Better competitiveness through a circular economy

Develop, produce, use and dispose: products and the associated services have long been planned according to this logic. However, since the 1.5° target was announced and it has become clear that manufacturing companies play a significant role in the use of resources and the resulting environmental impact, there has been a shift in thinking towards a circular economy. As a building block for decarbonization, it is a central element and an important line of business for companies. The principle of the circular economy is not new, but the holistic approach to it is. It requires a systematic perspective and consistent implementation. Circular business models must begin in the design phase of products and focus on the service aspect - only then do they promise success.

Green growth markets and circular strategies

The circular economy comprises seven important green growth markets. Three describe different service models. The service orientation is regarded as the central approach to doing business in cycles. According to this approach, the value is not primarily in the product, but in the service, for example in the form of advice and support, leasing or outsourcing. The fact that providers do not sell a physical product, but simply give it to customers for use, is intended to solve the major challenge of a circular economy, namely systematically returning used products for further recycling. Four growth markets relate to the concept of R-strategies: recycling, remanufacturing, refurbish and repurpose and reuse.

R-Strategies of the circular economy along the product life cycle © Borderstep Institute based on DIN et al. (2023)

Circular strategies start with the generation of ideas and planning of innovative products and also include product life extension, intensification of use and the end of the life cycle. It is advisable to supplement the classic 9R concept with Remain (maintenance). Overall, the R-strategies open up new options for circular value creation by reducing the need for primary raw materials and recovering secondary raw materials. The R-strategies systematize different circular strategies in a hierarchy, complement each other and coexist. The successful implementation of circular strategies by companies requires tailor-made business models, expertise in the field of circular product design, the development and management of return flows as well as cross-cycle and cross-sector cooperation. It is also fundamental to link the service orientation with the R-strategies.

Systematic processing of waste

More than 2.5 billion tons of waste are produced in the EU every year. According to the European Agency, only 46% of this waste is recycled. This makes recycling one of the most important green growth markets within the circular economy. At the same time, it makes companies in Europe less dependent on raw material and energy imports and therefore less vulnerable to cost increases and supply bottlenecks.

Although Germany has been considered a pioneer in terms of recycling rates for years, raw material flows in the German economy are largely organized in a linear fashion, with secondary raw materials accounting for only around 13% of total raw material consumption. As the demand for raw materials for new investments and the per capita consumption of raw materials will continue to increase in the future, there are many options for action. Experts put the increase in battery recycling at 100 GWh in 2030 and 1,000 GWh in 2040, combined with an increase in sales growth to 400 billion US dollars; battery recycling currently stands at 5 GWh.

These examples of circular growth markets in the circular economy show opportunities for action, especially for companies in the automotive, mechanical engineering and manufacturing industries © MHP

Recycling is particularly important for battery manufacturers, car manufacturers and the second-life battery market. One business model that has already proven itself in this environment is the dismantling and reprocessing of traction batteries from electric vehicles in order to supply batteries to a second-life market or to recover valuable materials through recycling. Recovery and reuse can increase resource efficiency, reduce e-waste and hazardous waste and promote closed material cycles.

You can only control what you can measure

For the transition to a circular economy, companies must systematically measure their environmental impact using material, product and environmental data. The life cycle of a product and its components must be taken into account - from product composition and manufacture to (extended) use. This is complemented by the exchange of data with stakeholders such as suppliers and users. An integrated process and data landscape closes digital loops and thus creates the necessary transparency for decisions in product development.

Circular strategies and service orientation as the basis for circular business models © Borderstep Institute based on Hansen et al. (2021, p. 32)

The specific data required is determined by the assessment methods used. There are a number of standards and indicators, each of which looks at different but equally relevant aspects, such as material flow, durability and the business model, environmental impacts along the life cycle or the design-related options for reusing the product and its components. A recognized indicator that integrates all aspects does not yet exist, but is to be created by the EU Ecodesign Regulation. In particular, the longevity and reparability of products and their potential for upgrading, reuse, remanufacturing, refurbishment and recycling will be considered. In business practice, interactions with costs, CO2 emissions, value, weight and stability of the products, complexity of the production processes and specifications for material composition must also be taken into account.

The multidimensional evaluation of products is made possible by a points system based on a morphological box. For example, the proportion of recycled materials can be determined by quantifying the proportion of recycled materials and secondary raw materials in a product. To measure the circularity level for recyclability, the use of standardized components, modularity or the possibility of high-purity sorting of materials are considered. In this way, the circularity can be evaluated one after the other using the indicators and a circularity index can then be determined for the product. This increases transparency and comparability and makes it possible to derive measures for improvement.

Acceleration through digitalization

Alexander Appel is Manager Sustainability Transformation at MHP. © MHP

The establishment of a materially closed economic system creates enormous potential - it saves resources and costs and leads to new business models. In some cases, digitalization makes these possible in the first place and accelerates them enormously in most cases. Technologies such as digital twins, blockchain, the Internet of Things (IoT) and digital diagnostic and remote maintenance technologies enable seamless product and material tracking, which is essential for the closed-loop management of resources. Digital product passports provide the necessary transparency regarding the materials used and thus facilitate recycling. Finally, significant material savings and real-time transparency can be achieved through the use of artificial intelligence and other technologies. Digitalization also opens up options for new business models, such as full-service offerings or pay-per-performance models and so-called 'smart contracts' for their implementation. The key here is to make digital technologies themselves environmentally friendly and sustainable. According to the 'Industry 4.0 Barometer 2025' by MHP and LMU Munich, there is still some catching up to do in the implementation of such technologies and in focusing on data not only technically, but also organizationally and culturally, and building up the corresponding skills.