Lead image by Flickr user Image Zen http://www.flickr.com/photos/imagezen/65199660/
In Europe, more households own washing machines than cars.1 While washing machines are far more standardised than cars in both their physical dimensions and the amount of material they contain (typically 30 to 40 kg of steel per machine), they vary substantially in price and lifetime. Customer segments range from the single- person household needing 110 washing cycles a year, to hotels and laundromats, which commonly run their machines for 1,500 to 3,000 cycles a year. When contemplating a purchase, customers have a wide range of choices among models and performance.
Although all washing machines have similar components, their longevity measured in washing cycles ranges from about 2,000 for entry-level machines2 to 10,000 for high- quality machines. The common break points are also well known: the motor, the pump, and the plumbing.
An economic opportunity with benefits for the material balance. The industry average for domestic washing machines is 250 cycles a year.3 Given that warranty periods are typically not more than one to two years, average users frequently have an incentive to buy the lowest-cost machine and get, on average, 2,000 washing cycles. With usage periods of less than 10 years in mind, customer groups with low usage intensity are inclined to opt for lower-quality machines. Yet, over the long term, high-end machines cost users roughly 12 cents per washing cycle, while low-end machines cost 27 cents per cycle. We can also show that the costs incurred by an average household using one high-end machine over a 20-year period are lower than if the same household uses a series of low-end machines to do the same number of washes over the same period.4
The trade-offs between high- and low- quality machines also have implications for material and energy consumption. Given similar material compositions and production processes, replacing five 2,000 cycle machines with one 10,000 cycle machine yields almost 180 kg of steel savings and more than 2.5 tonnes of CO2e savings.
These carbon emission savings could be partially offset by missed energy efficiency improvements that would have been more readily available if the household bought a new machine more often. It is therefore important that such gains—which are largely driven by optimising temperature, spin rate, and washing time—are also accessible to users of ‘built-to-last’ machines. Luckily, energy efficiency-enhancing features such as wider ranges of programmes, automatic load detection, sensor technologies, and auto dosing systems are usually a matter of software, electronics, and sensor systems— components that could be reintegrated into machines post production without substantially changing their structure.5 Providing updating and upgrading washing machine programmes after the first sale can thus be a way to offer energy efficiency improvements without regularly replacing the whole machine.
Changing the business model to gain against the low-cost segment. To realise the positive economic and ecological implications of durable washing machines, OEMs could consider offering high- end washing machines in a usage- or performance-based model. This could enable average users to profit from low per-cycle costs of high-end machines within a shorter period of time. A five-year leasing agreement would remove the high upfront cost barrier for customers and distribute costs over a defined period of time.
In a scenario where a 10,000-cycle machine worth USD 970 (before VAT and retail margin) is leased over a five-year period (11% interest rate) by a family (500 cycles p.a.), both the customer and the manufacturer could improve their economic situation.6 Over the implied lifetime of 20 years, the machine could be leased four consecutive times with a certain degree of reconditioning in-between (reflected in reconditioning costs of USD 105 after every lease, which include transportation costs, quality checks, cleaning and cosmetic changes, as well as software and systems upgrades).7 Independent of the time horizon (5, 10 or 20 years), the value that both the user and the manufacturer derive from the deal is higher than what they would get from a conventional sale
In a way, such leasing contracts remove inefficiencies in the market that stem from a maturity mismatch between the typical time horizon a household has when buying a machine and the time horizon high-quality machines are built for. The leasing scheme transforms a long-term investment in a 10,000-cycle machine into multiple cash flows and the right to use the machine for a certain period of time. This results in an economic win-win situation and yields positive material and energy implications through prolonged lifetimes of the products.
Combining benefits of new business models with effective refurbishment. As leasing models give manufacturers strong control over products over the life cycle and result in high and stable product return rates, they facilitate the recovery of value embedded in those collected products. End-of-life washing machines are typically recycled, yet it is estimated that only up to 10% of collected8 machines currently get refurbished.9 In many cases, old washing machines are intact and would be reusable following the replacement of some components (e.g., motor, bearings, front panel, printed circuit board, or pump) and some cosmetic changes. The cost for collection, transport, the refurbishing process, and other expenses is currently estimated to be around USD 170 per machine.10 The material cost of replaced components could amount to as much as USD 300, but depends on the machine’s quality segment as well as the number of replaced parts. This could make refurbishment economically viable in some but not all cases.
Combining new leasing models with refurbishing activities can be a particularly interesting opportunity. In a situation where circular activities would be pooled and replacement parts prices would not be subject to the high trade margins currently observed, material costs in the refurbishment process could be reduced by up to 40%. This would make refurbishment more attractive and foster the idea of (multiple) leasing systems for high-end but also other kinds of washing machines, as their lifetimes increase with effective circular treatment.
A comparison of costs for new and refurbished machines indicates that material input costs per product could be reduced by up to 60%, net. From an industry perspective, a transition scenario in which the collection rate increases from 40% to 65% due to adoption of new leasing models, and 50% of collected machines get refurbished (and the other half gets recycled) would generate net material cost savings of more than 12% of total industry input costs. In an advanced scenario, alternative ownership models, such as leasing or performance-based arrangements, could be brought to higher scale with specialised intermediaries entering the market.
Aligning incentives between customers and manufacturers regarding contract financing and duration is essential to make alternative ownership models work. In an advanced scenario with proliferation of alternative business models, an increase in manufacturer control over machines in circulation could be reflected in collection rates of up to 95%. This could be further supported by collaborative collection and treatment systems, which would improve the entire reverse supply chain. In such a scenario, the net material cost savings associated with refurbishment and recycling could be around 18% of total industry input costs.
Shift to performance-based contracts already happening. Many ideas have already been put forward to exploit the economic and business opportunities outlined above.
In Northern Europe, Electrolux offered customers per-wash options based on smart metering. The manufacturer installed its high-quality washing machines in customer homes, connected to a dedicated measuring device installed at the power outlet. This enabled tracking of not only the number of washing cycles but also the programme (e.g., cold versus hot wash). This business model was discontinued after the utility provider discontinued the smart metering. Without this element, Electrolux was unable to assess customer-specific usage and charge the customer accordingly. Further, customer acceptance was rather low; the advantages (e.g., free servicing, easy trade-in for upgrades, high-end machines with hardly any upfront costs) were not marketed adequately.11
ISE, a specialty washing machine company producing professional washing machines (10,000 to 12,000 cycles) in sizes comparable with domestic models, collects used heavy-duty washing machines from hotel or laundromat customers. After refurbishment, it sells these machines to the domestic market at a discount price.
Several market participants have discovered the potential of offering leasing contracts for washing machines to commercial users as well as to private households. Specialty leasing providers such as Appliance Warehouse of America offer a wide range of products and contract specifications to meet customer demands. Home appliance manufacturers such as Bosch Siemens Hausgeräte provide leasing to customers under a ‘full service’ scheme, which includes warranties that cover the whole contract time frame.12 This provides the customer not only with increased flexibility in terms of timing but also with better service levels and added convenience. In such a setting, third-party financing companies may take up an intermediary role, matching manufacturer and customer incentives and handling administrative tasks.
All of these already existing models have illustrated potential for increasing material productivity. When explaining why these models would not work, manufacturers typically cite a number of concerns – click here the continue reading
1 Euromonitor washing machine statistics, 2011; Statistiches Bundesamt, car statistics, 2009
2 A sub-segment of entry-level machines is built for only 800 to 1,000 washing cycles
3 Ina Rüdenauer et al. , ‘Eco- Efficiency Analysis of Washing Machines’, Öko-Institut working paper, November 2005; Rainer Stamminger et al., ‘Old Washing Machines Wash Less Efficiently and Consume More Resources’, Hauswirtschaft und Wissenschaft, 2005, Vol. 3; expert interviews
fn4. To perform this analysis we calculated a net present value (NPV) for high-end versus low- cost machine purchases (the 20- year NPV for a family using 500 cycles per year is USD -1,714 when purchasing a low-cost machine versus USD -1,158 when buying a high-end product). In this context the net present value is the sum of a customer’s discounted (8% discount rate) cash outflows for washing machine purchases over a specific time horizon
5 Ina Rüdenauer and Carl-Otto Gensch, Einsparpotenziale durch automatische Dosierung bei Waschmaschinen,Öko- Institut working paper, June 2008; Ina Rüdenauer and Rainer Grießhammer, PROSA Waschmaschinen, Öko-Institut working paper, June 2004; Panasonic company website; Samsung company website
6 This also holds when a third party (e.g., bank) acts as an intermediary and charges an additional 100-200 basis points. How the economic improvement potential is divided between manufacturer, customer, and a potential third party eventually depends on the individual contract and existing market dynamics (e.g., purchasing power or competition)
7 Underlying machine prices for leasing contracts refer to product value at given points in time under linear depreciation over expected lifetime of 20 years (=10,000 cycles)
8 In Europe, ~40% of large domestic appliances are collected in official WEEE channels. It is estimated that much more than that is collected via ‘unofficial’ channels. Source: Eurostat, WEEE key statistics and data, 2011; CECED, Joint position paper on WEEE recast second reading, CECED position paper, July 2011
9 Jaco Huisman et al., 2008 Review of Directive 2002/96 on Waste Electrical and Electronic Equipment – Final Report, United Nations University working paper, August 2007; Adrian Chapman et al., Remanufacturing in the U.K. – A snapshot of the U.K. remanufacturing industry; Centre for Remanufacturing & Reuse report, August 2010
10 This is in line with the assumed cost for reconditioning in the leasing process
11 David Pringle, ‘Electrolux offers free washers to homes that get wired’, Wall Street Journal Europe, February 2000; Timothy C. McAloone and Mogens Myrup Andreasen, Design for utility, sustainability and societal virtues: developing product service systems, International Design Conference working paper, 2004; Jacquelyn A. Ottman et al., ‘Green market myopia’, Environment, 2006, Vol. 48 (5)
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