In depth - Light Commercial Vehicle

August 02, 2012

Amongst the selected industries with medium-complexity and medium-lifetime products, by far the largest is the automotive sector, with global yearly sales of USD 1,880 billion.1 Light commercial vehicles account for USD 240 billion of the total annual market for vehicles on the road.

For our business case and the subsequent calculations, we consider a representative light commercial vehicle with an average lifetime of roughly eight years in the European Union. In this period, the van goes through three distinct usage stages. New vehicles ex-factory are typically used for three to four years by customers that depend on high-quality, reliable transport. Average mileages during this stage of intense usage (e.g., as a delivery truck for postal and courier companies) are assumed to be 100,000 km p.a. In a second stage, vehicles change ownership when ageing and wear and tear increase the cost of maintenance as well as the likelihood of failures and downtime. Typical usage profiles include ownership by small to medium enterprises that use the van to haul products between depots and construction sites at a lower frequency. Average mileage in this phase is assumed to be around 50,000 km p.a. After this second stage, lasting four to five years, the van enters a third active usage period across the EU’s eastern borders or in Africa, goes to recycling, or is stored as a source of spare parts.

Looking at the technical and economic break points, only a minor fraction of components is responsible for the degradation in van performance. From a circular economy perspective, the question arises whether exchanging these components could extend overall the life of the vehicle or at least increase its productivity—which is why we modelled a scenario in which OEMs adopt refurbishment activities at scale. Conservatively considering current technical feasibility alone, we derived two levers to move the status quo towards more circularity:

Improving vehicle design and focusing on exchanging the ‘weakest link’ components, which wear out or are most likely to break first, allows for a second usage period at full performance (i.e., 100,000 km p.a.). In our example, six components are exchanged: the engine and suspension, bumpers, wheels, battery, and fluids. Design changes enable easier, faster, and less expensive replacement of these critical components, e.g., modularisation of the engine by changing the design to bracket mounting, widening the engine bay for easier access to connection points, and using quick fasteners instead of screw couplings or bolted connections.

Establishing professional refurbishing systems to capture economies of scale in the reverse supply chain—by investing in proper tooling and achieving higher labour efficiency through process standardisation, workflow optimisation, and specialisation. Such refurbishing centres would typically be located centrally within the OEM’s dealership and service network.

Although collection rates2 of vehicles at the end of their final usage period (deregistration) are already as high as ~71%,3 partially due to stringent EU directives, shifting volumes from recycling to refurbishing—as outlined in the transition scenario4—can still save substantial material inputs by roughly USD 8.8 billion (i.e., 15% of material budget) annually (Figure 12A).


In addition, this will save about USD 192 million in energy costs as well as reduce the greenhouse gas emissions of the linear supply chain by around 6.3 million tonnes. Such a scenario could be developed more aggressively by increasing the share of vehicles collected for refurbishment to 50% of total end-of-life vehicles.5 On an annual basis, a total of overUSD 16 billion of net material, labour, and energy savings could be achieved in Europe alone.

While this is a considerable economic saving from a macroeconomic perspective, the question remains whether the individual company could or should have an interest in pursuing this potential. Demand substitution of new production— by discounted remanufactured parts and high-quality refurbished vans—is a concern that is understandably expressed in the industry. This point is especially acute as market forecasts for light commercial vehicles indicate that, at least until 2015, sales will only increase moderately.6

A sensitivity analysis showing the impact of different discount and demand substitution rate combinations shows that, for light commercial vehicles, one could maintain similar or even achieve higher profit contributions from refurbished vehicles as compared with original sales of new vehicles (Figure 12B). This positive perspective suggests that companies have an arbitrage opportunity on refurbishment— if managed well. By marketing this new feature to customers and sharing the savings with users through reduced prices, they could also sharpen their competitive edge. OEMand sector-level initiatives to foster engineering education and R&D activities specific to circular production could further support wider adoption of such circular business practices.


The collection rate is defined as the percentage of total end- of-life LCV volume (in terms of weight) that is recovered through refurbishing, remanufacturing or recycling. Exports of vehicles to non-EU countries, landfill, and other non-accounted disposal are counted as not collected

2 Georg Mehlhart et al., European second-hand car market analysis, Öko-Institut working paper, February 2011; Eurostat, ELV waste database, 2011

3 In this scenario, 26% of total end-of-life vehicle weight is recovered by refurbishment, 5% by remanufacturing, and 44% by recycling. This implies that 30% of collected vehicles are refurbished. The discrepancy between rates as a percentage of total end-of-life weight and as a percentage of number of end-of-life vehicles stems from the fact that is it not possible to recover 100% of a vehicle’s weight through recycling or remanufacturing

4 In this scenario, 43% of total end-of-life vehicle weight is recovered by refurbishment, 4% by remanufacturing, and 32% by recycling. The difference between rates as a percentage of end-of- life weight and as a percentage of end-of-life vehicles is explained in the previous footnote

5 HIS Global Insight, Light commercial vehicles sales in Europe, September 2011

6 Euromonitor washing machine statistics, 2011; Statistisches Bundesamt, car statistics, 2009