The automotive industry is undergoing a profound transformation as it tries to adapt to changing customer behaviours, new technology, increased regulatory pressure and emerging business models. At a global level, the industry is projected to grow to nearly US$9tr by 2030.
In the past few years, the sustained growth of the industry has been driven by electric vehicles (EVs). This growth is only expected to increase as the need to meet climate goals becomes more urgent. While Tesla remains the leader in the space, new EV manufacturers such as Xpeng are growing exponentially and traditional manufacturers are investing billions in their fleet electrification efforts.
As the transportation industry is responsible for 27% of greenhouse gas emissions, transitioning to EVs is key to reaching net-zero targets but there is another key issue at stake, namely how to dispose sustainably of the millions of cars still in circulation. Is it a better environmental alternative to extend their lifetime instead? While the concept of a circular economy applied to the automotive industry can be counter-intuitive in terms of sustainability, it’s important to consider how this can support the transition.
The aim of the circular economy is to eliminate waste throughout entire value chains, including manufacturing and use. It values preserving raw materials and recycling. By contrast, the current ‘linear economy’ transforms raw materials into products that are made, used and disposed of, finding value in producing and selling as many goods as possible.
Transitioning away from the ‘linear economy’ means systems-wide changes, including decarbonising production and designing products for recyclability at ‘end of life’. For an industry as large and complex as the automotive industry, it means achieving transformation at scale.
Unsurprisingly, the industry and its value chain are dominated by large manufacturers but a number of emerging players are driving innovations across different circular business models. Below are some of the names and business models which have the potential to scale and drive increased sustainability across the whole industry.
Circular supplies
This involves substituting linear lifecycle materials with renewable, recyclable, or biodegradable input materials in the production process. For example, Redwood Materials is creating a circular supply chain by retrieving raw materials such as cobalt, copper and nickel from end-of-life lithium-ion batteries to produce battery materials for electromobility and electrical storage systems which can be recycled.
Resource recovery
This involves the recovery and reuse of outputs from one process as inputs for another with the aim of increasing the economic value of resources across lifecycles. For example, Black Bear Carbon is a Dutch company founded in 2010. It upcycles end-of-life tyres to produce sustainable Carbon Black, reducing CO2 emissions and aiming to solve the global waste tyre problem.
Product life extension
These models aim to extend the lifecycle of resource cycles through repairing, upgrading or re-selling. In the context of the automotive sector, this can be divided into second-hand dealerships and predictive maintenance platforms. While second-hand dealerships have existed for decades, online second-hand marketplaces have been emerging in both emerging and developed markets over the past few years as consumers’ behaviours shift to online. Examples of already well-established players include Carvana in the US, Auto1Group in Europe, Kavak in Latin America and Cars24 in India. However, data and AI are also fuelling innovation in the predictive analytics segment. For instance, Twaice is a German company that uses predictive analytics software to increase the lifetime, efficiency, and sustainability of batteries. The company provides access to solutions for the optimised development and operation of lithium-ion batteries, independent of a battery or product manufacturers.
Sharing platforms
These schemes enable increased utilisation rates of products and services by making shared use and ownership possible. Turo is a US-based peer-to-peer car-sharing platform designed to help people book a car from local car owners through an online and mobile interface. Many others have emerged whether as peer-to-peer solutions or as OEM/leasing/renting companies’ proposed solutions, in one of the easiest applications of circular economy in the space.
Product as a Service (PaaS)
This model offers product access through rental or leasing services. PaaS helps reduce environmental impact by sharing and extending the use of an item and supports affordability by charging regular small amounts, rather than the full value at once. A large number of players have entered the digital subscription space over the past few years as a sign of changing trends in mobility. For example, Finn.auto allows people to subscribe to a car instead of owning one. Finn.auto is also proving appealing to environmentally conscious drivers as it allows CO2 emission offsets and is expanding its range of EVs.
For such a large industry shifting to circularity requires changes and business models evolution from incumbents too and it’s encouraging to see supporting trends. For instance, when looking at the sales mix, used-car sales which already account for over 50% of global sales are projected to increase to 62% by 2030. Increasing the lifespan of a product is a core principle of the circular economy, and predictive maintenance and growing secondary markets facilitate life extension. At the same time, by refurbishing used parts and remanufacturing engines, Renault offers remanufactured components and spare parts with as-good-as-new warranties to customers for prices that are 30–50% lower than for new replacement parts.
The path to net-zero is complex and thinking it can be achieved just through a full transition to EV is over-simplistic, at least in the short term. Only by looking at sustainability more broadly and by identifying new models that will help change our relationship with consumption can we achieve transformation at scale. The circular economy can be a big factor in reducing emissions as it focuses on the notion of ‘reduce, reuse and recycle’. Within this framework, we see the automotive industry as being relatively advanced but a growing number of second-hand marketplaces in the electronics and fashion industries and a move to non-polluting processes and systems from selected players in the food industry, are encouraging signs of how other industries are starting to embrace the circular economy.
About the author: Manuel Silva Martinez is General Partner at Mouro Capital
