Welcome to the second post of The Closed Loop. This will be one of five posts where we explore circular economy business models. Shifting to the circular economy means a total transformation of the supply chain. In the past, producers would often use raw materials that were toxic and nonrecyclable. That is because the entire supply chain was tied to the linear model. Circular supplies go beyond recycling and reuse. Today, there are companies that offer alternative virgin materials that are fully recyclable, non-toxic, and biodegradable.
“Internet Stuff, Law and Finance”:
I agree with Elon Musk when he says that our sharpest minds tend to pursue careers in internet stuff, law, and finance. That’s right: the smartest people are dedicated to making people click pop-up ads on the internet. In a way, this has affected innovation in major industries. To think that most cars on the road are still using the same combustion engine from the early 2nd industrial revolution is a bit absurd. Policies around fossil fuel use are changing that, though, and it will be the same script across all industries.
Building things that matter, especially in the supply chain, is hard. It takes up a lot of time and resources. If you are looking to make a quick buck, I would suggest going into e-commerce. However, there are great businesses that are tackling this problem and I am excited for you to read about them.
The Circular Supply Chain:
"Design is the first signal of human intention, and exchange is the second." - William McDonough.
Okay, enough veggies and potatoes – let us get to the meatballs. In encouraging economic growth that is decoupled from scarce resource use, producers will have to find new raw materials inputs that are fully renewable, recycle, and biodegradable. This is what the circular supply chain is about.
The circular supply chain is critical in a world of finite resources. Manufacturers are looking for predictable and cost-effective materials with which to make products. Furthermore, it makes for a great long-term play as it reduces risk, secures stable supply, complies with regulations, and ensures a better relationship with the customer. This is not about minimizing bad materials – if toxic inputs are still used to create a product that is more efficient and longer-lasting, it has not achieved the goal of being circular.
In the circular supply chain model, renewable energy is the most mature industry. The forward-thinking that we have seen in this sector highlights the urgency of moving away from the traditional linear model. It is no surprise since energy is a crucial player in everyday economic life. Major price drops and several green policies have seen the renewable energy sector grow in strength. Solar is here forever, coal is not.
More than reducing waste, circular supply is about eliminating waste and creating new material inputs.
Variations of the Business Model:
In the concept of the business model, we will focus on Osterwalder & Pigneur's (2010) definition which revolves around the concept of value – that is, ‘the rationale of how an organisation creates, delivers and captures value.’
In the circular supply chain, there are two ways in which companies create value: they produce for others or they produce for their own operations.
CRAiLAR Technologies is one example of an organisation that decided to tackle the circular supply chain industry by supplying a material that is fully biodegradable. Founded in 1998, this company produces renewable and environmentally responsible biomass using flax, hemp, and various bast fibres. By applying an all-natural enzymatic process to flax fiber, CRAiLAR produces a garment that is as soft and durable as cotton while minimising the environmental risks associated with cotton’s cultivation. It also saves money: Studies show that it takes anywhere from 2,000 to 29,000 litres of water to produce a single kilogram of finished cotton. CRAiLAR uses just 17 liters of water to produce one kilogram of its material – a savings of as much as 99 percent. When one considers the true cost of water – when it’s not subsidized or provided for free – it becomes clear that circular supplies are dramatically more effective than conventional sources, both economically and environmentally. Indeed, it is a product that H&M could have found useful in 2011 (read our first post if you haven’t already).
In response, IKEA is currently working on a new textile fibre technology and has partnered with H&M and other relevant brands. It is also seen as a replacement or a complement to cotton and oil-based fabrics such as nylon and polyester (but more on sustainable fashion later). CRAiLAR’s product is now used by some of the biggest apparel brands in the world, but it is not limited to just that industry - its potential extends far beyond fibre applications to industrial, energy, medical, and composite material industries as well. In December 2013, CRAiLAR announced it had received an infusion of $5 million in financing from IKEA and Adidas.
“Never Get High on you Own Supply”:
As it turns out, one of Notorious BIG’s forbidden commandments works wonders in the circular supply-chain space. Providers can also produce circular supplies and use them for their own operations.
IKEA, for example, produces and consumes its own renewable energy. In April 2014, the furniture company purchased a wind farm in Illinois as part of its effort to produce more renewable energy than it consumes by 2020. The project, which became fully operational in 2015, is expected to produce the equivalent of 130 percent of the energy used by all US IKEA stores, or 10 percent of its global operations. Ninety percent of US-based IKEA stores use solar energy produced from solar panels on store roofs, which helped IKEA meet 37 percent of its global energy needs with renewables. IKEA viewed this move as a strategic counter to fluctuating electricity costs and gaining a competitive advantage by continuing to add greater value to their customers.
Biotech - “The Gift that Keeps Giving like Babushka”:
Biotech is the Babushka doll of the circular supply chain. It can give birth, in the form of solutions, to many problems facing the linear model of production. It remains one of the most underutilised industry sectors, so the space for creation remains large. It is beneficial when high-value companies explore this sector as research and development tend to be expensive.
Novozymes is an $18bn biotechnology company that applies innovation in biorefining to help our economy shift its focus from nonrenewable oil to renewable plant- and waste-derived food, feed, fuel, and materials. Novozymes’ leadership believes that by using industrial biotechnology, the company can re-engineer thousands of everyday products to be more circular while cutting energy and raw material costs for its customers. This includes using cutting-edge technology to turn corn, soya, sugarcane, wheat, and waste into products as diverse as food oil, fish feed, electricity, plastics, and detergents.
Novozymes ramped up its commitment to biofuels in 2012 when it bought a stake in Beta Renewables, a global leader in cellulosic biofuels. A year later, Beta Renewables and Novozymes opened the largest cellulosic biofuels facility in the world. The plant is the first of its kind designed to produce ethanol from agricultural residue like straw and rice. The facility is powered by its own biofuel, and excess energy is sold to the local grid. Biofuels have high value potential in South Africa because of our agricultural activity and the valuable waste that generates from the industry. Whoever decides to monopolise food waste will have a huge competitive advantage.
For these organizations to gain relevancy and recognition, market leaders need to implement more ideas around the circular supply chain - and this is becoming inevitable. Nike has spent years working on ways to balance the tension between resource productivity and customer value. Their efforts have fostered innovations that have boosted product performance while reducing the products’ environmental impact. One example is Nike’s Flyknit technology, which effectively creates a shoe upper out of a few single threads. The result is a less wasteful (by up to 80 percent) production process that renders a better fitting and lighter shoe that can help boost an athlete’s performance.
Reducing waste, however, is just a first step. Nike is also investing in R&D and engaging in partnerships to improve product recyclability and develop 100 percent plant-based material to move away from scarce petroleum-based resources.
An Ode to the Patient Ones:
Businesses that will shape the future and be the face of capitalism are those that are technological and think broadly about building solutions that will stand the test of time. Such businesses are typically hard, obscure, and tend to scale very slowly. This is the exact opposite of everything we have learned through Silicon Valley and startup culture. The entire society is set up to not be patient. The R&D and intellectual incision that goes into creating purposeful work often cause most founders to give up. And why not? It is easier to do so – no founder should ever feel guilty of such. But those who stay the course tend to win bigger in the long-term by creating value that is unshakeable.
There are many challenges to this business model. Research and product development usually takes years and often means burning through a lot of money. On the other hand, such businesses are usually not rewarded by the market early on. Investors see them as risky.
However, this will change. More and more of these startups are making headlines, and those who have been around a little longer (CRAiLAR Technologies) will have their time to shine. Supply and demand will control the speed at which circular supplies can scale. Strong demand for virgin resources and diminishing opportunities for cheap extraction is expected to drive up costs for many virgin resources. Oil is a good example; While global demand for oil surged in the past decade, the most attractive oil fields are being depleted. This is leading the industry to explore smaller, deeper fields and more marginal regions such as deep water and the Arctic, often at a greater cost. The result is higher production costs, higher oil prices – and ultimately, greater interest in circular supplies. The issue is not limited to oil. Several other factors, such as policy change on CO2 emissions and fossil fuel use, emerging technologies such 3D printing, and urban mining will assist in streamlining and accelerating the transition to circular supplies.
Happy birthday, Kanye West:
Wake Up, Mr. West!
Hard, non-obvious. Kanye West once described himself as a “majorly underwhelmed” person in general. It does underwhelm me to see, for example, that the latest startup to raise millions of dollars is another food delivery app. Nobody is working on the most serious problems because they are generally underfunded. The market seldom rewards this kind of decision-making, so our best minds do not have the ambition to solve these. Those few that are going on and solving these problems are gaining immense value.
Kanye has taught me a lot through his artistry. A lot of the most talented individuals I have ever met often seem to suffer a case of anxiety and have difficulty fitting into social situations – and it says more about society than it does about themselves. Having to fit in often comes at a huge cost. Being talked out of our most original, brilliant ideas all to not be considered as ‘crazy’ is where we are. You suppress a huge part of yourself for the sake of being palatable.
But not Mr. West. It is rare to find people who have strong convictions on any topic nowadays. Having these convictions often means being a polarising figure. At least he is being himself and I like those odds.
Happy birthday Mr. West, thank you for being my morning shot of Espresso.
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