Following his participation to last year’s “Finance & Mobility” conference that took place during the FleetExpo, Marko Koerner, Senior Manager at KPMG Luxembourg, tells the Automotion readers more about the concept of circular economy, on its perspectives for Luxembourg, and on how it could help the automotive sector develop notably by keeping the material in the cycle and reducing waste to zero.
Circular economy is a very large concept, what are the perspectives for Luxembourg?
The concept of a Circular Economy is to move from a linear “take-make-dispose” model to a circular approach of reusing, repairing and refurbishing products as well as recycling raw materials. It is THE answer to the challenges of accelerating population growth coupled with a decline in resource and material availability. No economy can avoid to tackle these inevitable global developments – not even Luxembourg.
But the concept does not only respond to emerging global challenges; rather it provides a wide range of opportunities for the economy in the EU and the world: research shows that material saving potential alone is over USD1 trillion a year and half a million jobs could be created in the EU recycling industry alone. Existing CE projects show significant saving in capital investments resulting in higher returns for investors!
Luxembourg offers numerous opportunities to apply the concept of circularity in businesses. Any industry is affected and the model could be leveraged based on the interest and openness of business leaders and the level of support by political decision makers and the administration. Luxembourg has proved in the past to be very responsive to new challenges and developments. If the same level of ambition would be applied to this initiative, Luxembourg could serve as a pioneer to move its economy to circularity on a broad basis.
Many examples in several sectors already exist today! Often, such businesses are not known or announced to be „Circular”. Nespresso for example plays an important role in successfully returning material to the production cycle: with the objective to recover aluminum from used capsules, they introduced an own collection system in the BENELUX: used capsules can be returned in their shops, with the courier delivering new order or being dropped off at particular collection stations. In addition, an increasing number of companies in several industry sectors using material leasing instead of selling, they realize that controlling their raw materials will improve their competitiveness in a time when natural resources getting scarcer.
What is the main advantage and weakness of Luxembourg regarding this concept?
Luxembourg has the perfect size to serve as a testing ground for a transition to circular economy. It is big enough to host a sufficient number of companies applying the principles of circular economy and it is not too big allowing that national value chains are analyzed and adjusted if needed. The size of the country also allows a quicker decision making process. Industry leaders are open to new models and solutions and are acting very proactively. This topic appeared on Luxembourg's political agenda after the last elections. The current coalition agreement confirms the intention to support the transition to a Circular Economy and to make it grow to a mainstream market in Luxembourg, proving a strong commitment to this emerging economic model.
The role of the financial sector is crucial: experience shows that many projects with the objective to turn a linear business model into a circular one struggle due to the lack of access to finance. Financiers find it difficult to understand such projects and to assess the associated risks. KPMG’s main objective in this initiative is to raise the awareness of the financial sector in order to uplift the full potential of this significant sector to support the “real economy”.
A potential weakness might be the lack of awareness of the concept so far. But we are working on it!
What sectors have the highest ambition level to adapt a circular economy and why?
Any sector that relies on resources is affected from the before mentioned challenges and has to assess related risks and opportunities. Implications from expected resource scarcity, resulting in rapidly rising and volatile prices, might even jeopardize the survival of businesses. The higher the implications, the higher the pressure or the economic incentive to react.
A general trend is a move from “owning a product” to “access to service”, which describes the sharing economy. More and more consumers are prepared to share products and to try out new models. Car sharing for example is expanding at annual rates of as much as 30% and KPMG’s Global Automotive Executive Survey shows that 72% of study respondents consider wider mobility solutions as a genuine alternative to car ownership in urban areas. This will impact the automotive sector heavily and the producers are already considering these trends in the developments of new products and services.
The overall objective of the circular economy is resource efficiency which considers several options. One option is to return used resources for a new production cycle, another option concerns developments in the service sector, i.e. the idea of sharing things – both options contribute to a lower consumption of resources.
How could this concept be developed into a long term vision for the future of the automotive industry?
The long term vision for the automotive sector should be clear: increase the material that is kept in the cycle and reduce waste to zero. But how can this be achieved?
Based on the trends mentioned in our Global Automotive Executive Survey, the sector is undergoing unprecedented changes. Particularly the trend that consumers are looking for more efficient, longer lasting cars, primarily to save costs, drives the transition to circular economy based models. Manufacturers are considering how they can increase the durability of their cars and how they can “close the loop”. This already starts at the design phase of a car when manufacturers strive to ensure that this product can easily be disassembled to ensure an efficient retrieval process of materials.
The main challenge that needs to be tackled in the automotive industry is the development of a return logistic chain. Currently, the reusing and recycling level in the automotive sector is quite low. Even if manufacturers wanted to increase this level, they probably couldn’t. Cars are like all mass-produced products everywhere and they don’t drive themselves back to the manufacturer at the end of their useful life. Manufacturers either have to work closer with independent refurbishers and recyclers on the open market or create a smart reverse logistic chain to get their cars back for further use.
To close the loop, manufacturers have to analyze their natural resource dependency carefully. They need to identify their dependency for a range of materials (copper, lithium and others) and have to find ways to secure their material supply, preferably by getting products back that achieved end of life status in order to reuse them. KPMG research reveals that firms across a wide range of industries have typically been slow to develop long term strategies and responses, thereby missing on opportunities to make early moves and position themselves competitively. Although firms expect raw material scarcity to have significant impact on business performance, they have been slow to develop responses and typically have relied on traditional procurement levers.
What are the steps to manage the implementation of circular economy for local automotive actors?
The concept of Circular Economy is not widely known in Luxembourg so far. The recently published feasibility study for the country unveiled a number of businesses that already have circular operations or at least elements of circularity in their processes. The concept needs to be communicated more efficiently to the sector to raise the awareness about the concept and the potential behind.
A precondition to implement the concept of Circular Economy is not only system reorganization, but business model redefinition. Manufacturers may have to rethink their business from purely product makers and sellers to collaborators and deliverers of service-related performance. They should start to identify their risks along their supply chain: their material dependency, potential scarcity and related price volatility. To preserve a competitive position businesses might have to develop comprehensive, innovative responses with long-term sustained impact.
To achieve this objective, firms have to bring the topic to the top of the management agenda, allocate strategic capabilities in relevant functions typically viewed as operational and foster strategic, cross-functional collaboration and problem solving across relevant functions.
As the local automotive sector is very diverse, implementation steps might be very different for any single manufacturer however.