knowledge and logistic networks. As we look at micro companies sharing human resources might enable the flexibility and cost-efficient way for growth with motivated and committed people. Furthermore, sharing the logistic solutions with other companies might offer remarkable savings for example to small producers who often take their products by themselves to the retailers which is very time-consuming. As we look at the current news, such as “EquipmentShare, the Airbnb of construction, raises $26 million” (Kolodny, 2017) we see that B2B companies have already started to pursue new business models based on sharing economy ideology.
Case example – the Cargomatic app:
The sharing platform model is centered on the sharing of products and assets that have a low ownership or use rate. With the model, companies can maximize the use of the products they sell, enhance productivity and value creation. Examples of the sharing economy abound, including transportation (Lyft, RelayRides, BlaBlaCar), lodging (Airbnb), and neighbors helping neighbors (TaskRabbit, NeighborGoods), among many others.
With IoT towards services in manufacturing
Digitalisation is boosting and accelerating the circular economy. Internet of Things (IoT) solutions are being used to track raw materials, products and equipment, optimise their utilisation rate and monitor their conditions. This is increasing the interest of companies in switching to services based on improved opportunities to gather data across product life cycles. Companies in possession of data and competencies to process it will be able to develop their own operations and discover new business opportunities. Various service platforms are connecting service producers with users. Correspondingly, digital platforms are creating new business opportunities in inter-company operations for skilled combiners of data, but success requires openness of boundary resources.
IoT solutions will enable the smooth use of such services. Furthermore, data analytics, simulation and modelling will create new opportunities for, e.g., monitoring, preventive maintenance and optimisation throughout the value chain, as well as the evaluation of user needs and approval. Traditional operating models can therefore be disrupted on the basis of better and proactive understanding of service users.
In addition, the rapidly developing blockchain technology is creating cost-effective, global and secure solutions for payment, sharing, making contracts and the optimisation of resource use both between companies and consumers, which is helping to create new business models for the circular economy. (Antikainen et al., 2016)
Case example – Azure IoT Suite and Sandvik Coromant:
The opportunities of servitisation and digitalisation for the circular economy
In the ‘product as a service’ business model, customers use products through a lease or pay-for-use arrangement, in contrast to the conventional buy-to-own approach. This model is attractive for companies that have high operational costs and ability to manage maintenance of that service and recapture residual value at the end of life. Through services, broader ecosystems can be built through which both companies and consumers can be offered more comprehensive solutions. This way, the circular economy will be both global and local.
Servitisation and digitalisation will support circular economy concepts along the entire production and the product life cycle. Under the service model, the user will shift towards paying for the right to use, which will motivate the service provider and service user to jointly optimise resource use. The transition from product seller to service provider will require a change in company cultures, processes and business models. Process adjustment and a change in mind-set will also be needed on the buyer’s side. A successful service model will create a closer collaboration relationship from which all parties benefit. In some sectors such as the car industry, leasing and rental agreements are already everyday occurrences, whereas they are only just emerging in other areas such as in the chemicals industry.
Case Example – Rolls Royce:
Rolls Royce has made the decision to go from manufacturing and selling engines to extending comprehensive maintenance services to the airlines that use its engines. The TotalCare Services employ a “power by the hour” model in which customers pay based on engine flying hours. Rolls-Royce is responsible for the reliability and maintenance of an engine, and utilises and analyses engine data for maintenance management and for maximizing the availability of aircraft (Microsoft, 2016).
Case example – KONE:
KONE, a global leader in the elevator and escalator industry, bases its business model on a life cycle approach. KONE’s R&D process seeks to optimize material use, avoid the use of hazardous substances, maximize material durability and recycled content, and minimize water consumption. 90 % of the materials used in elevators and escalators are metals that can be recycled at the end of the product life cycle.
KONE services over 1.1 million elevators and escalators, and maintenance and modernization are tailored to maximize equipment performance. Services are designed to help customers achieve their eco-efficiency goals in every phase of their buildings’ life cycle. In 2016, the service business accounted for 45 % of KONE’s revenue; maintenance accounted for 31 % and modernization for 14 % (KONE, 2016).