The concept of circular economy may be counter-intuitive in terms of automotive industry sustainability, but it is important to consider how it can support the transition. By Manuel Silva Martinez
The automotive industry is undergoing a profound transformation as it tries to adapt to changing customer behaviors, new technologies, increased regulatory pressure and emerging business models. Globally, the industry is expected to grow to nearly US$9 billion by 2030.
In recent years, the industry’s steady growth has been driven by electric vehicles (EVs). This growth is only expected to increase as the need to meet climate goals becomes more urgent. While Tesla remains the leader in the field, new EV manufacturers such as Xpeng are growing exponentially and traditional manufacturers are investing billions in their fleet electrification efforts.
As the transportation industry is responsible for 27% of greenhouse gas emissions, the transition to electric vehicles is key to achieving zero emissions goals, but there is another key issue at play, namely how get rid of the millions of cars still in circulation in a sustainable way. Is it a better environmental alternative to extend their lifespan instead? Although the concept of circular economy applied to the automotive industry may be counter-intuitive in terms of sustainability, it is important to consider how this can support the transition.
The circular economy aims to eliminate waste throughout value chains, including manufacturing and use. It promotes the preservation of raw materials and recycling. In contrast, today’s “linear economy” transforms raw materials into products that are made, used, and disposed of, finding value in the production and sale of as many goods as possible.
Moving away from the “linear economy” means system-wide changes, including decarbonizing production and designing “end-of-life” recyclable products. For an industry as large and complex as the automotive industry, this means achieving large-scale transformation.
Unsurprisingly, the industry and its value chain is dominated by large manufacturers, but a number of emerging players are driving innovations in different circular business models. Below are some of the names and business models that have the potential to evolve and drive increased sustainability across the industry.
This involves replacing linear life cycle materials with renewable, recyclable or biodegradable input materials in the production process. For example, Redwood Materials is creating a circular supply chain by reclaiming raw materials such as cobalt, copper and nickel from end-of-life lithium-ion batteries to produce battery materials for electromobility and electrical storage that can be recycled.
It involves the recovery and reuse of the outputs of one process as inputs for another with the aim of increasing the economic value of resources throughout life cycles. For example, Black Bear Carbon is a Dutch company founded in 2010. It recycles end-of-life tires to produce sustainable black carbon, reducing CO2 emissions and aiming to solve the global problem of used tires.
Product life extension
These models aim to extend the life cycle of resource cycles by repairing, upgrading or reselling. In the context of the automotive sector, this can be divided into used dealerships and predictive maintenance platforms. While used dealerships have been around for decades, online used marketplaces have popped up in emerging and developed markets in recent years as consumer behavior shifts towards online shopping. Examples of already well-established players include Carvana in the United States, Auto1Group in Europe, Kavak in Latin America and Cars24 in India. However, data and AI are also fueling innovation in the predictive analytics segment. For example, Twaice is a German company that uses predictive analysis software to increase battery life, efficiency, and durability. The company provides access to solutions for the optimized development and operation of lithium-ion batteries, independent of a battery or product manufacturers.
These systems increase utilization rates of products and services by enabling shared use and ownership. Turo is a US-based peer-to-peer car-sharing platform designed to help people book a car from local car owners through an online and mobile interface. Many more have emerged, either as peer-to-peer solutions or as solutions offered by OEM/leasing/renting companies, in one of the simplest applications of the circular economy in the world. ‘space.
Product as a Service (PaaS)
This model provides access to products through rental or leasing services. PaaS helps reduce environmental impact by sharing and extending the use of an item and supports affordability by charging regular small amounts, rather than the full value all at once. A large number of players have entered the digital subscription space over the past few years, a sign of changing mobility trends. For example, Finn.auto allows people to subscribe to a car instead of owning one. Finn.auto is also proving attractive to environmentally conscious drivers as it offsets CO2 emissions and expands its range of electric vehicles.
For such a large industry, the shift to circularity also requires changes and evolving business models from incumbents and it is encouraging to see supporting trends. For example, when looking at the sales mix, used car sales which already account for more than 50% of global sales are expected to increase to 62% by 2030. Increasing the lifespan of a product is a fundamental principle of the circular economy, and predictive maintenance and the growth of secondary markets facilitates life extension. At a time, by reconditioning used parts and remanufacturing engines, Renault offers its customers remanufactured components and spare parts with like-new guarantees at prices 30 to 50% lower than those of new spare parts.
The path to net zero is complex and to think that it can be achieved simply by a full transition to electric vehicles is overly simplistic, at least in the short term. Only by looking at sustainability more broadly and identifying new models that will help change our relationship with consumption can we achieve large-scale transformation. The circular economy can be an important factor in reducing emissions because it focuses on the notion of “reduce, reuse and recycle”. Within this framework, we consider the automotive industry to be relatively advanced, but an increasing number of second-hand markets in the electronics and fashion industries and a move towards non-polluting processes and systems on the part of selected food industry players are encouraging signs of how other industries are beginning to embrace the circular economy.
About the Author: Manuel Silva Martinez is General Partner of Mouro Capital