But does it actually work?

July 30, 2012

Total cost of ownership (TCO) will increase.

Current washing machine manufacturers cite the potential problem that customers would be unable to participate in the continuous efficiency gains in energy or water consumption offered by new washing machines. Therefore, a long-lasting model could be less attractive from a TCO perspective. This concern would be highly problematic—were it not for the potential of leasing models. As we have shown in our net-present-value analysis, both washing machine sellers and customers can benefit from a model in which long-lasting machines are leased to customers—who then have the option of upgrading to a different lease model if a more efficient model emerges. Furthermore, efficiency gains often stem from innovation in the washing programme software or sensor systems, which can be easily upgraded. Doing this would provide a quick fix through which leasing firms and customers could inexpensively participate in these continuous efficiency gains.

Longer-lasting machines will substitute for new models and decrease sales.

As with any transformative technological change, a shift toward a circular economy would have winners and losers. It may well be that manufacturers of inexpensive washing machines, with high per-wash costs to consumers, would have to adjust to competing offerings of longer-lasting, more efficient models in a circular economy. That said, it should not be discounted that such ‘creative destruction’ also creates new opportunities—for instance, refurbishing and selling replacement parts for washing machines, or participating in the various aspects of the service industry that would be needed to support a circular washing machine business model.

Customers will not accept new, alternative contract schemes.

Some manufacturers argue that customers are used to purchasing household goods rather than leasing or renting them. Customers may avoid leasing contracts due to uncertainty and insecurity about financing agreements. While this may be true in the near term, there are myriad examples of users shifting to different ownership models. One case in point is the industry for short-term, inter-city car rentals, which has proven to be a resilient model that has enabled consumers to scale back car purchases in favour of less expensive and more convenient short-term rentals. Furthermore, transparency with regard to contract conditions and effective marketing of customer benefits (e.g., quality machines with hardly any upfront costs and easy collection) would help remove such concerns.

The financing of upfront production costs poses a financial risk to manufacturers.

In a leasing scheme, the producer faces a maturity mismatch between upfront production costs and future cash flow streams. Financing this gap from the company’s own funds could be a financing risk to a certain extent, yet typically these risks can be carried by financial intermediaries.

The end of Electrolux’s experiment with its new leasing business model shows that challenges may arise in the cooperation with business partners, which can hinder a new business model from becoming effective and profitable. Adopting more circular business models will therefore require skills in new forms of collaboration and alliance-building — but this, too, we see as eminently feasible, and indeed quite lucrative given the potential rewards.

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