Ep 220: From niche to necessity: the circular economy's strategic moment

[00:00:00.000] - Julia Binder What we're witnessing right now is that these disruptions are less and less episodic. What they become actually is that they become structural.

[00:00:06.960] - Manuel Braun I believe somehow that economic power is returning to the physical world and the physical realm.

[00:00:14.320] - Julia Binder Circularity is not a sustainability niche conversation anymore, but it's a key to a resilient and strategic business that wants to continue producing and selling their product.

[00:00:26.200] - Seb Egerton-Read Welcome to the Circular Economy Show. I'm your host, Seb. In today's episode, we're exploring how disruptions to the economy are increasingly becoming structural changes, how the circular economy is a central response to that mix of challenges, and why this requires a reframing from an impact case to a business case.

[00:00:45.720] - Seb Egerton-Read To help me do all that, I'm joined by two guests, Julia Binder and Manuel Braun. Julia is a professor of transformation at the IMD Business School, and Manuel is an entrepreneur who works with leading circular economy networks, innovators, and startups, and together, they authored the book, The Circular Business Revolution.

[00:01:07.560] - Seb Egerton-Read Okay, welcome to the podcast, Julia and Manuel. Julia, I wonder if I could ask you this question first. There's a lot of conversation in the world about disruption, and that's very prevalent in our news, whether that's relating to resource wars or real wars or technological disruption. The word disruption implies that something will continue after that disruption. What I see a bit more increasingly in the commentary is people are starting to talk about change. I wanted to ask you a question first up: what has changed, or what is changing in your view?

[00:01:43.600] - Julia Binder That's such a great question, Seb. I think you're right. When we look at the news right now, it's full of disruption. In many ways, if you ask in the past, your parents and grandparents, there's always a focus on disruption. But I think you're really pinpointing to something very important. What we're witnessing right now is that these disruptions are less and less episodic. What they become actually is that they become structural. I think this is the big, big change that we're witnessing.

[00:02:07.720] - Julia Binder For the longest time, we all believed in a global free trade, global economy, very globalised. Actually, one of the points that was holding us back in circularity was that it's extremely difficult to realise the potential of circularity in a fundamentally globalised economy where every single part is shipped 14 times around the world.

[00:02:25.460] - Julia Binder Right now, I think what is really big in terms of the disruption is that in the sustainability community, we always thought at one point there will be a big disruption coming from a natural disaster. Looking at the planetary boundaries, we're not too far off that one as well. But right now, where the biggest disruption, and that was more or less unexpected, is coming from is this disruption of the global economy.

[00:02:48.440] - Julia Binder I think here, what are the big changes that we're seeing right now is, A, this disruption of global free trade. I think everyone listening will now immediately think of Trump. Of course, Trump plays a big role if you think about how he has weaponized trade and how all the tariffs and taxes are basically really redefining relationships in real-time. But it's not just Trump.

[00:03:08.840] - Julia Binder If you think about the signals we're getting from China when it comes to restricting the export of rare earths, I think this is where we're seeing much more of this structural change whereby what you're seeing right now is that the trust, which is the biggest currency in a globalised economy, that trust is basically breaking in real-time. Which means that if we cannot rely on our partners, whether it be China or the US, or who else. It basically means we need to rely much more on friend-shoring. It means that we need to rethink where we get access to resources. Suddenly, this whole topic of circularity it's not a sustainability niche conversation anymore, but it's a key to a resilient and strategic business that wants to continue producing and selling their product.

[00:03:50.470] - Julia Binder I think this is the biggest, biggest change that we're witnessing right now that moves this entire conversation from a little green niche to something that really has business relevance and is on top of the board's agenda every day.

[00:04:02.540] - Manuel Braun Maybe to add to that, with taking a step back, I believe somehow that economic power is returning to the physical world and the physical realm, I mean, for the last 20 years, it felt like software is the dominant way of how to build business. Also, software is eating the world. I think it's a standard term in the tech scene. This is challenged right now.

[00:04:30.060] - Manuel Braun If artificial intelligence is turning software into an abundant input, potentially, what is becoming scarce again, and what we see currently is hardware, is infrastructure, it's energy supply, energy systems, materials, manufacturing capacity. This is showing us that we need to treat, I think, resources with a different value in a long-term perspective.

[00:05:00.000] - Julia Binder I think that shift is big, right, Seb? Because this means that physical resources, which we have taken as, let's say as, a given, as an easy one, we didn't even really question where it comes from. We just took it as something that we say that's part of our business model. But it's not a strategic advantage. This is becoming now a core strategic advantage, whether or not you have access to resources. That is fundamentally reshaping the discussion we're having.

[00:05:23.440] - Seb Egerton-Read I think what's interesting about what you're both saying there is, in many ways, historically, that globalisation has not been specifically attached to the notion of linear economy. But of course, what a linear economy tries to do is produce things as cheaply and quickly as possible. That has been part of driving the outsourcing of manufacturing, for instance. Something I read that you guys have published recently is that this isn't just physical resources. There's also a digital battleground that has a similar taste to it.

[00:05:54.620] - Manuel Braun Building on, I think, comment earlier, currently, I think we see an unprecedented growth when it comes to the digital infrastructure and the data centres that we need to power the AI revolution. That is a very, I think, practical environment where we see right now the challenges, but also the value of circular strategies. Maybe let's unpack that a little bit.

[00:06:21.780] - Manuel Braun When we look into a data centre, and we've recently done some research on this, you will basically see all types of critical minerals in there. When you look at the EU critical mineral list or strategic mineral list, you will find all of them in a data centre.

[00:06:41.820] - Manuel Braun Increasingly, we see a shortage of supply on many of these minerals, but particularly also the components. Very practically, looking into GPUs, which are very limited in supply and very concentrated in the supply infrastructure, prices significantly increasing.

[00:06:59.140] - Manuel Braun Similarly, CPUs, if you look at the stock price of Intel, it's back at a high that nobody expected half a year ago. This is a clear figure showing that we are going into a supply crunch in that environment. At the same time, you see a lot of value by pulling circular strategies.

[00:07:22.520] - Manuel Braun I remember a conversation that was recently happening at one of the workshops of the foundation, actually, in Stuttgart, the Critical Minerals Mission. There were colleagues from the big tech companies saying that they are increasingly building circular strategies into that environment, not just out of a sustainability motivation, also because it's just a good business to save cost and to actually de-risk that tech ecosystem.

[00:07:50.540] - Seb Egerton-Read It is a big disruption to companies, right? I think I've read somewhere that a smartphone, for instance, might have sourcing of parts from 40 different countries as part of its supply chain. That context you've laid out is a huge… For any board-level executive right now sitting in, trying to figure out what to do in the world is a huge disruption. I really liked, Julia, how you put that, that somehow there's a moment potentially for circularity in that mix.

[00:08:15.850] - Seb Egerton-Read I did want to ask one question, maybe to you, Julia, in the first case, but do chip in, Manuel. I'm a pro-collaboration, pro-global world person. From my interactions with the two of I sense you are, too. Is it a critic of what we just said might say that are we arguing that effectively linear equals globalisation and circular equals protectionist or nationalist even? What do you say to that?

[00:08:49.200] - Julia Binder I would agree that I'm also much more of a globalist in this and that I take the perspective of we want to collaborate in all the challenges that we're seeing we cannot do in a protectionist mode.

[00:08:59.420] - Julia Binder That as an important prerequisite for what follows. But I think what is important to understand is in the current very globalised model, whereby we externalise social and environmental costs, and there's no price tag on any of these, a circular economy is very difficult to implement. It gets very difficult if you have some, let's say, companies that have 60,000 suppliers.

[00:09:21.980] - Julia Binder If that's the case, and they're all over the world, then basically it becomes extremely difficult, if not impossible, to, in whatever way, close to loop. I think what we need is much more of regional ecosystems. This doesn't mean that now Germany is only working with Germany and France. It means what are partners to where it makes sense, where are some of these loops that we want to build?

[00:09:43.860] - Julia Binder Not all of this is regional, but I think we need to have smaller supply chains, less fragmented, because in a completely globalised, fragmented economy, the potential of circularity is very, very difficult to realise because then it's not traceable, not trackable. If everybody does whatever they want, we really lose oversight.

[00:10:01.450] - Julia Binder I think we need to find new ways of collaboration. I think there's still some value in understanding who is good in what. But if you think about it, we don't really have global collaboration in the first place. We have extreme dependencies. What was actually built in is we have very few countries who dominate the global economy.

[00:10:19.120] - Julia Binder That's not an ideal version of collaboration for me either. I think in many ways, yes, globalisation has brought a lot of benefits to many countries, and it also has created a lot of problems. I think we should not tell the story very one-sided and say, yes, globalisation benefits everyone. The reality is it doesn't. It externalises quite significantly.

[00:10:39.460] - Julia Binder I think right now what we're having is maybe this window of opportunity to redesign the economy in a way that makes sense for more of us. When I say makes sense, I really mean how can we create much more of these, whatever localised loops it is, and how can we really be sure that we don't have these massive dependencies on just a few actors.

[00:11:02.340] - Seb Egerton-Read I really liked what you said earlier as well, Julia, that it's good to say, were we ever in a truly, genuine, globalised economy? Also, who benefited from that? I wanted to ask you this, Manuel.

[00:11:16.080] - Seb Egerton-Read I'm thinking back to that executive who's trying to navigate this landscape and navigate some of the challenges, the smartphone example. There are some positive drivers as well. We're seeing policy momentum that is directly incentivizing certain circular business models. Or certainly, if you're an organisation looking at it, you should be paying attention.

[00:11:35.940] - Seb Egerton-Read We're seeing customer demand, demand for local jobs. There are certain positive drivers if you're trying to execute a circular business model that you might latch onto. I wonder if you could say a little bit about the positive side of this disruption.

[00:11:52.340] - Manuel Braun I think, on a positive side, a couple of observations. First of all, we see that increasingly, partnerships become really a source of value creation. When it comes to material, collection, recovery, all of this, that's often something where you cannot do all by yourself. You need to find smart ways to partnering up as an industry, as an association, as a cooperation. I see more and more examples where companies are able to pull off such ecosystems and build a strategic advantage from it. That's number one.

[00:12:35.240] - Manuel Braun The second observation I have is that those organisations which are able to be extremely customer-focused, maybe even outcome-oriented, are the ones who are much more resilient and less affected to these risks. I think that's also a positive signal.

[00:12:50.740] - Manuel Braun I always like that example of Hilti, the tool manufacturer, who moved over the last 15 years, the model from selling power tools to running fleets of power tools as a service. That's obviously something that is extremely close to the people on the construction site, what they need, offering flexible demand. That whole system, again, makes sense.

[00:13:14.940] - Manuel Braun Then maybe a third one. What I found interesting is actually at the IFAT last week, the world's biggest trade fair, actually on waste management and also circularity, actually. There was an interesting publication being launched, the circular economy startup monitor.

[00:13:39.080] - Manuel Braun They looked into actually entrepreneurial world, like new companies being founded in the space, and what was interesting in their data, it's from the Circular Republic, a network here in Munich. They found that, actually, from looking into all investments, venture capital that goes into circularity, more than half of that is placed in Europe.

[00:14:02.040] - Manuel Braun I think we might see actually here also an opportunity where some of the risks that we are facing at the pressure points turn into an economic opportunity. We're able to pull off new companies that are able to grow, provide new sources of jobs, and can be also then global leaders in that space.

[00:14:24.200] - Seb Egerton-Read We've talked about how these disruptions are effectively becoming structural changes in the economy. We've talked about how the circularity is almost a central answer to the challenge of the time. Something I've seen you both write about is this notion of the competitive advantage that circular economy means at the next level down.

[00:14:46.200] - Seb Egerton-Read Julia, I wanted to ask you first about, I was reading an article that you co-authored recently that talked about the material advantage that circular economy offers. I wonder if you could say a bit more about that and a bit of the reframing of what does it mean think about it, moving from an impact case to really a business case.

[00:15:04.980] - Julia Binder Absolutely. I think a lot of this builds on what Manuel just said. The big reframe, or the big shift, is that a lot of how we talked about and thought about circularity was around the R-levers, right? 7, 9, how many? Reduce, refuse, reuse, recycle.

[00:15:20.260] - Julia Binder They're extremely important, but oftentimes far from the business reality of the executives that you talk to, meaning that they can totally see why this is better for the environment, but it's still is a disconnect to what is my concern Monday morning?

[00:15:34.340] - Julia Binder Basically, what we differentiate is licence to operate versus licence to innovate, which is pretty much what you outlined before. One is the more, how do we better manage risks? The other one is: how do we actually use that as a way to build a strategic advantage and to really create value that goes beyond what we're currently doing? If you think about the licence to operate lens, this is about we have a lot of shifting regulations.

[00:15:58.020] - Julia Binder Actually, it doesn't help that it has become more unpredictable, that we cannot rely on a regulation being launched to actually being executed, and so on. It's volatile. It's difficult to manage for business leaders. How can we build a muscle here that we are better able to accommodate these changes? Then it's about how do we actually reduce risks. We discussed a lot of supply chain risks that we're currently seeing.

[00:16:18.640] - Julia Binder Again, I don't believe they will go away if the Strait of Hormuz is open. This will be much more structural. There is much more volatility in the supply chain. How can circularity provide an answer to that? How can we actually become more resilient? I think resilience really means also I want to have suppliers where I know that I get the materials from when I need them. It becomes all of this wasn't in the past a competitive advantage and really becomes a competitive advantage now.

[00:16:44.240] - Julia Binder If you then now shift lenses, how could circularity really be a value creation driver? We talked about relationships. I think one of the things that I always say is one of the problems of sustainable innovation, circularity, was often that we said, "Hey, here, consumer, you have a sustainable or circular product, but you need to somehow forego some personal benefit, whether it costs you a lot more, the performance is not as I expect."

[00:17:08.220] - Julia Binder We oftentimes expect it to get a worse-performing product for something where I have to trade on my personal benefits. I think what we're seeing with the more advanced companies now in circularity is that they actually use it to create better-performing products.

[00:17:24.360] - Julia Binder Oftentimes, we look at servitisation as one of the vehicles that actually creates a complete different customer relationship where it's not a one-off sales, and I never see my customer again. But basically, I really create over repair and remanufacturing several touchpoints that really lock in customers in a positive way.

[00:17:41.100] - Julia Binder I think this is where we then also create an incentive to have to reuse materials, then I have a higher return on my investments in these materials, and I can look into new diversified revenue pools, for instance, by adding repair services and others. I think it really opens up an entirely new spectrum and playing field to use circularity much more strategically.

[00:18:02.920] - Seb Egerton-Read Manuel, you've already shared a couple of examples from the tool manufacturer, for instance, that's now offering a fleet of services. But in what ways is that competitive advantage coming to life in some of the industries that you are working most closely with at the moment?

[00:18:18.960] - Manuel Braun Yeah. I think it's coming back to how do you look at the business case of circularity at the end of the day. That is the core of discussion in the current reality of the companies that try to build and scale this. One of the key messages, I think, from building what Julia said is here is that, yes, there are direct value pools like revenue drivers, cost-saving opportunities, but it's also very critical to look at indirect value drivers.

[00:18:48.060] - Manuel Braun Things like loyalty that you are able, for example, in a model where you offer a resale of a product, you have the opportunity to build up as a loyalty ecosystem. I buy back the tool from you, Seb, and you stay in my ecosystem. If I give you a good offer, the tool is being refurbished, I sell it to Julia, who is then happy that she might be able to afford that tool. It's maybe even a new customer group. It's a way to expand a market segment.

[00:19:23.460] - Manuel Braun These are arguments which are important to look at, and not just short-term profit only, but also the wider indirect value drivers like loyalty and derisking. The risk element is an interesting one, where my observation is that it's often forgotten.

[00:19:42.900] - Manuel Braun But a couple of examples which I find just helpful to think it through. If we look into packaging, I find that very interesting. I've been recently in a conversation with a packaging company from the Nordics. They strategically decided to actually get into recycling. They bought the recycler, and for part of the raw materials which they need, they said, "Okay, we do the recycling for ourselves." I think like 20 to 30% of the volumes, which is more costly for them to do than to buy it on an open market. But they know that the prices in the markets are extremely volatile.

[00:20:20.300] - Manuel Braun What we saw now, when the Strait of Hormuz was closed or still is that some prices in the market switched, to where suddenly recycled content becomes cheaper than the virgin raw material. Suddenly, you have a strategic advantage in that situation. At the same time, you have a long-term security on the prices, versus dependency on short-term volatility. I think these are very tangible examples where it's important to consider indirect value and take a long-term perspective.

[00:20:51.360] - Seb Egerton-Read There's something about that, and you were describing as well, Manuel, I guess, when you were talking about thinking about the business case a bit more holistically: how do you have that conversation with a CFO? If you're that sustainability professional, circular economy professional, whichever department the strategy exists within, trying to join these dots together, you've got to start figuring out what it really means to make that business case. It's not going to be the exact same metrics or numbers as you would have made the business case in a linear economy.

[00:21:22.240] - Manuel Braun Yeah, just that spot on, Seb. I think I always say, let's talk about numbers earlier. That's my observation. It always helps to understand the unit economics early on, and this then actually forces the right conversation with the right people to actually then talk about also the indirect value drivers, as we just did. If the margin on the resale product might be lower than on a new product. Well, I mean, for many, that is already a difficult situation. It might dilute your margins.

[00:21:53.530] - Manuel Braun You need to look at it broader. What are the other benefits to that? Talk about also the quantified evidence to that. I think that is a general observation that we need to find ways to do it easier. I think also, as ambassadors of this topic, help in that context and to really scale it.

[00:22:14.680] - Manuel Braun Personally, I'm always somebody who takes the glass full perspective. I see so many good conversations happening and lots of momentum in the topic. We didn't even start to talk about younger generations and how they might be actually a driver for this. But there's also a way of looking at this with a little bit of a glass-empty perspective, because for many of these things, which have good pilots and maybe even good initial business case, to really scale it, it might need a lot of more commitment, a lot of more support, also policies in place.

[00:22:50.480] - Manuel Braun I realised that last week when I was at a design conference, and ultimately, design is such an important driver. Many of the designers were frustrated because they didn't have the mandate to actually open up some design decisions which were already locked in. It's just one of the practical examples. I went out of that meeting, and I thought, okay, long way to go to really scale a circular by design.

[00:23:14.220] - Seb Egerton-Read You hit on there, Manuel, what I wanted to finish on just as a thought, because I've worked with the Ellen MacArthur Foundation for 12 years, and it feels like for 10 of those years, we've been talking about the need to scale. It's almost a constant. It's almost become like a cliche, almost, to talk about the need to scale certain solutions.

[00:23:36.180] - Seb Egerton-Read You're hitting on the challenge of that, even when the case feels actually very compelling and very strong, and even when some of the momentum and wins, both on the risk and disruption end and on the opportunity end, feel quite compelling. I don't know, I wanted to finish by asking maybe you in the first case, Julia, really, what can executives and organisations do differently, even tomorrow, to start on that journey?

[00:24:01.100] - Julia Binder Yes, and I think that's really a critical question here. Maybe just one reflection on the scaling challenge. I think it really fundamentally challenges how we scale in business. Because oftentimes, the typical logic is let's build a little prototype, and we'll just scale it up. This works super nice for software and all of this, and it doesn't work for circularity. Why? It goes back to what you mentioned in the beginning, Seb, because we need to think much more in ecosystems.

[00:24:24.620] - Julia Binder Suddenly it's not just me and my little company or even my big multinational company, but I need to think upstream, downstream. I need to involve partners, industry, and so on. I think this makes scaling more risky, more difficult, but eventually also more powerful. We wrote a case on Decathlon, for instance, which was exactly about that.

[00:24:43.160] - Julia Binder How do we scale business models that may work in little bits and pieces across a multinational, which I think is super intriguing and interesting because you have different cultures, different infrastructure, different regulations? I think there are fundamental challenges, but it's not impossible, but it requires us to have a different scaling logic. Now to your question, what could someone do already tomorrow?

[00:25:03.820] - Julia Binder I think it really starts by understanding your dependencies and opportunities. Some companies that I've now recently been on panels in all of it with, for instance, Apple or PMI, even, started to have a critical material impact assessment to really say, where do we actually have a lot of dependencies, but vice versa, also a lot of opportunities to really build an advantage into our supply chain.

[00:25:27.440] - Julia Binder Again, it's so interesting because we're suddenly talking. It's about strategic advantage in the supply chain, which fundamentally wasn't part of the discussion. We always said that's pretty pre-competitive, and right now it's becoming core of your competitive advantage. I think it's about seeing better.

[00:25:43.650] - Julia Binder If you don't know where you have the biggest vulnerabilities, if you don't know where you have the biggest dependencies, if you don't know where you have maybe hidden risks, you can also not capture the value from doing it differently. I think it's really about creating this insight, and then it's really elevating conversation. Elevating the conversation is where who would be the people you need around the table? This starts internally. Who internally-CFO, whoever-do I need at the table for this conversation?

[00:26:10.580] - Julia Binder Then again, how do I build this ecosystem, which is not something you do tomorrow in one meeting, but how do I build a superior ecosystem? Because eventually this is where in the future, we will have not Apple versus Samsung, but it's Apple with its superior ecosystem versus Samsung in its superior ecosystem. If we don't design this now, then actually we will have vulnerabilities and disadvantages tomorrow.

[00:26:34.000] - Seb Egerton-Read Manuel, you said you're a glass half full person. Do you see enough momentum in that direction in some of the places that you're deeply engaged?

[00:26:43.000] - Manuel Braun I believe that there is a good momentum and that this is changing. My practical observations are, particularly, I've been into some of the workshops recently where we try to initiate partnerships, new forms of partnerships, new forms of collaborations. I realised there is incredible openness by many companies to do this.

[00:27:06.560] - Manuel Braun What can you do? I think tomorrow, my response would be to force yourself to take a long-term perspective. Many companies or countries that do that have a strategic advantage. I believe that, particularly for scale and circularity, taking collectively a long-term perspective is key.

[00:27:26.960] - Manuel Braun Because for many material flows, it's not a technical challenge. We can recover that material, for example. We know how to refurb products. We know how to reuse them. We have good engineers. It's not the technical challenge. Often, it's more the question of a long-term commitment by the right companies. Offtake commitments, commitments into investments to really build this together. Taking a long-term view collectively is, for me, the critical unlock.

[00:27:57.760] - Seb Egerton-Read Manuel and Julia, thank you so much for joining us on the Circular Economy Show. I'm sure we'll have you back on again in the future.

[00:28:05.920] - Seb Egerton-Read It's critical to understand your dependencies and opportunities, to elevate the conversation to a CFO or other boardroom representative, and to understand and think about your ecosystem through a long-term view.

[00:28:19.780] - Seb Egerton-Read Thanks for listening to this episode of the Circular Economy Show. Manuel and Julia do run a course together at the IMD Business School called Creating Value in a Circular Economy for senior managers and other leaders. We'll share the link to that in our show notes for those of you interested to explore more. We'll also share links to their book, and the articles we mentioned, and the startup landscape that Manuel talked about. Until next time.