RETHINKING THE LUXURY AUTO BUSINESS MODEL IN BRIEF We propose 3 strategies luxury auto makers can use to reduce waste and improve profitability, all while helping conserve the environment. As a mature, high-cost industry, luxury auto makers stand to enjoy considerable gains from these strategies. STRATEGIES FOR A CIRCULAR ECONOMY IN THIS REPORT Rethinking the Luxury Auto Executive Summary....................................1 Business Model by Mark Esposito, Jonathan Xu What is a Circular Economy?..................2 Current state of the luxury auto Executive summary In the illustrative case of Mercedes Benz, industry..........................................................2 implementing these strategies could The automotive industry can benefit from increase profits by up to nine times within Current business models…………..............3 a radically different business model, one five years. that involves less waste, higher customer Opportunities for a Circular Economy loyalty, and significantly improved profits. What is a Circular Economy? Strategy..........................................................4 In this report, we propose strategies luxury automobile makers can implement that A circular economy is an economic system Strategy 1: Engage in more closed- can revolutionize their business. Instead of where companies keep resources in use for loop recycling……..................................4 selling cars for a one-time profit, as long as possible, extract the maximum manufacturers should switch to a service- value from them whilst in use, then recover Strategy 2: ‘Rent instead of sell’ based long-term lease business model. and regenerate products and materials at business model….…….....................…….4 1 Instead of losing touch with customers the end of each service life . This means after the initial sale, manufacturers should that firms design and manufacture their Strategy 3: Lengthen product collect back used vehicles years later to be products in a way that is recyclable and usability....................................................7 remanufactured into new vehicles. These remanufacturable into new products. For are examples of Circular Economy example, instead of discarding a Significantly increased profits with the new business model..................................7 strategies (explained in the next section), smartphone after four years of use, it is whereby manufacturers efficiently recycle returned to the manufacturer, Implementing a Circular Economy and remanufacture their products without disassembled, and made into a new model. Strategy: Final Considerations................8 sacrificing quality. Ultimately, this leads to According to the World Economic Forum, a more sustainable business model and a smartphone made this way could enjoy Conclusions..................................................9 environment. Circular Economy strategies could help firms dramatically increase A circular economy enables Appendix....................................................10 profits while conserving environmental the decoupling of growth resources. from resource constraints RETHINKING THE LUXURY AUTO BUSINESS MODEL 2 50% lower production costs per device 2. A increases per-unit profits while reducing The positive news is that, at an industry circular economy enables the decoupling the need for firms to continually increase level, approximately 95% of a vehicle’s of growth from resource constraints, partly manufacturing and sales force capacities. material content currently is recycled, by insulating firms’ cost structures from reused or used for energy recovery, volatile commodity prices. Current state of the luxury according to the Automotive Recyclers Association 13. This is done in what is 3 auto industry Businesses can follow three approaches typically described as the open-loop to implement a Circular Economy strategy: The global luxury auto industry generates recycling method where end-of-life vehicles are professionally processed by 1. Practice more closed-loop recycling. approximately US$200 billion a year in 7 recycling firms. Each year, the steel This means adopting self-sufficient annual sales , and is often characterized industry recycles more than 18 million tons recycling processes and using recyclable by four brands, namely Mercedes Benz, of steel from cars that are no longer fit for materials that maintain their quality BMW, Audi, and Lexus. Collectively, these the road. This is equivalent to nearly 18 throughout recycling processes. Closed- brands account for more than half of million new cars. Greenhouse gas loop recycling is more preferable because luxury vehicle production and sales, emissions are reduced by over 30 million allows a product to be recycled back into producing approximately 5 million vehicles metric tons per year. Every ton of new steel itself. In contrast, open-loop recycling per year for combined sales of almost 8 made from scrap steel conserves 2,500 indicates that it can be recycled into other US$160 billion . Traditionally, the industry pounds of iron ore, 1,400 pounds of coal, types of products, and is commonly has focused its efforts on quality and 120 pounds of limestone 14. referred to as downcycling. Whenever manufacturing and prestige marketing, Manufacturers build new tires with 10% economically feasible, closed-loop two effective levers that have helped justify recycled tire rubber material. Recycled tire recycling is always more preferable to the higher retail prices that these vehicles 4 command. However, as the industry rubber is also used in brake pedals or floor open-loop recycling . 15 continues to be challenged by rising raw mats . Metals such as steel or copper material prices, net profit margins have from old cars are melted down and reused Closed-loop recycling does been eroded under difficult operating for new consumer products, building not imply a degradation of conditions 9. construction, or put back into the product quality. production of new vehicles. According to the New York Times, the estimated average lifespan of a car is 13 2. Rent, instead of sell, products. This years 10. Drivers, however, keep a new car On average, a car lasts 13 means that business charge customers a on average for only 6 years, according to years. Drivers, however, keep fee to use their products and services. In Autotrader, the largest online marketplace a new car for only 6 years. return, customers enjoy greater peace of for US car transactions 11. mind and convenience, while businesses reap improved profit margins. Such an Among BMW, Mercedes, and Audi cars arrangement significantly reduces listed on Autotrader, only 30% of them Typically vehicles in North America are unnecessary consumer waste, and were 6 years or older 12. This potentially composed of approximately 20% post- promotes product longevity 5. suggests that older luxury vehicles are consumer recycled material by weight. either not being resold frequently or are Everything from old carpet to blue jeans 3. Offer ways to lengthen and widen the being prematurely retired by their drivers. may end up in a new vehicle 16. Auto use of products. For example, recyclers remove parts such as engines, manufacturers can establish product transmissions, doors and bumpers for recycling, refurbishment, and replacement reuse in other vehicles. Other parts that programs which engage with customers can also be remanufactured include directly. By increasing the points of starters, alternators and water pumps. customer contact, firms have more Batteries, catalytic converters, tires and opportunities to improve customer some plastics are removed and their engagement, brand loyalty, and the profit materials are recycled into new products 17. margins. In Europe, governments have typically If manufacturers promote excessive been highly supportive of environmental longevity of their products, does this protection laws. In 2015, the legally always entail a reduction in profits over the required recycling rate for end-of-life long-run? Not necessarily: by vehicles, components and materials was implementing the ‘‘rent instead of sell’’ raised to 95 % overall recovery (85 % reuse business model, manufacturers can and recycling of materials) 18. mitigate reduced product turnover with Based on research from American Recyclers increased customer loyalty and higher per- Association unit profit margins 6. This revenue model RETHINKING THE LUXURY AUTO BUSINESS MODEL 3 Current business models 22. The key raw materials used in luxury BMW is in a similar position when it comes automobiles are metals (~75%) and to incorporating circular strategies into The luxury automotive industry is a mature plastics (~10%) 23. Both of these material their production and recycling processes. industry that has traditionally focused on types are highly recyclable, with metals at Most of BMW’s recycling is in the form of high quality design and manufacturing, as 95%, and plastics at 80% 24. open-loop recycling. BMW has established well as prestige marketing. Its above- recovery systems in over 30 countries for average Cost of Sales component (on Remanufacturing key vehicle component is end-of-life vehicles to be recycled, average, 80% of revenue) indicates an important step in both cost savings and presumably by third parties 29. Currently, lucrative cost-saving opportunities 19. Net sustainability. In remanufacturing a most BMW vehicle components are profit margins in this century-old industry component, it no longer needs to be recycled as raw materials as