CIRCULAR ECONOMY
Discussion document
January 2016
CONFIDENTIAL AND PROPRIETARY
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Agenda
▪
Significant value is lost in our traditional
economic model
▪
The Circular Economy reframes the model,
capturing value leakage
▪
McKinsey can distinctively support you in the
Circular Economy journey
▪
Our credentials offer a superior value proposition
1
SIGNIFICANT VALUE IS LOST IN OUR TRADITIONAL ECONOMIC MODEL
The stark realities of global trends promise tectonic changes for business
Resource constraints
▪ 3 bn new middle-class
consumers driving resource
demand
▪ Exhaustion of easy-to-access
reserves and need for imports from
volatile regions or with limited
infrastructure
▪ Rising price levels and price
volatility
The new consumer
▪ Emerging bias of access
over ownership, for both
consumers and B2B customers
▪ On the supply side, desire to better
deploy underutilized assets — from
cars to bedrooms to CPUs
▪ Multi-channel and “always on” the
new norm
Mobilized governments
▪ Governments developing
strategic resource programs
— e.g., EU, D, US, Japan
▪ National and regional authorities
creating level playing field for value
recovery — e.g., UK landfill tax hikes
▪ Governments at all levels increasingly keen
on keeping parts and materials — and
hence labor — local
Enabling technology
▪ New technologies improving
reverse logistics—including
product tracking, sorting, and
separation
▪ “Segment of one” now feasible
▪ Sharing economy enabled by
mobile apps, geotagging, internet of
things
2
SIGNIFICANT VALUE IS LOST IN OUR TRADITIONAL ECONOMIC MODEL
As these trends play out, a significant part of a company's value
Highlighted on next page
is exposed
Illustrative example manufacturing company with USD 5 billion revenue base
5-year scenario
Resource
constraints
Increasingly expensive crude oil
pushes up plastics price
Electricity price increases due to
Mobilized
discontinuation of energy
government
subsidies for large corporations
The new
customer
Market share lost as brand
loyalty is decreasing
Enabling
technology
Competitor launches advanced
return management system that
reduces manual correction
significantly vs. own operations
Assumed
change
+10%
+5%
+15%
Revenue base
USD millions
Value at stake
USD millions
-800
80
-1,500
75
5,000
-5%
The major global trends can create a significant risk
exposure, quickly adding up to >10% of revenue base
SOURCE: McKinsey's CE Special Initiative
Cost base
250
-700
105
Σ
510
3
SIGNIFICANT VALUE IS LOST IN OUR TRADITIONAL ECONOMIC MODEL
Resource prices have increased significantly and replenishing reserves
of materials has become increasingly difficult and expensive
McKinsey Commodity Price Index1
Real price index: 100 = years 1999-20012
300
World War I
1970s oil shock
250
200
▪
Soaring
prices since
the turn of
the century
▪
Supply
bottlenecks
are
expected
▪
Due to
underlying
macrodynamics,
current
downward
trend is not
sustainable
World War II
150
100
Postwar
depression
50
0
1900
10
20
Great
Depression
30
Number of ore
discoveries3
20
40
50
60
70
90
2000
2010
Exploration expenditure
$ billion, real
World-class
Exploration
expenditures
80
Major
15
8 USD 7.5
billion
6
10
4
5
2
0
1997
98
99
2000
01
1 Arithmetic average of 4 commodity subindexes: food, nonfood
agricultural items, metals, and energy
02
03
04
05
2006
0
2 2013 based on average of first 11 months
3 All metal and mining materials; latest data available to 2006
SOURCES: Grilli and Yang; Pfaffenzeller; World Bank; IMF; OECD statistics; Food and Agriculture Organization of the United Nations; UN
Comtrade; McKinsey Global Institute analysis, MinEx, BHP Billiton; US Geological Survey; MEG Minerals 2009
4
SIGNIFICANT VALUE IS LOST IN OUR TRADITIONAL ECONOMIC MODEL
This is not just macroeconomic theory: companies across industries and
regions already grapple with input cost spikes
This image cannot currently be display ed.
General Mills Inc, the maker of Cheerios cereal, reported quarterly profits that
trailed analysts’ estimates because of higher commodity costs and unfavorable
currency fluctuations. The margin was pressured by higher input cost
(Bloomberg, December 2013)
JSW Steel, a steel manufacturer, has decided to increase prices across all grades
by up to 2%. Increase in domestic iron ore prices by Rs 200-300/tonne, rise in
coke prices and freight rates have taken up the cost of production for steel
producers (Business Standard, December 2013)
Auto companies in India are contemplating an increase in prices by around 2-5% to
mitigate increase in input costs and maintain margins. The increase is primarily due
to rising materials, input and higher freight costs (Economic Times, July 2013)
Osram AG, a lighting company, recently announced a 48% decline
in operating income due to an "explosion" in input prices,
including those of the rare earth metals it uses to make fluorescent bulbs, and said
it would have to raise prices (Bloomberg, August 2011)
Unilever, the second largest consumer good company, is battling high input
costs from rising commodity prices such as crude and vegetable oils and
slow growth in developed nations. (Reuters, April 2012)
SOURCE: McKinsey's CE Special Initiative
5
SIGNIFICANT VALUE IS LOST IN OUR TRADITIONAL ECONOMIC MODEL
Yet additional supply would have to accelerate by up to 250% vs. the past
20 years to meet projected resource demand
Supply replacement
Incremental
Additional supply needed over 20-year time frame1
Primary energy
QBTU
Steel
Million t iron ore
+32%
470
Water
km³
+57% 1,790
620
Land
Million cropland ha
+139%
+178–
+249%
2,150
175 - 220
160
1,140
130
105
1,330
1,850
900
460
63
13
870
340
270
19902010
(at historical rates)
supply
2010-30
(supply
expansion
case)
19902010
50
460
2010-30
(supply
expansion
case)
70 - 115
3002
19902010
2010-30
(supply
expansion
case)
19902010
2010-30
(supply
expansion
case)
If we were to meet resource challenges through supply expansion
only, we would need to increase supply output dramatically
1 Calculated as incremental supply plus replacement rate; does not tie to total demand
2 Water supply will need to increase by a further 300 km³ to meet accessible, sustainable, reliable supply
SOURCE: McKinsey analysis
6
SIGNIFICANT VALUE IS LOST IN OUR TRADITIONAL ECONOMIC MODEL
Despite these warning signs, our products are still losing enormous value1
over their lifetime, this means there is a lot of value at stake to be captured
Unutilised
EU example2; Value of manufactured products, % of GDP, 2012
Value recovered through
waste and recycling industry
manufacture our products we
A To
overuse resources with a factor 1.5
20
versus regeneration levels3
B
15
Utilised
During their productive life,
our goods and products
have a very low utilization,
e.g. 8 percent for cars and
less than 40 percent for
offices
C
We only use our products an average of
~28 years4 or ~9 years when excl. buildings
the first use cycle, we
D After
recapture only 5 percent
5
10
5
of the raw material value
In Europe, 60 percent of
total end-of-use materials
are not recycled,
composted, or reused
0
0
5
10
15
30
35
40
Product life (Years since production)
1 Year 0 starting value based on industry value added (Eurostat,2012) for manufacturing and European raw material input, linear depreciation assumed with average lifetime of 40 years for buildings, 15 years for
machinery and equipment, 10 years for transport equipment, 8 years for furniture, 7 years for fabricated metal products and 5 years for electric and electronic equipment; 2 EU27 minus UK, Portugal, Bulgaria,
Ireland, Luxembourg and Malta; 3 Indicative, based on Europe's footprint per person compared to earth's capacity per person; 4 Value-weighted average life time; 5 This material value retention ratio is defined as
the estimated material and energy output of the European waste management and recycling sector, divided by the output of the raw material sector (adjusted for net primary resource imports and 30 percent
embedded resource value in net imported products).
SOURCE: Eurostat; Global Footprint Network; International footprint consortium
7
SIGNIFICANT VALUE IS LOST IN OUR TRADITIONAL ECONOMIC MODEL
In a Circular Economy (CE) we create value by closing the loop of the
conventional linear economic model
Principle
1
Preserve and enhance natural capital
by controlling finite stocks and
balancing renewable resource flows
ReSOLVE levers: regenerate, virtualise,
exchange
Principle
2
Optimise resource yields
by circulating products,
components and
materials in use at the
highest utility at all times
in both technical and
biological cycles
ReSOLVE levers:
regenerate, share,
optimise, loop
Principle
3
Foster system
effectiveness by revealing
and designing out negative
externalities
All ReSOLVE levers
SOURCE: Ellen MacArthur Foundation; McKinsey Center for Business and Environment; Stiftungsfonds für
Umweltökonomie und Nachhaltigkeit (SUN); Drawing from Braungart & McDonough, Cradle to Cradle (C2C).
8
Agenda
▪
Significant value is lost in our traditional
economic model
▪
The Circular Economy reframes the model,
capturing value leakage
▪
McKinsey can distinctively support you in the
Circular Economy journey
▪
Our credentials offer a superior value proposition
9
THE CIRCULAR ECONOMY REFRAMES THE MODEL, CAPTURING VALUE LEAKAGE
To capture the economic value at stake, you need to transform your
organization
Linear economy challenges
Proving the business
case and identifying the
size of the prize
Rethinking business
model, product design,
and value chain
simultaneously
Achieving crossfunctional cooperation
and ownership in the
organization
How to transition to a circular model
1
2
3
Identify the economic
value losses in your
system
Redesign your business to capture
economic value
leakage using the
ReSOLVE framework
Transform your
organization to
integrate circular
systems design
10
THE CIRCULAR ECONOMY REFRAMES THE MODEL, CAPTURING VALUE LEAKAGE
1 Even for material flows that are perceived to have high recovery rates
there is still a lot of room for improvement
Recycled PET, 2010; in million t
Solid-state PET
(bottles)
represents only
one third of total
PET material
Only 10% of recycled
PET bottles reaches
same cycle again,
90% are downgraded to
e.g., polyester
Only one third of solidstate PET enters
recycling – thereof
further 18% goes to
waste in further sorting
Production
waste recycling
Virgin
PET
54.9
Solid state
17.7
16.0 Virgin PET for bottles
A-PET
C-PET
1.7
Melt phase
37.2
16.5
Post-disposal recycling
Pre-form production
Bottle production
10.8
0.5
rPET
flakes
4.2
Virgin PET
for other
applications
rPET covers only only
~8% of overall PET
demand1. In bottles
alone, this yields a
loss of ~12 USD bill/yr2
Sorting waste
1.0
Production waste recycling
38.9
43.2
Non-bottle
applications
4.7
43.1
0.1
1 ~0.08=4.7/(54.9+4.7)
2 virg. bottle res 2,116USD/t; rPET (avg. clr&grn flakes) 1,124USD/t; wasted PET 10.8+1.0=11.8tmil; value loss=11.8tmil*(2,116-1,124)USD/t = 12 USDb
SOURCE: McKinsey analysis; SRI; CMAI; TECNON; expert discussion
11
THE CIRCULAR ECONOMY REFRAMES THE MODEL, CAPTURING VALUE LEAKAGE
1 Even for systems that are perceived as highly mature and
optimized there is still a lot of room for improvement – mobility
Car
utilisation1
1.6% looking for parking
1% sitting in
congestion 5% driving
Typical French
car parked 92% of time
Average European car has 5
seats but carries 1.5
people/trip
Tank-to-wheel energy flow - gasoline
Energy used to
move people
12:1 deadweight ratio3
Aerodynamics
Inertia vehicle
Rolling resistance
Auxilliary power
Transmission
losses
Engine losses
Productive use
Deaths and injuries/year
on road
30,000 deaths in
accidents and 4x as many
disabling injuries2
86% of fuel
never reaches
wheels
˃95% of
accidents
from
human
error
Idling
▪
▪
Land utilisation
Road reaches peak throughput only 5% of time and only 10% covered
with cars then
50% of most city land dedicated to streets and roads, parking,
service stations, driveways, signals, and traffic signs
1 Based on car parked number for France and productive vs unproductive driving time in US.
2 For every death on Europe's roads there are an estimated 4 permanently disabling injuries
3 Based on average car weight of 1.4 tonnes and average occupation of 1.5 passengers of 75 kg.
SOURCE: EU Commission mobility and transport, accident statistics; www.fueleconomy.gov; EEA car occupancy rates data; S. Heck and M. Rogers,
Resource revolution: How to capture the biggest business opportunity in a century, 2014; Centre d’études sur les réseaux, les transports, 12
l’urbanisme et les constructions publiques.
THE CIRCULAR ECONOMY REFRAMES THE MODEL, CAPTURING VALUE LEAKAGE
1 Even for systems that are perceived as highly mature and
optimized there is still a lot of room for improvement – food
Productive use
Food waste
Fertiliser utilisation
Malnutrition deaths and diseases
31% of food produced is
lost or wasted
95% of fertilisers do not provide
nutrients to human body
Obesity causes 5% of
deaths
Fertiliser used to feed
people
69% consumed
11% consumer waste
20% value
chain waste
Not absorbed by
human body
Lost or
wasted
vegetables1
Used by inedible
part of crop3
Not taken
up by
crops (up
to 70%)
Releasing GHG
emissions and
causing
eutrophication
and drink water
pollution
˃50% of European
population is
overweight (30%) or
obese (22%)2
5% of EU population is
at risk of
undernutrition
Land degradation
~30-85% of European agricultural land is affected by soil
degradation (range depending on definition and data set used)
1 In Europe ~46% of edible mass of fruit and vegetables is lost or wasted (FAO, Global food losses and food waste, 2011).
2 BMI >25 (overweight) or >30 (obese).
3 On average 23% of vegetable crops is not edible (peels, leaves, ...).
SOURCE: FAO, Global food losses and food waste – Extent, Causes and Prevention, 2011; MGI, Overcoming obesity: An initial economic analysis, 2014; WHO website
obesity data; EEA, Towards efficient use of water resources in Europe, 2012; IFDC; Olle Ljungqvist and Frank de Man, Under-nutrition - a major health problem in Europe,
13
2009; Holly Gibbs and Meghan Salmon, Mapping the world’s degraded lands, 2015.
THE CIRCULAR ECONOMY REFRAMES THE MODEL, CAPTURING VALUE LEAKAGE
1 Even for systems that are perceived as highly mature and
optimized there is still a lot of room for improvement - housing
Construction
▪
▪
0-0.5% productivity
increase per year in most
European countries 19902015, whereas 2% per
year achieved in some
countries
Utilisation
Utilities
▪
60% of European offices
are not used even in
working hours
▪
20-40% of energy in
existing buildings can be
profitably conserved
▪
50% of residential
dwellers report living in
too much space
▪
Passive building
standards at or near
profitability for most newbuild segments, but still
only constitute a minority
of buildings
10-15% of building
material wasted during
construction
End of life
▪
54% of demolition
materials landfilled, while
some countries only
landfill 6%
▪
Most materials unsuitable
for reuse as they contain
toxic elements
Urban planning
50% of most city land dedicated to infrastructure
11 million households experience severe housing deprivation
Congestion cost 2% of GDP in many cities
SOURCE: Norm Miller, Workplace Trends in Office Space: Implications for Future Office Demand, University of San Diego, 2014; GSA Office of Governmentwide Policy, Workspace Utilization and Allocation
Benchmark, 2011; Flexibility.co.uk, Shrinking the office; IEA Statistics © OECD/IEA (http://www.iea.org/stats/index.asp) Energy Statistics and Balances of Non-OECD Countries, Energy Statistics of
OECD Countries, and United Nations, Energy Statistics Yearbook; European Commission, Service contract on management of construction and demolition waste, 2011.
14
THE CIRCULAR ECONOMY REFRAMES THE MODEL, CAPTURING VALUE LEAKAGE
1 Addressing the structural waste in mobility, food and housing Primary
could
resource costs
result in a €1.8 trillion opportunity by 2030
Other cash-out costs
2
3
Mobility, food and built environment, EU27, societal perspective 2030
Externalities4
Annual primary resource costs, other cash-out costs and negative externalities1
EU-27, 1000 billion EUR1
7.2
-1.8
(-25%)
1.1
0.2
2.0
6.3
1.0
0.1
1.9
5.4
1.5
3.4
3.0
1.8
Today
2.7
1.4
Improvements
Rebound
effect
Current development scenario
2030
1.2
Additional
improvements
Rebound
effect
2030
Circular economy scenario
1 All numbers rounded to € 100 billion
2 Primary resources include virgin automotive and construction material, virgin synthetic fertiliser (€535/tonne), pesticides,
agriculture land and water use (€0.20/m³), fuel (€1.64/litre gasoline, €1.45/litre diesel, €0.91/litre of heating oil, €68/tonne of coal, €0.067/kWh of natural gas), land for residential and office
buildings and non-renewable electricity (€0.20/kWh)
3 Other cash-out costs include all household and government expenditures on mobility, food, residential housing and office space,
excluding the primary resource costs
4 Externalities include CO2 (€29/tonne), traffic congestion, non-cash health impacts of accidents, pollution and noise, land opportunity costs,
opportunity costs related to obesity, adverse health effects due to indoor environment and transport time (related to urban planning)
NOTE: Numbers may not sum up due to rounding
SOURCE: Company and expert interviews; Web search; Eurostat household expenditure data; ACEA, The Automobile Industry Pocket Guide, 2015; Todd Alexander Litman, Transportation Cost and Benefit Analysis: Techniques, Estimates and Implications, Victoria Transport Policy Institute, 2009; Udo Jürgen Becker et al., The True Costs of Automobility: External Costs of Cars: Overview
on existing estimates in EU-27, TU Dresden, 2012; ICCT, European Vehicle Market Statistics Pocketbook, 2013; ICE database of CO2 embedded in material; Frances Moore and Delavane Diaz, Temperature Impacts on Economic Growth Warrant Stringent Mitigation Policy, Nature Climate Change, 2015; MGI, Overcoming obesity: An initial economic analysis, 2014; FAO,
Global food losses and food waste – Extent, Causes and Prevention, 2011; EEA, Towards efficient use of water resources in Europe, 2012; EU Commission, Official journal of the EU, Commission Agriculture and Rural Development, 2012 budget, 2012; FAOSTAT; Kimo van Dijk, Present and future phosphorus use in Europe: food system scenario analyses, Wageningen
University, 2014; Josef Schmidhuber, The EU Diet – Evolution, Evaluation and Impacts of the CAP, FAO, 2008; Gregor Zupančič and Viktor Grilc, Anaerobic Treatment and Biogas Production from Organic Waste, 2012; Joint Research Centre (JRC) of the European Commission et al., Precision agriculture: an opportunity for EU farmers – potential support with the CAP
2014-2020, 2014; Laure Itard et al., Building Renovation and Modernisation in Europe: State of the art review, TU Delft, 2008; BPIE, Europe’s buildings under the microscope: A country-by-country review of the energy performance of buildings, 2011; Per-Erik Josephson and Lasse Saukkoriipi, Waste in construction projects: call for a new approach, Chalmers University of
Technology, 2007; Mark Hogan, The Real Costs of Building Housing, SPUR, 2014; Cushman & Wakefield Research Publication, Office space across the world, 2013; Ellen MacArthur Foundation, Delivering the circular economy toolkit for policymakers, 2015.
15
THE CIRCULAR ECONOMY REFRAMES THE MODEL, CAPTURING VALUE LEAKAGE
1 Industry example: Circular setups in fast-moving consumer goods and
manufacturing sectors have a staggering potential in cost savings
Net material cost savings in consumer
industries1
USD billion per year, based on total material
savings from consumer categories, Global
Net material cost savings2 in complex
durables with medium lifespans
USD billion per year, based on current total
input costs per sector, EU
706 (21.9%)
Others
Tissue and hygiene
10
26
Beauty and
personal care
98
Fresh food
121
Beverages
Apparel
155
26
Office machinery
and computers
Furniture
Medical precision
and optical equipment
Radio, TV, and
communication
520 – 6303
(19 – 23%)
19
41
45
51
55
94
Other transport
Electrical machinery
and apparatus
270
Motor vehicles
1 Extrapolated from case examples in 3 major categories
2 Material input cost savings of material costs incurred for reverse cycles
▪ There is a
tremendous loss
of material value
in the fast-moving
consumer goods
and manufacturing
sectors
▪ Transforming to a
138
Machinery and equipment
Packaged food
ESTIMATE
circular model
enables capturing
this value
204
3 Scenario assumes further developed reverse-supply-chain, cross-chain
and cross-sector collaboration and legal frameworks
SOURCE: Euromonitor 2011; Eurostat Input/Output tables 2007 for EU-27 economies; Ellen MacArthur Foundation
circular economy team
16
THE CIRCULAR ECONOMY REFRAMES THE MODEL, CAPTURING VALUE LEAKAGE
2 The ReSOLVE framework reframes our economic model and captures
value leakage
Examples
REgenerate
Share
Optimise
▪
▪
▪
Shift to renewable energy and materials
Reclaim, retain, and restore health of ecosystems
Return recovered biological resources to the biosphere
▪
▪
▪
Share assets (e.g. cars, rooms, appliances)
Reuse/secondhand
Prolong life through maintenance,
design for durability, upgradability, etc.
▪
▪
▪
Increase performance/efficiency of product
Remove waste in production and supply chain
Leverage big data, automation, remote sensing and
steering
Shift to advanced materials (less resource intensive)
Shift to different technologies
(electricproducts
vehicles,orLED)
▪ Remanufacture
components
Shift to different product/service
(e.g., car to public transport)
▪ Recycle materials
Shift to renewable▪ energy
solar, etc.) and materials
Digest(wind,
anaerobic
oop
▪ Extract biochemicals from organic waste
L
▪
Books, music, travel, online shopping, autonomous
vehicles etc.
▪
▪
▪
Replace old with advanced non-renewable materials
Apply new technologies (e.g. 3D printing)
Choose new product/service (e.g. multimodal
transport)
Virtualise
Exchange
SOURCE: Company interviews; Web search; S. Heck and M. Rogers, Resource revolution: How to capture the biggest business opportunity in a century, 2014.
17
Cash-out2 (excl.
THE CIRCULAR ECONOMY REFRAMES THE MODEL, CAPTURING VALUE LEAKAGE
externalities)
2 The levers are expected to become highly
profitable - the resource benefit curve
Mobility
Food
Built environment
Mobility, food and built environment, EU27, 2030
Economic multiplier
€ non resource benefit per € of resource benefit
Incl. externalities3
Mobility
Food
Built environment
Illustrative4
Material evolution (incl. lightweight
and remanufacturing)
Residential sharing
13
Regenerative and healthy food chain
Industrial and automated processes
10
Car and ride sharing
9
Resource efficient agricultural practices
Digital supply chains (food waste reduction)
8
Durable and modular design
Urban planning/design
7
Office sharing and telecommuting
6
Looping
Closed loops
5
Autonomous, driverless driving
Renewable and efficient energy use
4
4.5
3
System integration (modal shift)
Restoration of natural capital
2
Urban farming
1
Electric vehicles and renewable energy
0
-1
25
50
75
100
125
150
175
200
-2
Annual primary resources benefit1 of circular
scenario vs. current development scenario
€ billion
1 Primary resources include virgin automotive and construction material, virgin synthetic fertiliser (€535/tonne), pesticides, agriculture land and water use (€0.20/m³), fuel (€1.64/litre gasoline, €1.45/litre diesel, €0.91/litre of heating oil, €68/tonne of coal,
€0.067/kWh of natural gas), land for residential and office buildings and non-renewable electricity (€0.20/kWh)
3 Other cash-out costs include all household and government expenditures on mobility, food, residential housing and office space, excluding the
primary resource costs
4 Externalities include CO2 (€29/tonne), traffic congestion, non-cash health impacts of accidents, pollution and noise, land opportunity costs, opportunity costs related to obesity, adverse health effects due to indoor environment and
transport time (related to urban planning). Other externalities such as eutrophication, biodiversity loss, deforestation are not quantifies in this analysis, but are likely to be significant as well.
4 Some levers show ranges because the impact and/or implementation cost are hard to quantify or because the impact differs a lot from one case to another
SOURCE: Company and expert interviews; Web search; Eurostat household expenditure data; ACEA, The Automobile Industry Pocket Guide, 2015; Todd Alexander Litman, Transportation Cost and Benefit Analysis: Techniques, Estimates and Implications, Victoria Transport Policy Institute, 2009; Udo Jürgen Becker et al., The True Costs of Automobility: External Costs of Cars: Overview
on existing estimates in EU-27, TU Dresden, 2012; ICCT, European Vehicle Market Statistics Pocketbook, 2013; ICE database of CO2 embedded in material; Frances Moore and Delavane Diaz, Temperature Impacts on Economic Growth Warrant Stringent Mitigation Policy, Nature Climate Change, 2015; MGI, Overcoming obesity: An initial economic analysis, 2014; FAO,
Global food losses and food waste – Extent, Causes and Prevention, 2011; EEA, Towards efficient use of water resources in Europe, 2012; EU Commission, Official journal of the EU, Commission Agriculture and Rural Development, 2012 budget, 2012; FAOSTAT; Kimo van Dijk, Present and future phosphorus use in Europe: food system scenario analyses, Wageningen
University, 2014; Josef Schmidhuber, The EU Diet – Evolution, Evaluation and Impacts of the CAP, FAO, 2008; Gregor Zupančič and Viktor Grilc, Anaerobic Treatment and Biogas Production from Organic Waste, 2012; Joint Research Centre (JRC) of the European Commission et al., Precision agriculture: an opportunity for EU farmers – potential support with the CAP
2014-2020, 2014; Laure Itard et al., Building Renovation and Modernisation in Europe: State of the art review, TU Delft, 2008; BPIE, Europe’s buildings under the microscope: A country-by-country review of the energy performance of buildings, 2011; Per-Erik Josephson and Lasse Saukkoriipi, Waste in construction projects: call for a new approach, Chalmers University of
Technology, 2007; Mark Hogan, The Real Costs of Building Housing, SPUR, 2014; Cushman & Wakefield Research Publication, Office space across the world, 2013; Ellen MacArthur Foundation, Delivering the circular economy toolkit for policymakers, 2015.
18
THE CIRCULAR ECONOMY REFRAMES THE MODEL, CAPTURING VALUE LEAKAGE
2 Industry leaders have already shifted their business model to stop leakage and tap into value pools generated by new value creation and capture
Sources of value creation
Cost
savings
Revenue
growth
Strategic
repositioning
Impact case examples
Detailed later
Reduced
material volume
Lend Lease used scaffolding wood from construction process in furnishing and
landscaping of the London Olympic Village
Reduced
material prices
Supplier of H&M is able to substitute 40% of virgin fibers with recycled ones,
which would otherwise be lost to waste
Reduced material
price volatility
Bosch hedged material price volatility by bringing material back at pre-agreed
prices
Reduced input
prices
Renault cut the total costs of ownership of cutting fluid (input and process) by
33% through CE collaboration with suppliers
Participation in
secondary sales
Ricoh established a "GreenLine" product achieving significant sales volume in
otherwise untapped market segments and high profitability (twice that of new
products)
Capturing premium
via non-sales
based services
Vodafone Red Hot program gives access to latest phone and helped stabilize
market share dilution
Growing market
share
SABMiller helps maintain market dominance in South Africa due to the use of
returnable glass bottles
Stimulating
innovation
Teijin developed the ECOCIRCLE™ and developed proprietary process to
recycle polyester creating strategic lock-in with Patagonia
Regulatory
strategy
Philips committed to using 10% recycled plastics in their products by 2015,
staving off potential EU EcoDesign regulations
Tighter control of
supply chain
B&Q/Kingfisher collaborated closely with raw material supplier and
manufacturer to develop and source for circular product line
SOURCE: McKinsey's CE Special Initiative
19
THE CIRCULAR ECONOMY REFRAMES THE MODEL, CAPTURING VALUE LEAKAGE
2 The framework is already being tested and in some cases implemented
at commercial scale in mobility
Share
3,000
Electric Bluecar shared in Paris, UBER now present in more than
200 cities – Sharing economy enabled by digital disruptions such as
smart phones and the mobile internet
12%
Market share in global automotive market in 2013, makes Toyota the largest OEM
globally, with its lean Toyota Production System as one of the main drivers
of success
1
Renault’s disassembly and re-manufacturing site at Choisy le Roi1 is their
number 1 most profitable industrial site
50%
Reduced cruising time for parking in San Francisco with SFpark,
an intelligent parking initiative using smart meters, on-street sensors
and dynamic pricing
700,000
Miles without accident travelled by Google’s self-driving car –
Many other companies are already actively piloting autonomous vehicle technology
35,000
Tesla electric vehicles produced in 2014 and all major OEMs are launching
EV models (60 models in 2014) - 3x Improvement in engine efficiency vs.
traditional car; up to 450 km range; more durable, low-maintenance engine
25%
Weight reduction on BMW i3 allowed by carbon fiber reinforced plastic
3D
Completely 3D printed interior and shell for Urbee 2 car prototype, designed
for mass production
Optimize
Loop
Virtualize
Explore
1 Re-using 43% of the carcasses, recycling 48% in foundries to produce new parts, and valorizing the remaining 9%
SOURCE: Web search, company websites
20
THE CIRCULAR ECONOMY REFRAMES THE MODEL, CAPTURING VALUE LEAKAGE
2 Industry example: New service model for cutting fluid resulted in 33%
lower TCO1 for Renault
Financial result
USD millions, bars not to scale
Optimization of cutting oil upcycling
▪
Original
situation
▪
▪
▪
▪
Optimized
situation
▪
Renault procured the cutting fluids
from manufacturer of the machine
Servicing and disposal of the fluids
done by Renault
Fluid needed to be exchanged weekly
or monthly due to impurity
Significant recurring wastage
Renault asked manufacturer to provide
maintenance services for the cutting
equipment, incl. fluid supply & disposal
Supplier implemented design changes
and extended usage period to full year
due to fluid design and usage process
At the same time, supplier was able to
improve margin by 125%: win-win-situation
COGs
(fluid)
128
-45%
71
Service &
margin
10
Product
price
138
+130%
23
-32%
94
Technicians
2
TCO1
140
-50%
1
95
Improved
TCO
-32%
1 TCO: Total cost of ownership
Based on 170,000 annual capacity plant. Base case: 5 gallons per vehicle, 150 USD per gallon, 5% service, 3% margin, and 1 FTE technician per
vehicle at 12 USD per hour. Current case: 2 gallons per vehicle, 210 USD per gallon, 10% service, 10% margin, and 0.5 FTE per vehicle at 12 USD
per hour
SOURCE: Company interview; McKinsey
21
2 Product development example - Xerox designs its products to optimally
address waste minimization and asset maximization at end-of-life time
▪ Designs its products such that they are optimized for return, reuse and
▪
recycling at end of life
– Made for durability over multiple cycles and requiring fewer hazardous
substances
– Designed for disassembly, containing fewer parts than in former
product series
They have an extensive tacking back program for "end of life" photocopiers
and printers, creating a remanufacture and parts reuse program
– 80% can be re-used directly, rest can be recycled
– Machine stripped down into max. ~8,000 parts
▪ Reduced cost for
collection and remanufacturing based
on smart initial
product design
▪ Refurbished device
often equipped with
software upgrade to
state of the art
Uncontaminated material streams facilitate collection and re-use
New or “reman” machines
End-of-life machines
Staging
Quality testing
Copy center Teardown/strip
C45
Sort
Machine
assembly
Clean
Work center
Pro 265/275
Parts
Build subAssemble
assemblies
frame
Machine frames
New parts
New parts
Reprocess
SOURCE: The Centre for Sustainable Design, University College for the Creative Arts, Farnham, UK; McKinsey
22
Agenda
▪
Significant value is lost in our traditional
economic model
▪
The Circular Economy reframes the model,
capturing value leakage
▪
McKinsey can distinctively support you in the
Circular Economy journey
– Experiential learning program
– Proprietary ReSOLVER tool
– Transformation engagement
▪
Our credentials offer a superior value proposition
24
We invite you to circular economy labs to…
Realize
We
need
to
A path to more economic value
I
II
Rethink
Your business systems and product design
Recycle
Refurbish/
remanufacture
Reuse/redistribute
III
Redesign
Our materials, parts, and products
Maintain
SOURCE: Source
25
MCKINSEY CAN DISTINCTIVELY SUPPORT YOU IN THE CIRCULAR ECONOMY JOURNEY
We invite you to CE LABS – experiential workshops that guide your team
through a hands-on microcosm of the CE transformation journey
What it is
And what you get
Capability building on
CE topics
▪
▪
▪
Highly experiential
and hands-on workshops
Cross-functional
along all main functions
Customizable
to your business
Multi-angle creative
solutions that are aligned
across all functions
A 100 day action plan
to set the transformation
in motion
SOURCE: McKinsey's CE Special Initiative
26
The CE LABS follow a structured yet flexible approach along 9 modules,
which can be customized to your specific business needs
Module objectives
Realize
the potential of going circular
I
II Rethink
the way we run our business
▪ Learn how global trends
challenge the linear business
system, leading to significant
1 risks and missed
opportunities in a
conventional setup
Diagnose value losses in
status quo business system
4
▪ Understand how Circular
Economy mitigates the risks
and captures opportunities
2 through additional value
pathways
▪ Envision a potential "future
3
state" for business in a circular
world1
SOURCE: McKinsey's CE Special Initiative
III Redesign
our product
5
7
Systematically design a
comprehensive new business
system
Plan how to make the radical
change happen. Assess
stakeholder needs and
6 uncover roadblocks to
implementation of CE
principles
8
Understand why product
design is key to a CE
business system
Use product design as a
critical tool to capture
the value available in CE
Summarize and prepare
next steps to push CE
forward in your
9 organization
27
I
Realize the potential of going circular
Module objectives
1
2
3
Activities
Learn how global trends
challenge the linear
business system, leading
to significant risks and
missed opportunities in
a conventional setup
▪ Outline 4 major global trends, as well as
Understand how Circular
Economy mitigates the
risks and captures
opportunities through
additional value
pathways
▪ Reintroduce and explain the ‘butterfly’
Envision a potential
"future state" for business
in a circular world
Develop a greenfield business concept on basis
of CE value pathways
SOURCE: McKinsey's CE Special Initiative
resulting challenges and opportunities for
businesses
▪ Analyze business to identify major challenges
to value chain
framework of CE value pathways
▪ Deep-dive into case examples of companies
that have leveraged CE principles
28
II
Rethink the way we run our business
Module objectives
4
Diagnose value losses in
status quo business
system
Activities
▪ Map the full life-cycle value chain
▪ Identify the most severe of value leakages in
the value chain
Design
choices
5
Systematically design a
comprehensive new
business system
▪ Use the CURe framework to prototype
Business
system
Product
design
Create
Return
circular business systems
▪ Derive implications on reverse logistics and
product design
Use
6
Plan how to make the
radical change happen.
Assess stakeholder
needs and uncover
roadblocks to implementation of CE principles
SOURCE: McKinsey's CE Special Initiative
▪ Analyze stakeholders involved in a circular
business system transformation
▪ Derive concrete actions to move your
organization towards implementation of CE
business systems
29
III
Redesign our product
Module objectives
7
Understand why product
design is key to a CE
business system
Activities
▪ Connect business system to product design
requirements
▪ Stress importance of product design for
Circular Economy through examples
8
Use product design as a
critical tool to capture
the value available in CE
▪ Live teardown of a product to assess and
derive circularity-enabling features
▪ Deep dive into key parts of the product that
can enable circular business systems
9
Summarize and prepare
next steps to push CE
forward in your
organization
SOURCE: McKinsey's CE Special Initiative
Derive concrete actions to redesign our product
to enable circular business systems
30
Your team will collaboratively achieve a systematic understanding of CE
principles and how to draw them all together for change in your organization
Recognition of primary Identification of lost value
linear economy
and ideas on how to
challenges
capture
Co-developed future state
vision of circular-based
business system
Pragmatic, concrete
design changes to
transition to new
business model
Key workshop series outputs
31
Agenda
▪
Significant value is lost in our traditional
economic model
▪
The Circular Economy reframes the model,
capturing value leakage
▪
McKinsey can distinctively support you in the
Circular Economy journey
– Experiential learning program
– Proprietary ReSOLVER tool
– Transformation engagement
▪
Our credentials offer a superior value proposition
32
We have created a tool – the ReSOLVER – that can quickly identify the
largest strategic opportunities for your company
ReSOLVER’s Value prop: A first-of-its-kind tool to easily and reliably identify, quantify and
prioritize strategic CE opportunities such as business model changes
VALUE CHAIN
MODELER
▪ Model existing value
chain, with companyspecific data
▪ Identify current
value pools
LEVER
SELECTOR
▪ Select from a CE
lever catalogue and
customize it to target
organization
VALUE
QUANTIFIER
▪ Calculate net value
created by each lever
▪ Quantify impact on
the OEM, the customer and society
BUSINESS MODEL
BUILDER
▪ Build new business
models (e.g., Products to Services)
and test their impact/
feasibility
▪ Identify trade-offs
between business
models
33
ReSOLVER can help you answer a few key questions for the transition
Key questions answered by ReSOLVER
•
What business model is the most beneficial for my product?
•
What levers should I focus on?
•
What revenues and profits can I expect? What implications does that have on
my balance sheet?
•
What is the impact on my customer? What competitive advantage can I expect?
•
What will the transition be like? What challenges will I face?
•
What is the societal impact of my product today? In new business model?
ReSOLVER is unique in its ability to move beyond
current products and business models to new value
streams across the entire value chain
34
ReSOLVER shows the impact of Circular Economy levers from the
perspective of the consumer, the OEM and society
Consumer perspective:
Provides a simple apples-to-apples comparison of
the cost of a given utility across business models
OEM perspective (Steady state):
Quantifies revenue, gross margin,
balance sheet and operational metrics
OEM perspective (Transition):
Maps revenues and profits over time
across different business models
Society perspective (externalities):
Financial burden, GHG emissions,
material consumption, accidents, etc
35
PRELIMINARY
For example, in the automotive industry ReSOLVER quantifies the shift
from selling products to selling services…from selling cars to selling kms!
Linear Model
KPI
Circular Model
Vehicle Ownership
• Consumer
• OEM
Passengers/vehicle
• 1.5
• 3
Car-kms
• 188,000/year
• 1,000,000/life
Circularity levers:
• 18,400/year
• 230,000/life
• N/A
OEM balance sheet
• EUR ~750m
The Circular Model creates a
win-win-win for the OEM…
• Sharing, Reman,
Recycle, 3D Printing
• EUR ~4,000m
…for the consumer…
OEM gross profit1
M EUR
from selling cars…
…to selling kms!!
…and for the environment…
GHG emissions2
KtCO2e
Cost to consumer2
EUR
6,209
1,181
In this example, the
OEM is transitioning
from selling products
to selling services….
4,425
4,175
-33%
-78%
~6x
979
208
Linear
1 In steady state
Circular
Linear
Circular
Linear
Circular
2 Per 28,000 passenger-kms
36
PRELIMINARY
How can the cost to consumer decrease while increasing OEM profit ~6x?
By selling services, not products, and applying circularity principles, the
OEM can dramatically reduces cost per km; savings are shared between
end-consumers (e.g., reduced price/km) and OEM (e.g., increased profitability)
1
Share
▪ Resource productivity increases by ~20x:
– Car drives 10x more kms per year (188k vs 18k)
– Passenger utilization doubles (3 vs 1.5 passengers)
▪ By building a car that lasts longer, OEM can reduce
AUTOMOTIVE EXAMPLE
OEM profit
Mil EUR
BAU
208
profit
1
manufacturing cost per km1
2
550
▪ The OEM captures the entire value chain, and because
Optimize
3
Loop
4
Virtualize
5
Exchange
2
of scale, does so more effectively:
– Maintenance: OEM’s can perform maintenance more
effectively and can do preemptive maintenance
– Insurance: Scale achieves significant cost reduction
– Financing: OEM’s have access to cheaper capital
200
3
45
▪ OEM ownership enables remanufacture of
components and recycle of materials, reducing
procurement, assembly and transportation costs
5
178
▪ When autonomous vehicles become feasible, they
will reduce the cost of Uber-type services significantly
▪ High utilization puts EV’s deep in the money2
▪ 3D printing of certain components reduces procurement
New
profit
and transportation costs, and makes product lighter
1 This only makes economic sense when the car is highly-utilized
2 Because they have low marginal cost
1,181
~6x
37
However, the transition may have challenges and can
have a long payback period
AUTOMOTIVE EXAMPLE
PRELIMINARY
OEM Gross profit over time
M EUR
Linear
1.100
Circular
Profit declines in first years
due to subscription model
schedule and initial
investment required
Other barriers include:
1.000
900
800
700
Payback period of
a few years
- Large OEM balance sheet
- End-consumer
behavior/mindset shift
600
500
- Requires OEM expertise
across value chain
400
300
200
100
The tool allows for
sensitivity analysis to
develop the best path forward
0
Year
1
Year
5
Year
10
Year
15
Year
20
38
Agenda
▪
Significant value is lost in our traditional
economic model
▪
The Circular Economy reframes the model,
capturing value leakage
▪
McKinsey can distinctively support you in the
Circular Economy journey
– Experiential learning program
– Proprietary ReSOLVER tool
– Transformation engagement
▪
Our credentials offer a superior value proposition
39
Client Customizable Page
We join our deep expertise to leave you well-positioned for lasting
CE value creation
WHAT
WHY
HOW
Circular
economy
as coherent
concept
Sustainable
growth
as strategic
imperative
Deep business
analytics and
proven
transformation
logic
Ellen MacArthur
Foundation, CEconvener, inspirer
and educator of
companies and
executives
<Short
description of
client’s
sustainability
targets or
performance>
McKinsey, with
over 4200
transformation
engagements1 in
all sectors and
functions
Client
logo
▪
The Foundation and
McKinsey have a history of
working together—we can
engage with you without
creating further
coordination or transaction
costs
▪
We will transfer knowledge
of concepts, analytical
tools, and transformative
approaches to your teams
throughout our collaboration, so as to leave the
organization with the
capabilities to drive your
CE agenda forward
on its own
1 2008-2013ytd
40
During the project we will set the foundation for a CE transformation
in 9 steps
Ignite
Build
Operate
1▪ Conduct a value
leakage scan
4▪ Validate value
leakage
assumptions
7▪ Determine value
stream end state
ambition
2▪ Set up ideation
labs to create value
5▪ Build different
scenarios to
capture value
8▪ Set up pilots of top
scenarios as lighthouse projects
3▪ Develop first
business cases
6▪ Finalize business
cases
9▪ Develop full
implementation
roadmap
SOURCE: McKinsey
41
Ignite – Set up for success
Objectives
▪
Conduct a value
leakage scan
▪
Set up ideation
labs to create value
Deliverables
▪
Value chain map with value
creation and capturing
leakages that serves as input
for the ideation labs
▪
Workshop with cross
functional team
(marketing,
manufacturing, R&D and
procurement)
▪
List of value creation
opportunities (design
alternatives, reverse logistics)
Potential new business
models that enable capturing
the value
▪
Ideation workshops with
cross functional team
(marketing,
manufacturing, R&D and
procurement)
First approximation of the
overall value capturing
potential
Selection of business units /
product lines that are best
suited for CE initiative
implementation
▪
Working sessions with
idea owners and F&A
1
2
▪
▪
Develop first
business cases
3
SOURCE: McKinsey
Key activities
▪
▪
42
Build – Detail out the ideas
Objectives
Key activities
▪
Validate value
leakage
assumptions
▪
Fully validated and
quantified value leakages
in value chain map that is
supported by all stakeholders
(manufacturing, supply chain,
service etc.)
▪
Validation with all key
stakeholders
▪
Build different
scenarios to
capture value
▪
Prioritized list of potentially
attractive scenario’s for
creating and capturing the
value, including approximation
of the net value opportunity for
each individual scenario
▪
Workshops with cross
functional team
(marketing,
manufacturing, R&D and
procurement)
▪
Finalize business
cases
▪
Fully detailed business
cases for the top ~10 ideas,
that are approved by F&A
▪
Working sessions with
idea owners and F&A
4
5
6
Deliverables
SOURCE: McKinsey
43
Operate – Set the plans in motion and align all stakeholders
Objectives
Key activities
▪
Determine value
stream end state
ambition
▪
End state of the value
chain map (with reduced
leakages) that is supported
by business cases
▪
Working sessions with
idea owners to assign
value leakage reductions
in value chain map
▪
Set up pilots of top
scenarios as lighthouse projects
▪
Commitment from BU
owner to start piloting
some of the value creation
and capture scenarios in
his business
▪
Workshops with cross
functional teams
(marketing,
manufacturing, R&D and
procurement) from
different BUs
▪
Develop full
implementation
roadmap
▪
Full implementation
roadmap of all planned
CE initiatives in a 5 year
time-frame
▪
Working sessions with
idea owners senior
management
7
8
9
Deliverables
SOURCE: McKinsey
44
Agenda
▪
Significant value is lost in our traditional
economic model
▪
The Circular Economy reframes the model,
capturing value leakage
▪
McKinsey can distinctively support you in the
Circular Economy journey
▪
Our credentials offer a superior value proposition
45
The new McKinsey Center for Business and Environment builds on
McKinsey’s tradition of leading edge thinking on sustainability
Our vision
The McKinsey Center for Business and
Environment develops next-generation
insights and tools together with partners
and clients – bringing the best
knowledge and capabilities in the world
together to solve through innovation
some of the biggest environmental
challenges we face
The Center:
Current initiatives
1
2
The
circular
economy
Ecosystem
services
▪ Focuses at any point on a small number
of initiatives with system-level impact
▪ Partners with the most influential and
relevant stakeholders to effect change
▪ Develops distinctive knowledge and
client service models in the areas of
3
Energy
transitions
– Green Innovation,
– Resource productivity, and
– Sustainable growth
▪ Brings to bear a permanent staff of highcaliber experts, as well as external
experts and advisors
4
Urban
transit
Helping clients navigate a
circular future and capture 3x
material cost/revenue benefits
of closed-loop value chains and
regenerative consumption
Supporting the development of
business models and solutions
that value, protect and restore
the services provided by forests,
oceans, wetlands and other
natural ecosystems
Designing the transition to low
carbon energy systems including
value pools, investment
opportunities, regulatory
enablers and transition roadmap
Piloting future transit models that
will exponentially reduce transit
times, energy consumption, and
pollution and translating this
future into new business models
for providers
46
Circular economy features importantly in our Resource Efficient Operations
BUILD RESOURCE
PRODUCTIVITY
IMPROVEMENTS ON
TOP OF TRADITIONAL
LEAN THINKING
STRETCH YOUR
ASPIRATIONS BY USING
THE THEORETICAL LIMIT
CONCEPT
PRIORITIZE PROFIT AS
THE MAIN FACTOR FOR
FINAL DECISIONS
INVOLVE THE WHOLE
ORGANIZATION TO
SUSTAIN CHANGE
MOVE FROM FINITE
SUPPLY CHAINS
TO SUPPLY CIRCLES
think
CIRCULAR
think
LEAN
think
LIMITS
Leverage lean
principles and
utilize existing lean
expertise within
the organization to
build a resource
productivity
strategy. Lean and
thinking about
green are highly
synergetic and use
the same
fundamentals
Use the theoretical limit
concept to set
ambitious goals that
foster creative thinking
and deliver significant
resource productivity
improvements
SOURCE: Operations Extranet
PROFIT /
HOUR
Review the full profit
equation (revenues less
costs) when making
resource productivity
changes. Significant
trade-offs (among
throughput, yield,
energy, and the
environment) need to
be weighed collectively,
as adjusting one lever
can benefit or conflict
with other levers
think
HOLISTIC
Make necessary changes in
the management system
and
in mindsets and behaviors
across the organization to
bolster the technical
improvements
Consider your product as your
future resources and
collaborate to optimize the
overall supply circle
47
Our leadership in circular economy
Together with the Ellen MacArthur
Foundation we have written five highly
acclaimed reports on design for the
circular economy
We collaborate in ‘Project MainStream’ with
the World Economic Forum, Ellen MacArthur
Foundation and industry leaders to catalyze
the Circular Economy at scale
48
We have a team of circular economy experts
▪
▪
▪
Director, McKinsey Center for Business and Environment
Leader Strategic Resources service line, including circular design activities
Brings leading competencies in business transformation and circular business models
Morten Rossé
▪
▪
▪
Expert Associate Principal in the McKinsey Center for Business and Environment
Project manager for the Growth Within report
Focuses on the circular economy, and green growth
Adrien Vincent
▪
▪
▪
Associate in our Paris office
Conducted the analysis for the Growth Within report
Focuses on the circular economy
▪
▪
Senior Expert, McKinsey Center for Business and Environment
Leader in Material Systems: Circular economy, waste and resource management (municipal, industrial,
and commercial)
▪
▪
Project leader in the Frankfurt office of our Product Development Practice
More than thirteen years of consulting and industry experience serving several industries, with a
majority of his project experience including large R&D transformation programs
Focuses on our Design-for-Sustainability efforts
Martin Stuchtey
Helga
Vanthournout
Eric
Hannon
Stephan
Mohr
Sander Defruyt
▪
▪
▪
▪
▪
▪
▪
Master Expert and a member of the core group of the European Product Development Practice
Founder of the McKinsey Design-to-Value labs and the Cleansheet solution
Has led and conducted numerous design-to-cost and design-to-value studies for clients in the
consumer goods sector
Junior Associate in our Antwerp office
Conducted the analysis for the Growth Within report
Focuses on the circular economy
49
Automotive-specific backup
50
CLOSING THE CARBON FIBER SUPPLY CHAIN LOOP
Carbon Fiber return logistics are still in their infancy,
and the amount of retained value is still uncertain
Recycling & process improvements can
dramatically bring down cost of CF
Recovering production scrap, 40-60% of volume
▪ (planned mid-2014) MIT RCF converts drop-offs into
nonwoven rolled goods, molding compounds and resin
transfer molding (RTM) preforms
Using recycled carbon fiber can reduce cost 30%, but
recycling technology is still primarily in research
2016 estimated market size USD 420-520 Mio.
But current recycling capacity is 2.5%-5.0%
of virgin CF production.
▪
Thermal decomposition
– Commercially through pyrolysis, notably by UK
recycler Milled Carbon
– Used in non-load bearing components and in
sheet moulding compounds.
▪ Shredding
– First commercial center launched by Milled Carbon
– mostly as fillers
Combustion
– In research stage with no current commercial uses
CFs can reduce vehicle body weight by
up to 40-50% compared to steel
Cost reductions in CF process can make
most components in the EU luxury and
electric vehicle segments profitable
Six suppliers hold 93% market share of Carbon Fiber
Increasing players within CF value chain
Tier 1 Suppliers
Research
OEMs
Tightening regulations drives light weighting
CO2 emissions
Average CO2
emission/km/year in Europe
Potential penalties
EUR per car in fleet
Current fleet
average
Europe 2010
140
0
Target
2020
95
4,035
Potential
target 2025
75
-46%
12,350
Potential future cost per kg of light weighting with CF, $
Average of components, $
Current Cost
41
w/ 30-40% Cost Reduction
26-30
4
3
2
SOURCE: Toray presentation (2007), European Commission, McKinsey analysis, Oak Ridge National Laboratory
1
Benefits per kg of CFs
1
2
3
4
EU electric vehicles
EU luxury vehicles
EU mid-market vehicles
US mid-market vehicles
51
CLOSING THE CARBON FIBER SUPPLY CHAIN LOOP
Carbon Fiber BIW is more favorable than steel BIW when
comparing life cycle cost and environmental impact
Life cycle analysis of body-in-white made with carbon fiber vs. steel
Total lifecycle costs for BIW components
$, Thousands
Steel BIW
Life-Cycle Analysis - Environmental Costs of BIW
Normalized eco-millipoints (mpts)
Carbon Fiber BIW
Steel
22
2
19
2
15
BIW
Manufacturing
(incl. Pre)
2
1.20
19
3
13
3
20
16
Use
0.95
4
16
CFRP
13
10
0.47
15
13
0.38
0.31
0.03 0.04
Minimum
Average
Maximum
Comparison at various cost scenarios
Climate
change
human
health
Human
toxicity
0.24
0.07 0.10
Particulate Climate
matter
change
formation ecosystems
0.03 0.02
Natural
land
transformation
Fossil
depletion
While cost of raw material for carbon fiber composites is more than steel, total life cycle cost for a carbon fiber BIW is
less than steel BIW due to lower use costs
Life cycle cost of carbon fiber BIW is 16% lower than for steel
Normalized LCA results show CFRP having less environmental impact than steel in all but one area
SOURCE: University of Boras, Welsh Composite Centre
52
CLOSING THE PLASTICS SUPPLY CHAIN LOOP
Plastics recycling case example: Renault has found significant
value in establishing circular flows for plastics
PP plastics advantages for circular
value streams
Renault has established Goodbye Car, a buyback
program that ensures a steady supply of material
▪ Existing industry standards result in
highly standardized material
▪ Product passports are pervasive making
material identification straightforward
▪ Vehicles as discrete, high value goods
mean reverse flows are simpler and
with easier business case
▪ Large, stable supply of material from
end-of-life vehicles
▪ Established customer habit of going to
the open market to sell vehicles
Current blend of recycled/virgin
PP is maximum 17%
Next challenge is to increase
recycled content and preserve
quality
▪ Program buys back cars of every make and model to reuse, re-manufacture, and recycle high value parts
▪ Disassembly is outsourced to a network of contractors
▪ Success has led to even selling input materials to
suppliers of other OEMs
53
SECURING SECOND LIFE BATTERY OPPORTUNITIES
Several players are already active to prepare for
potential 2nd-life opportunities
... Indicate the race has
already started
Recent headlines …
Industry
Research institutions
… has developed and installed the
world’s first large-scale power storage
system which utilizes used batteries
collected from electric vehicles.
Duke Energy will test the repackaged
Chevrolet Volt batteries on a part of its
grid to pilot the technology in a project
with GM and ABB.
BMW created a joint effort with
Vattenfall to examine second life
applications for batteries as part of their
recycling and repurposing strategy.
NOT EXHAUSTIVE
…develops innovative strategies to
enhance plug-in-electric-vehicle value
through secondary use of PEV
batteries.
… and partners are conducting
research to identify, assess, and verify
profitable applications for the 2nd use
of PEV Li-Ion batteries.
The project led by Eaton, Credit Suisse,
Nissan and the University of Trento will
explore the potential to develop a
market for the recycled EV batteries.
▪
Momentum picking
up quickly around
research and
business activities
over last months
▪
Strong involvement of large
automakers
▪
Increasing crossindustry alliances
… announced that it completed a
heralded California study of the
extensibility of electric vehicle battery
life to household electric storage
devices.
4R Energy, ABB and Sumitomo evaluate
the reuse of lithium-ion battery and to
build a prototype of a grid storage system
using Nissan Leaf batteries.
SOURCE: Press search
54
SECURING SECOND LIFE BATTERY OPPORTUNITIES
Nissan already capturing part of the market for
2nd-use batteries
Market development
▪
Used batteries can still
have ~ 70-80% capacity
Potential for 1 million
battery packs to enter
2nd use market in 2018.
Market size estimated
to be USD 1.4 billion
▪
▪
Nissan is active in exploring 2nd-use market and other strategies for used batteries
Market potential of 2nduse batteries market is
estimated to be USD
8 - 17 billion by 2030
Potential application
areas for 2nd-use
batteries:
– Grid support
applications
– Power supply
applications
– Vehicle applications
– Power-operated
applications
SOURCE: McKinsey; Press research
Research/
cooperations
▪ Sumitomo Corporation created the joint venture company, “4R
2nd use
▪
Ceased
plans
Other
strategies
Energy Corporation”, in collaboration with Nissan Motor Co.,
Ltd. in September 2010, to address the secondary use of EV
lithium-ion batteries. Currently, Sumitomo has developed and
installed the world’s first large-scale power storage system
which utilizes used batteries collected from electric vehicles.
GM and Nissan are working with ABB Group, a power and
automation technology company, to develop energy storage
systems using Volt and Leaf batteries.
▪ Renault-Nissan will not make any more battery-swap cars
after its current battery-swap model, the Renault Fluence Z.E.
sedan, ends production. The only commercial application was
with Better place with battery swap stations in Israel and
Denmark.
▪ Nissan is offering a battery leasing option (Nissan Leaf Flex)
Leasing
for the 2014 LEAF in the UK. Leasing the battery knocks five
grand off the purchase price, and monthly lease fees range
from £70 to £129 a month.
55
SECURING SECOND LIFE BATTERY OPPORTUNITIES
Securing raw material access is crucial, e.g., neodymium
demand expected to greatly exceed current production
Raw material demand of
automotive powertrain industry
Percent of 2010 world production
Price
since 2008
184
Lithium
1
Rare
earth:
neodymium
100% =
110.000 t3
56
1,600
15
550
100% =
7,300 t1
2
8
39
52
2010
20
▪
Countries will continuously
tighten CO2 regulation to
10g/km and/or influence
prices through subsidies
and taxes
▪
Oil price rises only
slowly, to 120 USD/bbl in
2030 and 150 USD/bbl in
2050 (IEA reference
scenario)
▪
By 2030 country-wide
coverage of BEV and
FCEV "refueling" stations
installed in all regions of the
world
+48%
21
89
Assumptions for
scenario:
+9%4
100% =
16.6 mil. t2
Copper
Platinum
Assumption:
No shift to
asynchronous
e-motors
100% =
250 t
+35%
HEAVY
REGULATIONSCENARIO
+13%
2030
1 Global neodymium production 2008
3 Global lithium carbonate equivalent production 2009
SOURCE: IZT Fraunhofer Institute, Bloomberg, McKinsey
2 Global copper production 2007
4 EU import price for 72.5% LiO2
56
SECURING SECOND LIFE BATTERY OPPORTUNITIES
Electric Vehicles show less environmental impact in
the long term when compared to ICEs
Normalized impacts
Base Vehicle
Other powertrain
Use phase, non-fuel-related
Engine
Battery
Fuel/electricity
EV1
ICE
End of life
Environmental impact areas with major contributions from Fuel Consumption/Electricity
Global warming and fossil resource depletion units are normalized from a max of ~40,000 kg equivalent/150,000 km
0
1.0
0
Global
warming
Fossil
resource
depletion
Terrestrial
acidification
Photo-chemical oxidation
formation
1.0
Major contributions from Manufacturing and Supply Value Chain
Eco-toxicity units are normalized from a max of ~100 kg equivalent/150,000 km
0
1.0
0
1.0
Particulate
matter
formation
Terrestrial
eco-toxicity
Freshwater
eco-toxicity
Freshwater
eutrophication
Human
toxicity
Mineral
resource
depletion
SOURCE: Journal of Industrial Ecology, Hawkins et al. (2012)
EVs powered by the present
European mix offer a 10% to
24% decrease1 in global
warming potential (GWP)
relative to conventional
gasoline vehicles assuming
lifetimes of 150,000 km.
1 Only one representative EV type (Li-FePO4 Euro) is shown,
see analysis for more details
57
SECURING SECOND LIFE BATTERY OPPORTUNITIES
European regulation for recovery/recycling rates of ELVs and
batteries and restricts use of hazardous substances
NOT EXHAUSTIVE
Directive 2000/53, Directive 2005/64/EC (and
amendment 2009/01/EC)
Batteries Directive 2006/66/EC (amendment
Directive 2013/56/EU)4
Member States shall take the necessary measures to ensure that the
following targets for end-of-life vehicles (by an average weight per
vehicle and year) are attained by economic operators:
▪ By 2006: 85% reuse and recovery, 80% reuse and recycling
(possible exemptions for vehicles produced before 1 January
1980)
▪ By 2015: 95% reuse and recovery, 85% reuse and recycling
For industrial2 and automotive3 batteries
▪ All collected batteries must be recycled
▪ Prohibition of disposal in landfills or by incineration
▪ Minimum recycling efficiencies for battery-recycling processes for lead-acid
batteries (65%), for nickel-cadmium batteries (75%), and for other batteries
(50%) have to be attained with best lead and cadmium recycling possible
▪ Labelling: crossed out wheeled bin and chemical symbols indicating the
heavy metal content. For automotive batteries additional capacity label
For industrial batteries
▪ Restriction on the use of mercury and cadmium (amendment Directive
2013/56/2013, repealing decision 2009/603/EC revoked exceptions for
cordless power tools, button cells, applying from 2016)
▪ Producers or third parties acting on their behalf can not refuse to take back
waste industrial batteries
For automotive batteries
▪ Producers or third parties have to set up collection schemes for those waste
automotive batteries that are not collected on the basis of schemes set up
under the ELV Directive
Above-mentioned measures enter(ed) into force:
▪ By 26 September 2009 for collection targets
▪ By 26 September 2011 for minimum recycling efficiencies
▪ 2012: Collection Rate of 25% of portable batteries
▪ 2016: Collection Rate of 45% of portable batteries, Member States must
report to commission every year (before end June) on progress of collection
▪ 2015: Commission must review the implementation and impact of the
Directive (article 23)
For any new model presented for type approval, manufacturers have
to give proof that the new model meets the 85/95%
recyclability/recoverability targets. Otherwise Member States shall
▪ With effect from 15 December 2008, refuse to grant EC/national
type-approval
▪ With effect from 15 July 2010, consider certificates of conformity1
which accompany new vehicles as no longer valid, and refuse the
registration, sale or entry into service of new vehicles
Adaptation to technical and scientific progress of Annex II Directive
2000/53/EC conducted in 2013 (6th revision, regarding certain leadrelated exemptions (8e, 8f, 8g, 8h, 8j, 10d). Previous revisions of
Annex II occurred in 2002 (1st), 2005 (2nd), 2008 (3rd), 2010 (4th), 2011
(5th)
1 Certificate ensuring that the manufacturer has put in place satisfactory arrangements and procedures to manage properly the reusability, recyclability
and recoverability aspects covered by Directive 2005/64/EC; 2 Incl. those used in hybrid cars for propulsion purposes and as warm starter in – lithium
ion or nickel metal hydride battery; 3 Batteries used for vehicle starting, lighting and ignition
4 Further secondary legislation includes Directive 2008/12/EC, Directive 2008/103/EC, Commission Decision 2008/763/EC, Commission Regulation (EU)
No 1103/2010, Commission Regulation (EU) No 493/2012
SOURCE: eur-lex.europa.eu; European Commission web pages; Eurobat; Questions and Answers on the Battery Directive (2006/66/EC)
58
EXTENDING “CERTIFIED PRE-OWNED” & “PREMIUM SELECTION”
So far, Germany has relatively low penetration of recycled
aftermarket parts for structural reasons
Estimated share of recycled parts on repairs
Percent
U.S1
13
Netherlands
12 - 18
Mexico
8 - 12
Spain
5 - 10
Key drivers affecting low share of recycled
parts in Germany today2
▪ Consumer
– Car as "prized possession"
– Low price sensitivity
– Non-OE parts seen as a threat to
NOT EXHAUSTIVE
performance/prestige
▪ Distribution and repair shops
– Most repairs done through OEM dealer networks
– Distributors cautions in sourcing non-OE parts with
safety implications
Italy
3-8
Germany
U.K.
2-6
1-3
▪ Insurance
– Tiered policies allowing higher in-network
utilization (so far, no push for recycled parts usage)
▪ Certification
– Large testing institutions (e.g., TÜV) available, but
not aimed at certifying generics/recycled parts
Korea
<1
Push of recycled parts usage only
possible with OEM-certification
and for selected parts
1 Excludes 6% share of reconditioned parts
2 And even lower share of generic parts usage (1 - 3%)
SOURCE: CCC, expert interviews, local press searches, McKinsey analysis
59