Losses due to geographic dispersion
Even small appliances like an electric toothbrush contain around 40 small components produced using multi-tier supplier networks, with dozens of sites spanning the entire globe. A more complex power tool from B&Q/Kingfisher is assembled from up to 80 components in a three-tier supplier system comprising more than 14 raw materials, extending across different geographies [Figure 13].52 The rise of globalization and product modulation has created global economic growth by maximizing the economic arbitrage of materials and production costs. However, the loop for each of the components, sub-components and materials should eventually be closed. Geographic dispersion will need to be examined at very granular levels to close the loops because of how very spread out the different activities are along the value chain.
Figure 13: Simplified bill of materials (BOM) explosion: Power drill
SOURCE: Expert interviews
All the arbitrage opportunities and models described in the previous chapters are based on an implicit set of assumptions: that materials, components or product loops can be closed, both physically and in terms of quality, to create a balanced materials flow at a steady state. Successful and profitable examples do exist at a company level. But at a global level, supply chain setups are increasingly complex and fragile. This is the result of the world’s ever growing global trade volume and value,53 as well as the shift of manufacturing from industrialized countries to emerging economies has created increasingly complex and fragile supply chain setups. In the interviews the team conducted for this report, geographic dispersion was one of the most frequently cited points of leakage, and one of the hardest to overcome. So what are the options for systematically identifying leakage points?
A taxonomy of current supply chains and loops
To be able to make some broad observations across the myriad of supply chains that make up our global, trade-based economy today, it is helpful to simplify the discussion by examining a few archetypes based on the concept of geography. Because in a circular economy, geography matters. As in nature, the archetypes underlying our trade interactions are stunningly uniform. The value of products whose first use cycle has expired is still subject to distance and transport costs at present. Across the industries analysed so far, this study identified—in addition to the typical linear supply chain—three other archetypes of circular or partly circular supply chain setups. These will be termed loops, as products ideally circle back after end of use [Figure 14]. Each category of materials loop has its own types of leakage points, and therefore calls for different enablers to capture the arbitrage opportunities to close it. These archetypes can later be used to provide a search and prioritization approach for identifying how to turn these leakage points into circular arbitrage opportunities.
Figure 14: Archetypes of supply chains and loops
1 Or other manufacturing countries; 2 Analoguous to the US and other importing regions Source: World Economic Forum and Ellen MacArthur Foundation circular economy team
Closed geographical supply loops benefit from large quantities of material and components being returned from their point of use to the point of manufacture to reduce the amount of virgin material or component input required.
Closed regional and local loops are intuitively the most attractive as they are based on close proximity between points of production and use. Supply chain logistics can be organized at relatively low transport costs and without having to cross international borders. Returnable glass bottle systems are a signature example of closed regional and local loops, and give bottling companies full control of their materials flows. For instance, South African Breweries (SAB), the local subsidiary of SABMiller, currently sells more than 85% of volume in a closed loop returnable bottle system. If this were converted to a one-way packaging and distribution system, the country’s glass output would have to be doubled just to cater for the increase in demand for beer bottles. Modeling shows that in beer beverage packaging, the economics of these return systems are far superior to those of one-way systems, even compared with 100% recyclable PET bottles [Figure 15, for assumptions, see Appendix 1].54
Figure 15: The returnable glass bottle system is an inherently circular business with attractive economics
1 Cost for collecting (storage cost at store), cleaning, and transport by truck (150 km on average)
2 Incremental costs from reverse cycle: Material costs include virgin PET costs US$ 4.59/kg, rPET costs US$3.67/kg, and glass costs US$ 0.75/kg; other costs include store collection and washing cost for returnables is US$ 0.015/bottle; returnable transport costs are US$ 0.074/ bottle for PET and US$ 0.12/bottle for glass
Source: Expert interviews; McKinsey Interview, Ellen MacArthur Foundation circular economy team
Desso, a global carpets, carpet tiles and sports pitches company, designs many of their products with the aim of closing the loop by using materials that are safely recyclable. The polyolefin-based layer of the DESSO EcoBase® carpet tile backing is 100% recyclable in Desso’s own production processes, while the Nylon 6-based top yarn can be functionally recycled into new Nylon 6 over and over again. This in turn can be transformed into 100% regenerated nylon yarn by yarn supplier Aquafil. The company has been developing a take-back programme since 2008, collecting end-of-use carpet tiles to recover materials from old carpets, which would generate significant materials savings once scaled up.55
Construction materials represent further potential for closed regional and local loops. These are generally manufactured and used locally or regionally. Leighton Holdings, a large Australian company that is partially focused on construction, procures raw materials for their pre-fabricated (precast) concrete from Asia (e.g. from China, Japan, Thailand and the Philippines), manufactures the products, and then uses them in those regions.56 Options for closing the loop include local reuse of end-of-use precasts or functional recycling of the raw materials, such as steel and concrete, in new products. This would allow the company to reduce the amount of new raw materials required.
Closed global supply loops have been the rare exception so far. Understanding them is a particular interest for this report. To make them viable, global supply loops today often require high-value goods, such as airplane jet engines for reuse. Due to low-cost transport, traditional recycling can be global, representing the outer loops of the circular economy with the lowest value arbitrage opportunities. One industry-wide example of a balanced global materials flow between point of production and point of use is the global secondary fibre stream for paper and cardboard production. This fibre stream is used in Asia to make packaging materials for export products because it is less expensive to use recovered rather than virgin fibres.57
Creating global loops can generate attractive benefits, as ever more companies are beginning to understand. A few are starting to set up systems of this kind. Ricoh, for instance, expects to capture an arbitrage opportunity by shipping used plastic residues from their materials recovery sites in Europe and around the world back to their component manufacturing sites in Asia for use in manufacturing new components.58 Given the current price differences between virgin and recycled materials (polypropylene, for example) and the low rate of Asia-bound container shipping, Ricoh’s estimated materials cost savings could be up to 30%.59 As return containers from the US and Europe to China are frequently empty, global reverse cycles could be organized at marginal transport costs [Figure 16]. H&M collects end-of-use jeans and sends them to their supplier in Pakistan to be processed, respun, and made into new jeans.60
Figure 16: Excess capacity in containers returning from the US or EU to China is reflected in lower freight rates
1 Load factor is the ratio between cargo demand and available capacity.
2 Container rate is based on 20ft container shipped to/from either central or northern China
SOURCE: Drewry Container Freight Insight 07-2013, 05-2013
The economics of such arbitrage opportunities are expected to improve as the cost of raw materials increases, alongside the efficiency of ocean transport and logistics systems (driven by economies of scale). However, good standards for materials reuse need global support. The global regulatory and customs contexts are a case in point. For example, China has ratified the Basel Convention and banned the import of all e-waste either for direct reuse or recycling.61 Other regions/countries, including the EU and Japan—also parties to the Basel Convention—ban exports of e-waste, too. However, large volumes of e-waste still move from the US, EU, Japan and other countries to China via various routes (Hong Kong still allows the import of second-hand EEE and e-waste with an import license, for example).62 In 2010, the total volume of e-waste imported to China was estimated at between 9 – 11 million tonnes.63 The illegal trading of e-waste makes it very difficult to track materials flows and maximize materials recovery.
Partially open geographical loops have a supply chain that is partially linear (from raw materials extraction to manufacturing of the finished product, for example), followed by regional or local closed loops for maintenance and refurbishment, or the harvesting of local components. Good examples can be found for technical products. Renault, for instance, has established regional remanufacturing plants for their gearboxes and engines, in which components are remanufactured, and then integrated back into refurbished gearboxes and engines. Many of these components are originally produced in a multi-tier linear manufacturing network: their footprint has increasingly shifted to Asia. This hybrid of a linear and circular business model already generates attractive, circular arbitrage opportunities. At their Choisy plant, Renault reuses 43% of the carcasses, while 48% are recycled in the company’s foundries to produce new parts, and the remaining 9% are valorized in treatment centres.64 Caterpillar, Ricoh and Canon operate similar partial supply loops, in which products are manufactured across global supplier networks and then maintained, repaired, refurbished and redistributed locally for the respective local markets.65 The circular benefits of this stem from the prolonged use of materials and products and the offsetting of virgin materials input and embedded energy, labour and capital expenditure.
Geographically open cascades move products, components, and materials—after their initial usage cycle(s)—to different markets or market segments, frequently in other regions, for secondary use. Today, some 30 to 40% of worn clothing collected in the US and Europe is sold second-hand overseas.66 The US alone exports worn garments with a total value of over US$ 12 billion p.a., mainly to Central and South America, China and Sub-Saharan Africa.67 Its trade in second-hand mobile devices and other consumer electronic equipment is also vibrant. The US exported a total value of US$ 1.5 billion in 2011 (or 760,000 tonnes) of used electronic products for refurbishment or recycling, mainly to Mexico, India, Hong Kong, China and other Asia-Pacific markets.68
Companies around the world are waking up to the opportunities of the end-of-use product trade. One example is Brightstar Corporation, a US-based company founded in 1997 that offers specialized global wireless distribution and services, including buy-back and trade-in solutions for mobile devices.69 Their consolidated revenues increased by 11.4% from US$ 5.7 billion in 2011 to US$ 6.3 billion in 2012, outpacing the industry’s growth. Similar cascades across different products—from trousers to furniture fillings to insulation materials, for example—are also organized across geographies, frequently from the northern to the southern hemisphere.
While these cascades prolong product utility at a global level, offsetting the input of virgin materials, they also destabilize materials streams and cause leakages from global or local loops. This is mostly because the net-importing regions for cascaded goods—including many developing countries—have not yet fully implemented international conventions or established uniform regulations on the re-entry of products and components into global recycling loops. In many developing countries, including China, India and Brazil, the collection and recycling of valuable end-of-use materials are often driven by the informal sector. This results in inefficient reprocessing, as well as health and safety hazards for the workers involved.
In China, for instance, the formal sector is well integrated and yet only covers around 20% of the e-waste (WEEE) collected.70 The formal sector could extract more value from the same piece of e-waste than their informal counterparts; this could be improved further if the products themselves were designed with resource recovery in mind. In the garments sector, Switzerland-based I:CO is working on revalorizing pre-owned garments by cascading them into Sub-Saharan Africa and building up collection schemes to capture end-of-use streams. However, I:CO faces initial challenges due to the lack of formalized collection schemes.71 Therefore, up to now, large amount of materials that could serve as feedstock for global recycling loops is still lost.
Open linear materials take-make-dispose still vastly dominate supply chain logistics. Products are made in a sophisticated multi-tier manufacturing network, used, and then disposed of in landfills. China, Bangladesh, Vietnam, Thailand and Turkey account for 75% of the world’s garment production, whereas use is concentrated in Europe, the US, China and Japan.72 According to I:CO. the global collection rate for clothing is only 20%, while 80% ends up in landfill. Estimates suggest that the figures for all fast-moving consumer goods sectors are similar: only 20% of the total materials value of US$ 3.2 trillion is recovered, while 80% goes to waste.73 Some of today’s highest-volume waste streams are open linear flows, including construction and demolition, food and beverages. Rubble produced during the construction and demolition of buildings accounts for 26% of the total non-industrial solid waste produced in the United States—160 million tonnes in 2008. This despite the fact that it includes many recyclable materials, from steel to wood and concrete. Only 20 to 30% of all construction and demolition waste is ultimately recycled or reused.74
Which pattern will win in the circular economy?
Of these options, only geographically closed loops will be able to address the imbalance of today’s materials and product flows in a steady state. Of the closed-loop archetypes, the ones that are organized locally rather than globally should, in theory, exhibit superior economics. One would expect to see this reflected in lower reverse logistics costs and reduced embedded externalities (mainly energy consumed). Typically, the greater the distance, the more the transport and indirect costs will be (higher inventories equal greater transaction costs). But this is not always the case. Global trade volumes are increasingly containerized, and empty containers need filling to offset the structural imbalance of trade flows. This means global reverse cycles can be economically viable in certain scenarios. With the current market price for virgin paper board (kraftliner) almost twice that of recycled materials (testliner)—US$ 1,000/tonne versus US$ 577/tonne even after shipping costs at approx. US$ 64/tonne75 — testliner is still an attractive input for paper board producers. 30 million tonnes of recovered paper and cardboard were shipped to China in 2012, up from 17 million tonnes in 2005.76
The residual value of components and products rises as access to resources becomes more constrained and demand increases, so transport costs quickly diminish as a percentage of total costs. Economies of scale are therefore improving. The latest reflection of this is the July 2013 launch of the world’s largest container ship, a Triple-E, by Maersk Line, the Danish ocean freight giant. The Triple-E represents a significant increase in capacity: it is 16% larger than Maersk’s standard E-class vessels, and also more energy efficient.77