World Economic Forum and Accenture Report Finds Achieving Full Circularity in the Automotive Industry Could Increase Value Chain Profitability by 50%
The auto industry will need to expand its focus from vehicle sales to the full vehicle lifecycle, collaborating significantly with other players in the value chain
NEW YORK–A new report from Accenture (NYSE: ACN), the World Economic Forum and the World Business Council for Sustainable Development suggests that the automotive industry could increase the profitability of its value chain by 50% by achieving full circularity.
The report, titled “Driving Ambitions: The Business Case for Circularity in the Car Industry”, is a follow-up to a report the three organizations issued last year on the case for circularity in the industry. Circularity is about extending a product’s lifecycle through the repair, refurbishment, recycling and/or reuse of materials to reduce waste and minimize pollution and other ecological impacts — i.e., returning items back into the supply chain rather than to landfill.
According to the new report, circularity can enable automakers and mobility providers to tap new sources of value beyond the limits of their current business models — with an opportunity to improve profitability across the value chain by 50% and generate lifetime revenues 15 to 20 times greater than the vehicle’s initial sales price. The greatest value pools would be achieved mainly through as-a-service models, including leasing/subscription, car sharing, and mobility as a service, as well as through lifecycle services of remanufacturing, repair and recycling.
While it is possible to improve circularity in today’s ownership-based model, in which individuals own the vehicles they drive, the returns on circularity — from both profit and environmental standpoints — are strongest in the as-a-service models, where vehicle use is intense (in the ownership-based model, vehicles often sit idle most of the day). Shifting consumer preferences toward mass adoption of access-based models, the report states, will be a key strategic enabler to higher circularity returns.
The report notes several other actions required to achieving full circularity:
- Automakers will need to broaden their perspective from one that is mostly internally focused — i.e., on vehicle sales — to one that considers the full vehicle lifecycle.
- All actors along the value chain will need to collaborate closely and develop partnerships, building on a high level of transparency acquired through the exchange of data and information. This would entail building common platforms for data sharing and transparency, with an “orchestrator” organization fostering alignment and the creation of circularity benefits.
- Players will need to transform their operating models and develop new capabilities and technologies to govern, steer and manage collaborations and to optimize the lifecycle of vehicles and their components.
- Companies will need to make strategic choices regarding the transformation of their core business — through, for example, co-innovation and partnership, and by expanding into collaborative activities or the full circular value chain (recycling, repair or as-a-service models). They could start slowly, first transforming selected vehicle models or components and later the full business.
The report suggests two possible scenarios for the transformation. Individual players could either gradually adapt their operating model to the circular car strategy, or they could follow a “leaping” transformation through horizontal expansion, which can be achieved through mergers and acquisitions or strong investments in building new capabilities.
“Increasing circularity in the automotive industry will require a significant mindset shift among car makers and mobility providers, requiring them to collaborate with others, which include competitors, more than ever,” said Axel Schmidt, a senior managing director at Accenture who leads its Automotive industry group globally.
The report notes that the transformation from a linear to a fully circular value chain would likely have a significant impact on profitability in the first three to five years, due to the research and development costs required to build the infrastructure and advance key technologies such as recycling and modularity. However, it’s expected that profitability would return to its prior levels within five years of the transformation and increase further thereafter.
In addition, the shift to a fully circular value chain could change profitability so drastically that, in addition to improving the profitability of existing businesses, some businesses that are not currently profitable could become viable — especially in the areas of full lifetime leasing, vehicle-on-demand, and mobility as a service. These business models profit from maintaining asset ownership over the full life cycle and thus incorporate all circularity cost and revenue improvements into their business case.
Pedro Gomez, Head of Shaping the Future of Mobility, Member of the Executive Committee, World Economic Forum, said: “The time to shift to circular economy in automotive and mobility is now. However, transforming business models and operations from linear to circular and creating new business value through circularity is indeed a paradigm shift for most players. Thus, there is a need for all stakeholders in the automotive ecosystem to work together to rethink and redesign their approaches to manufacturing and supply chains, sales and distribution, reuse, recycling, and remanufacturing. With this report, the Circular Cars Initiative (CCI) in collaboration with Accenture, put forward a clear business case and a direct roadmap for strategic transformation.”
“Circular economy principles naturally align with how companies in the automotive industry ecosystem manage their businesses, given the focus on longer product life cycles and strong after-sales maintenance. The automotive industry can drive many other industries forward and lead by example with a swift transition to circularity, which for many in this space is natural extension of business as usual, only with sustainability built in, not just bolted on,” said Peter Lacy, Accenture’s global Sustainability Services lead and chief responsibility officer.
The report notes that while transformation to circularity is costly, the “cost of inaction might be significantly higher.”
For more information and to view a copy of the report, please visit www.accenture.com/CircularCarsReport.