Circular economy for sustainability

  • Articles
  • Dec 01,23
For the circular economy to succeed there must be some value addition. While it is clear that most, if not all, companies will have to practice elements of CE in the near future, if not already doing so, says R Jayaraman.
Circular economy for sustainability

In a broad sense, sustainability is a process by which resource consumption and resource availability – now and in the future – are balanced. The most common resources are human. One can see the bleak future awaiting some economies in Europe and elsewhere where the population rate of growth is so low that soon the countries will find it difficult to even survive. No doubt, importing of such resources is possible and has been resorted to by many countries. But this can have serious consequences for the importers, and also, the exporters, who lose the incentive to upgrade their domestic economies, and become dependent on remittances from abroad. These ‘remittance’ economies are vulnerable to economic changes, as well as the long term, when they will have to stay reliant on external forces. The options for actions available to such economies are limited and they will end up closing down, in the long run. 

Other key resources include land, money, minerals, oil and gas, and similar items. These are not unlimited, but, rather, limited, although could be in abundance for the time being. Land is plenty, theoretically. There is an unequal distribution of land all over the world, places where the population density is very thin, like the USA, many countries in Latin America, places in Europe and Africa, much land is still uninhabited. Even within a country, for example, India, land is available for certain purposes, but not for others, especially, commercial enterprises. 

Money is a man made resource, and is available to the enterprising ones. It is transferable, without a physical transfer of goods. Other mentioned resources are available in different quantities in various places, these are made by mechanisms which are in the realm of geology. Given this scenario, the so called ‘fossil fuels’ are those which belong in the last category. All others are reproducible, and replenishable. Consumption of resources results in their depletion, and this is applicable to land, money (although money can be printed, which is what many countries in the world do), minerals, oil and gas. Since these resources are required by a modern industrial economy as the floorboards for building a high standard of living – which is what most western nations do, their populations seem to live so that their standard of living can continuously keep going up - their usage is continuous and their stocks, declining. 

The steep increase in the production of iron and steel in the last decade, specifically due to China, which increased its production from about 640 million tonnes to 1,000 million between 2010 and 2023, has played havoc with the availability of iron ore.  Naturally, there is a concern that, at this rate, the world could run out of select natural resources, which form the very basis of industry. Hence the flag of sustainability was hoisted around early 1990, with the Triple Bottom Line announcement. This has been followed by the 17 SDG’s (or Sustainability Development Goals) by the United Nations. Of course, the SDG’s are concerned with and cover a much wider panorama than merely natural resources conservation, but, one of the central themes is sustainable resource utilisation. And its effects on the global economy. 

In this light that one must see the ‘Circular Economy’ (CE).  Is this a fad, a fancy, a whim, or is it really useful? Is it a ‘old wine in a new bottle’? Whatever it is, it is but one more way to attain sustainability. Every bit counts, and needs to be pursued to its ultimate uselessness.  What is the essence of circular economy? To conserve by the 3R’s method – reduce, reuse, recycle. It is more of the latter two words than the first one. Reuse means to use the asset after some refurbishment, such that, the asset does not lose its original identity. In fact, in some cases, there is ‘cosmetic surgery’ performed on the asset. Examples are, sale of old TVs, fridges, air-conditioners and a whole host of other such consumable durables. This phenomenon does two things – it puts an asset back into use, thus extending its useful life. Second, it could stop some purchasers from going for a new set. 

Third, it could expand the market by bringing into the consuming fold those who were kept out due to the unaffordability. Whereas, recycle usually refers to components, which, after refurbishment, will be used to produce a product. This has the effect of reducing waste, making use of something which still has a consumption value or can be made to be so. Depending upon the final product price, market expansion is possible. Both these phenomena lead to lower demands in a certain sector of the economy, compensated, to an extent, by the development of a new market. This could work well at the ‘bottom of the pyramid’, in Prof CK Prahalad’s words. Useful for creation of wealth at the bottom, creating affordability and increasing the standard of living at the bottom. This phenomenon, which is being seen in India in the last few years, is still being nurtured, albeit grudgingly, one might suspect. For one thing, new product manufacturers would not like to go this way, as it reduces their demand. They are mass producers and do not want to get into the ‘retail manufacturing’ area, which is where much of the 3 R’s action is.  It also makes them sell these refurbished products through different channels which could cannibalise their products. Opening up a new channel for sales has its own issues to be dealt with. And the margin may not be worth the while, due to its retail nature, which could involve time consuming follow-ups to close out a sale. Convincing customers to buy ‘used products’ or ‘refurbished products’ needs a set of different skills. 

In spite of all these hurdles, the CE and the CSC (Circular Supply Chain) are growing. Today, one can exchange any consumer durable at the mall stores for a consideration. Laptops, fridges, TV’s, washing machines, and many more, offer such deals. Even passenger cars. For cars, there is a legitimate ‘Used Cars’ shops which sell them and sometimes make more profit per car. Maruti is a good example. It is not considered ‘passe’ if you would walk into a Maruti Used Car showroom. 

For the CE to succeed, there must be some value addition. These have already been explained, the issue is – how do you avoid eating into your existing market? How do you keep the two markets separate, with both performing a useful role for sustainability? While it is clear that most, if not all, companies will have to practice elements of CE in the near future, if not already doing so. Finding new markets is priority. 

Lets look at one example. Many educational institutions use books of various sorts in each class. Once the year is over what do you do with the books? If they are to be re-used, one needs to find a new market. Hence, the value add is in finding such a market. Many Indian students use foreign authored books, and these are expensive. While Indian editions are available, even these are expensive, by Indian standards. Thus, for a foreign book seller, it would be best if the used books are collected and sent to other countries or other centres where they can be used, but which countries or centres would not buy the books otherwise, due to high cost. Hence, the book company will expand its market, but, obviously, cost has to be worked out. Innovation is the route to go. 

About the author:
R Jayaraman is the Head, Capstone Projects, at Bhavan's S P Jain Institute of Management & Research (SPJIMR). He has worked in several capacities, including Tata Steel, for over 30 years. He has authored over 60 papers in academic and techno economic journals in India and abroad. Jayaraman is a qualified and trained Malcolm Baldrige and EFQM Business Model Lead Assessor.

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