What it will take to kickstart the circular economy

January 16, 2025

What it will take to kickstart the circular economy

When businesses can conceptualize the new markets that circular practices can lead to, they will find the commercial incentive to make the big changes required.

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Ask any business leader what the circular economy is, and you'll probably get a pretty well-informed response. But from a practical standpoint, most circular endeavors today are controlled experiments rather than full-scale circular transformations.

And it shows: According to some estimates, the world dumps over two billion tons of waste every year. One measure finds humanity is using resources gleaned from the earth 1.7 times faster than the planet can produce them.

Businesses have had centuries to perfect linear economy practices of resource exploitation-what will it take to unlearn those wasteful principles and pivot to a circular mode of operations?

The answer is as old as business itself: economic opportunity. Businesses need a compelling economic reason to make a radical shift from the status quo; however, this will require devising entirely new business models for circular value recovery that differ significantly from linear economic models. Both short- and long-term value propositions need to be carefully laid out. By defining the market opportunity and mapping the pathways to achieve it, businesses can begin their circular transformation.

Defining the market opportunity

Today, we are in the early stages of exploring circularity as a business model, not unlike where Netflix was in the 1990s-well before streaming services grew to a $600-plus billion market. Companies both large and small are, however, establishing significant proof points.

One is Signify, formerly Philips Lighting, which in 2013 reimagined its business model as a lighting-as-a-service approach in response to new market conditions. With this model, customers pay only for the light they use and return the equipment at the end of the contract for recycling or reuse. To meet KPIs for uptime and energy savings, and enable fast assembly and disassembly, Signify builds durable, long-lasting, modular equipment and manages it with artificial intelligence and the Internet of Things (IoT) to ensure efficiency and sustainability.

Fast-forward 11 years, and lighting-as-a-service is estimated to reach $16 billion by 2032. Today, an ecosystem of over a dozen lighting companies, IT integrators, software providers, installers, and facility management service providers are competing in this growing space. In addition to fulfilling circular principles of reduce, reuse and recycle, the customer value proposition is also clear: for a large airport or stadium, this new business model could result in a 90%-plus reduction in operational costs.

Once a viable market has been identified, the work begins. Businesses need to embed four systems of change into their operations to deliver circularity at scale:

• Design for sustainability. The Design for Manufacturability/Reliability (DFM/DFR) principles are traditional drivers for product economics. Design for Sustainability (DFS) complements many of these established practices, but also contradicts some. Serviceability, extensibility and recyclability to retain and recapture value throughout products' lifecycle and beyond become important principles. AI-driven models can help simulate and optimize the lifecycle value of a product, which makes it more valuable to maintain or upgrade, including software-driven lifecycle extensions. DFS also drives changes to product structure, material supply to promote more environmental efficiency in transport, material reduction and substitution, recyclability, and draw-down on raw material consumption. Additionally material use should be minimized, especially when it comes to plastics and hazardous materials, such as the PFAS commonly used in textiles.
  
  Automaker Volvo intends to be a circular business by 2040, in part through material reduction and sourcing more durable materials that can be reused and recycled into new cars. Its EX30 model, for example, is made of 17% recycled materials, and Volvo hopes to increase that to 25% (including recycled and bio-based materials) in new models.
  
  
• Supply chain traceability. Data that enables traceability in the supply chain is critical to re-engineer carbon-intensive, one-way supply chains and create more economic opportunity across communities, including those in which the products are used. Rather than exploiting the environment or labor for raw materials, the idea is to extract parts, components and materials and reintroduce them into the supply chain or new applications.
  
  
• Manufacturing, remanufacturing and reverse logistics. Businesses need to determine what to do with reintroduction of recovered material. Another important driver is the reduction of single-use and intermediate materials in the manufacturing process, such as packaging. New data models such as digital product passports and lifecycle analysis (LCA) are critical for enabling the design of the extended supply chain, contract manufacturing arrangements and logistics design.
  
  When GE Healthcare's older medical equipment is not suitable for refurbishment, desirable components are redeployed as reusable parts or recycled. According to GE, 82% to 100% of a system may be recyclable.
  
  
• Lifecycle revenue models. Finally, circularity requires a rethink of the product itself, the market in which it's sold, the ecosystem that supports that market, and the value delivered to customers. Many large asset manufacturers (of turbines and earth-moving equipment, for example) have had to think beyond being a manufacturer to being an owner of a fleet of assets which deliver revenue "by the hour." It is also critical to integrative a view of lifecycle costs to target value beyond manufacturing. Remote asset management, digital field services and enhancement of aftermarket service models become significant levers of reducing Scope III emissions and improving sustainability.

In summary, establishing a scalable, circular business model requires transforming many operating processes. Gen AI, IoT and a whole spectrum of technology levers play a critical role in designing, simulating and ultimately scaling circular transformation within the organizational stakeholders and supply chains.

Getting the circle spinning: how AI and allied technologies help build momentum

Circularizing will require a combination of incremental and holistic change. Businesses can jumpstart their own circular efforts by focusing on four key principles.

1. Tweak and transform. It's important to engineer a system of change. This will allow companies to capitalize near-term value opportunities to prove the concept, then work toward a more fundamentally transformative opportunity. AI-driven system design also helps deliver a flexible enterprise technology framework.
   
   
2. Integrate downstream visibility. Whether leveraging takeback programs, subscription services or reverse logistics processes, businesses need to track what happens to their products and the materials they contain through the entire lifecycle. Much of this information exists within enterprise systems of record, but gen AI and other technologies help consolidate a view of opportunities which lead to circularity.
   
   
3. Technology to drive collaboration and empowerment. Gen AI, machine learning, and IoT-enabled operations all help solve a crucial transformation challenge: there simply isn't enough engineering expertise within companies to design change in how various roles will transform.
   
   
4. Establish correlation between business and customer goals. Circular business models need to benefit both businesses and customers. Today, ESG reporting largely informs investors and industry watch groups. Re-interpreting ESG data for business performance and creating more authentic, material value propositions for customers will accelerate transformation.
   

The circular economy introduces a profitable path away from exploitative business models that no longer have a place in the world. It's a matter of bending the linear trajectory of doing business into a circle-a circle with global benefits for people, the environment and a new way of profitably doing business.

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