How AI Will Accelerate the Circular Economy14 June, 2023 / Articles
Recommended article from Harvard Business Review.
The global economy still functions in a linear manner and is characterized by the extraction, production, consumption, and disposal of materials. This is a problem given that we live on a planet with finite resources. Yet the shift to a circular economy, in which businesses recover or recycle resources used in their value chain, has remained elusive, despite offering trillions of dollars in value creation. Barriers 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 that are being recycled.
To accelerate the pace of innovation and learning, the Digital, Data, and Design (D^3) Institute at Harvard Business School recently hosted an event focused on the circular economy, where entrepreneurs and business leaders shared how they’re using digital tools and artificial intelligence to remove those barriers and create entirely new markets and business models. Specifically, the conference helped identify three main ways to achieve a more circular economy: increasing product utilization, material efficiency, and use of recycled materials.
Product utilization seeks to extend the useful life of a product, such as through sharing economy platforms, product refurbishment programs, or enhancing product duration. One new way companies are extending the life of the product is through over-the-air software updates that increase the residual value of a product. Take the example of the iPhone. Today, the iPhone constitutes 80% of the market among 300 million or so phones in the secondhand market. A primary 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 a user can access the app ecosystem and all the new features that Apple releases, maintaining iPhones’ appeal as a high-quality product in the secondhand market. Over-the-air updates of software is becoming the norm for more 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 prolonging product lifespan might hinder sales growth and therefore firms should implement a planned obsolescence strategy, leading firms perceive enhanced product utilization as a mechanism for reaching new consumers, enhancing customer satisfaction, and building business models that monetize their efforts to create more durable products through services. Apple now has 935 million subscribers in its services segment, which has grown to almost $80 billion in revenues and runs at close to 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 for its use. Advancements in data and tracing technology has enabled better information flow to facilitate this business model. For example, SuperCircle developed a digital infrastructure that enabled circularity in the fashion industry by integrating customer purchase data with warehouse and distribution systems to trace the lifecycle of clothing. Entrepreneur Chloe Songer, cofounder of SuperCircle, explained how they partner with apparel brands like Reformation to create a customer experience that allows for goods to be returned for a credit or discount, while also facilitating the logistics infrastructure for aggregating and selling these clothes to the recycling sector. Identifying the consumer as a temporary owner of a long-lived asset opens up a world of opportunities to continue engaging customers.
Material efficiency, which refers to making products with fewer materials, is not a novel concept for many firms that have long pursued a lean operating model, characterized by minimizing waste in production processes. However, with recent breakthroughs in artificial intelligence and innovative technology, material efficiency is witnessing the emergence of even more opportunities.
For instance, our conference heard how entrepreneur Shelly Xu’s SXD Zero Waste applies artificial intelligence to redesign garment mockups that generate less pre-consumer waste from offcuts during apparel production. The result is the creation of sweaters, dresses, or pants with close to zero waste in fabric and about 55% lower cost, as opposed to 10–30% waste in traditional designs. Successful entrepreneurial solutions will be those that invest time in educating B2B customers about the potential for cost savings and the need to revise legacy processes that traditionally result in more waste, such as fashion design.
The “tough-tech” segment, using breakthrough science, engineering, and technology, also has the potential to create solutions that both 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 firm that grows cotton from cells in a lab using 80% fewer resources compared to traditional agriculture. An important part of the innovation journey in tough tech involves educating investors on the longer innovation cycles and the need for iteration on the path to scalability.
Perhaps the most well-known element of a circular business model involves minimizing the use of virgin materials as a percentage of a product’s total materials. For instance, Apple’s products now incorporate 20% recycled materials. Beyond reducing carbon emissions, the use of more recycled materials helps companies increase “materials security,” which is particularly concerning for industries reliant on rare minerals such as lithium and cobalt. Increasing recycled materials is also a key solution for reducing carbon intensity in hard-to-abate industries like cement and steel. However, Joy Chen and Per Anders Enkvist from McKinsey highlighted that the availability of recycled materials is currently limited, and sometimes more expensive than virgin materials. Technological enhancements to increase the availability of high-quality recycled materials and reduce costs therefore are huge opportunities.
In particular, scaling up 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, technology to sort and process the waste to be used downstream, and a downstream taker. This process needs to be done at an industry scale where materials are accessed at the right time, price, and quality. Robotics can facilitate this sorting process at lower cost. For example, Apple developed Daisy, a state-of-the-art robot that can breakdown an iPhone into reusable components in 18 seconds, including rare minerals such as cobalt, gold, and platinum.
Opaque supply chains represent significant barriers to understanding the breakdown of materials at end-of-life for recovery and sorting. Maria McClay, from Google, explained how in 2019 Google piloted a solution to use machine learning and analytics to provide a more comprehensive view of impact along the textile value chain, and in 2021 was able to expand the offering to other brands. Another solution described by Hari Nair from Procter & Gamble is the HolyGrail project that uses digital watermarks in products to make the sorting of recyclables easier at the end of life.
Investing in the Trillion-Dollar Opportunity
To support the adoption and scaling of these digitalization-enabled solutions, we need investment to fund the trillion-dollar opportunity. Yet asset allocators in circularity face a “pattern recognition” challenge, where the capability to identify promising opportunities is still evolving. Venture capital funds have been hesitant to invest in early-stage companies with significant capital expenditure needs, which is often the case in circular solutions. On the other hand, private equity funds have been 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 tap the full investment potential of a circular economy, investors need to develop in-depth sectoral expertise and innovation in investment structures.