Building a circular economy

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Building a circular economy


Frans van Houten

DAVOS, Switzerland - In the 16th century, the astronomer Nicolaus Copernicus made a profound discovery: the sun, not the earth, was at the center of the known universe. At the time, many denounced Copernicus’s insight as heresy against established Christian doctrine; eventually, of course, the Copernican Revolution paved the way toward a new, scientific worldview and enhanced human prosperity.

Today, the world needs a similar paradigm shift. But this time it is the prevailing economic model that must be transformed. By 2030, the global middle class will total nearly five billion people, all of whom will expect the same kinds of opportunities and comforts that wealthy populations have long enjoyed. This will put increasing strain on the environment and deplete the world’s stock of resources.The problem is that the world has long maintained a myopic focus on producing and consuming goods as cheaply as possible. The result is a linear economy based on the rapid use, disposal and replacement of goods.

Sustaining the current model would require unlimited resources and infinite space for waste - something that clearly is not possible. Indeed, the consequences of our disposable economy - skyrocketing CO2 emissions, unmanageable waste streams and the increasing difficulty of extracting resources, to name a few - are already apparent.

To find a sustainable alternative, one need only look to nature, where nothing is wasted. Forests, for example, are completely efficient systems, with species’ life cycles occurring in perfect harmony with the seasons. This underpins levels of resilience and longevity that economic systems should strive to emulate.

Just as ecosystems reuse everything in an efficient and purposeful cycle, a “circular” economic system would ensure that products were designed to be part of a value network, within which the reuse and refurbishment of products, components and materials would ensure the continual re-exploitation of resources.

Of course, building a circular economy would require a fundamental restructuring of global value chains. Instead of selling products, businesses would retain ownership, selling the use of the goods they make as a service. Selling a product’s benefits instead of the product itself would create a powerful incentive for producers to design for longevity and eventual recycling, which would enable them to optimize their use of resources.

This requires a new generation of materials, as well as innovative development and production processes. It also demands new business models, a redefined concept of legal ownership and use, new public-tendering rules and novel financing strategies. A circular economy also calls for adaptive logistics and a leadership culture that embraces the new system and rewards progress toward establishing it.

Beyond the moral imperative, there is a strong financial argument in favor of the transition - namely, the promise of over $1 trillion in business opportunities. This includes material savings, increased productivity, new jobs and possibly new product and business categories.

But businesses cannot transform the economy alone. In order to shift firms’ emphasis from minimizing initial costs to maximizing total value, while ensuring the protection of people’s health and well-being, governments should change their tendering processes by implementing requirements for circularity, thereby helping to drive demand for new solutions.

At the same time, consumers must be open to using products that they do not own. Because the circular economy is inherently systemic, it can succeed only if all stakeholders co-design, co-create, and co-own products and services. With this in mind, my company is redesigning its products and considering how to capture their residual value.

At the same time, it is shifting from a transaction- to a relationship-based business model - one that entails closer cooperation with customers and suppliers. And it is changing its corporate culture to emphasize long-term solutions. None of these changes is easy to implement, but all of them are necessary.

Like all major transitions in human history, the shift from a linear to a circular economy will be a tumultuous one. It will feature pioneers and naysayers, victories and setbacks. But, if businesses, governments, and consumers each do their part, the Circular Revolution will put the global economy on a path of sustainable long-term growth.

Copyright: Project Syndicate, 2014.

*The author is chief executive officer of Royal Philips.

By Frans van Houten

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