Despite living on a planet with limited resources, our economy remains linear and full of single-use products. The shift towards a circular economy, where companies recover or recycle resources, has hit roadblocks, including low cost of used products and high recycling costs. Harvard’s D^3 Institute recently highlighted how digital tools and AI can help overcome these barriers. They discussed three key strategies: extending the life of products, using fewer materials in production, and using more recycled materials. These tech-enabled strategies promise significant financial returns, but unlocking their full potential requires serious investment. Simply put, it’s time businesses recognized the potential of turning waste into wealth.
The world economy still operates in a linear fashion and is characterized by the extraction, production, consumption, and disposal of materials. This is a problem given that we live on a planet with limited resources. Yet the transition to a circular economy, where businesses recover or recycle the resources used in their value chain, remains elusive, despite the offer. trillion dollars in value creation. Obstacles include the low residual value of used products, an inability to collect materials, prohibitive costs of separating and processing materials, and lack of traceability of products and materials used. recycle.
To accelerate the pace of innovation and learning, the Digital, Data, and Design (D^3) Institute at Harvard Business School recently hosted a activity focused on the circular economy, where entrepreneurs and business leaders share how they are using digital tools and artificial intelligence to remove barriers and create entirely new markets and business models. In particular, the conference helped identify three main ways to achieve a more circular economy: increasing product use, material efficiency, and the use of recycled materials.
Product Use
Product usage seeks to extend the useful life of a product, such as sharing economy platforms, product repair programs, or extending product life. A new way companies extend product life is through over-the-air software updates that increase the residual value of a product. Take the example of the iPhone. Now, the iPhone covers 80% of the market among the 300 million or more phones on the second-hand market. A main reason for this success, Marcelo Claure, former CEO of Sprint and Softbank International, explained at the event, is the forward compatibility of the iOS operating system, which ensures that a user can access the app ecosystem and the all new features released by Apple. , continuing to appeal to iPhones as a high-quality product on the secondhand market. Over-the-air software updates are becoming the norm for many products – even cars. As a result, we expect an increase in the residual value of used products and an increase in product utilization.
Contrary to the belief that extending product life can hinder sales growth and therefore companies should implement a planned obsolescence strategy, leading companies see improved product utilization as a mechanisms to reach new consumers, improve customer satisfaction, and build business models that monetize their manufacturing efforts. stronger products through services. Apple now has 935 million subscribers in terms of its service, which Grow to nearly $80 billion in revenue and ran nearly double the gross margin compared to the hardware business.
Another opportunity to extend the useful life of products is through the product-as-a-service model, where companies retain ownership of a product while consumers pay to use it. Advances in data and tracking technology have enabled a better flow of information to facilitate this business model. For example, SuperCircle has developed a digital infrastructure that enables circularity in the fashion industry by integrating customer purchase data with warehouse and distribution systems to track the lifecycle of clothing. Entrepreneur Chloe Songer, cofounder of SuperCircle, explains how they partnered with clothing brands like Reformation to create a customer experience that allows items to be returned for a credit or discount, while also facilitated the logistics infrastructure for the collection and sale of these recycling clothes. sector. Recognizing the consumer as a temporary owner of a long-term asset opens up a world of opportunities to further engage customers.
Material Efficiency
Material efficiency, which refers to the production of products with fewer materials, is not a new concept for many companies that have long followed a lean operating model, characterized by the reduction of waste in production processes. However, with recent achievements in artificial intelligence and innovative technology, material efficiency is witnessing the emergence of even more opportunities.
For example, our conference heard how entrepreneur Shelly Xu’s SXD Zero Waste is using artificial intelligence to redesign garment mockups that generate less pre-consumer waste from offcuts during production. clothes The result is the production of sweaters, dresses, or pants with almost zero fabric waste and about 55% lower costs, as opposed to 10-30% waste in traditional designs. Successful entrepreneurial solutions are those that invest time in educating B2B customers about the potential for cost savings and the need to change legacy processes that traditionally result in a lot of waste, such as fashion design.
The “tough-tech” segment, using breakthrough science, engineering, and technology, also has the potential to create solutions that reduce the material impact of existing supply chains and create “drop-in” solutions that can be incorporated into existing supply chains. . An example of an entrepreneur in this space is Luciano Bueno, who founded GALY, a company that grows cotton from cells in a lab using 80% less resources compared to traditional which is agriculture. An important part of the hard technology innovation journey includes educating investors on longer innovation cycles and the need for iterating on the path to scalability.
Recycled Materials
Perhaps the most prominent element of a circular business model involves minimizing the use of virgin materials as a percentage of a product’s total material. For example, Apple products now include 20% recycled materials. Beyond reducing carbon emissions, using more recycled materials can help companies increase “materials security,” especially in industries that rely on rare minerals like lithium and cobalt. . The addition of recycled materials is also an important solution for reducing the carbon intensity of heavy industries such as cement and steel. However, Joy Chen and Per Anders Enkvist from McKinsey emphasize that the availability of recycled materials is currently limited, and sometimes more expensive than virgin materials. Technological advances to increase the availability of high-quality recycled materials and reduce costs are therefore huge opportunities.
In particular, improving material recovery and separation is key to making recycled material more available and affordable. Bjørn Arve Ofstad, CEO of Norsk Gjenvinning, the largest waste management company in the Nordics, explained that this sector needs an upstream feedstock, waste sorting and processing technology to be used downstream, and a collector. below. This process must be done on an industrial scale where materials are accessible at the right time, price, and quality. Robotics can speed up this sorting process at a lower cost. For example, Apple developed Daisya state-of-the-art robot that can break down an iPhone into reusable components in 18 seconds, including rare minerals like cobalt, gold, and platinum.
Opaque supply chains represent significant barriers to understanding the breakdown of end-of-life materials for recovery and sorting. Maria McClay, from Google, explains how in 2019 Google piloted a solution using machine learning and analytics to provide a more comprehensive view of the impact of the textile value chain , and in 2021 was able to expand the offer to other brands. Another solution described by Hari Nair from Procter & Gamble is HolyGrail project which uses digital watermarks on products to make it easier to sort recyclables at the end of life.
Investing in Trillion-Dollar Opportunities
To support the adoption and scaling of these digitization-enabled solutions, we need investment to fund the trillion-dollar opportunity. However circularity asset providers face a “pattern recognition” challenge, where the ability to identify good opportunities is still evolving. Venture capital funds are reluctant to invest in early-stage companies with significant capital expenditure needs, which often happens in round solutions. On the other hand, private equity funds are reluctant to invest in early stage startups. One solution, described by Andrew Merino of Generate Capital, is the emergence of multi-sector, sustainability-focused funds that bridge the gap between traditional venture capital and private equity. To capture the full potential of investing in a circular economy, investors need to develop deep expertise in the sector and innovation in investment structures.
