Accelerate the transition to the sustainability era in automotive with the circular economy

Responsible for 37% of CO2 emissions, the automotive sector is at the center of the global decarbonization agenda. That’s why, according to the Capgemini Research Institute, 65% of organizations have a comprehensive sustainability strategy, with electrification as the preferred approach. However, this solution increasingly exposes automakers to sourcing risks due to intensified battery production demands.

What’s at stake for the automotive industry? 

To meet societal and environmental needs, anticipate legislation, and reduce exposure to resource scarcity and sourcing difficulties, manufacturers need to scale up their efforts. Increasingly they’re arriving at the same solution: introducing circularity into their models. OEMs’ objective should be to embrace the circular economy to minimize their raw materials footprint, keeping vehicles and components at their highest value for as long as possible (repair, maintain, reuse) and reintroducing them into new product lifecycles when they reach the end of use (repurpose, remanufacture, recycle). Implementing these new business models with a holistic approach will help companies to address four main challenges.

1. Build business resiliency with circular products that deliver end-to-end value

Automotive players’ obligation to “greenify” their activities through electrification has made their procurement activities increasingly complex. Mining, material processing, and battery production are conducted by very few countries (notably China), with production and supply capacities that fall well short of today’s demand. In addition, automotive is not the only sector that needs such raw materials as lithium, cobalt, copper, or nickel – a fact that adds even more stress to sourcing.

This situation has resulted in significant price increases: between the start of 2021 and May 2022, lithium prices rose by a factor of more than seven and cobalt prices more than doubled. Limiting disruption in global supply chains implies deploying circular economy concepts to reuse and recycle as high a proportion of these rare elements as possible in the production loop. Circularity can help absorb a significant proportion of metals sourcing costs (by 15% for copper and 102% for nickel in 2021, by 50% for both lithium and cobalt and 80% for copper by 2030). Automotive companies need to work toward reusing resources and components through repurposing or recycling and find ways to extend EV lifespan through recovery operations (repair, refurbish, retrofit, remanufactured). Only then will circularity take its position at the heart of the business strategy for long-term resilience.

The cornerstone of a circular economy strategy is sustainable product design. The goal is to design vehicles that are fit for purpose through sufficiency, digitalization, durability, modularity, recoverability, or recyclability. Another key piece of the puzzle will be biotechnology – the next frontier for automotive players in material selection and waste management processes, bringing novel enzymes, bio-based materials, and new, tunable products.

Biotechnology can help tackle issues at the two extremes of the lifecycle, overcoming resource scarcity by inventing alternative materials, and dealing with pollution (from plastics in particular) through solutions such as biodegradable materials and chemical recycling. This model change will introduce the shift from a volume business to one focused on value, with technology helping to support this transition to sustainability. 

For instance, BMW is making a €30bn investment in R&D by 2025 to extend its leadership in resource efficiency from production to the entire vehicle lifecycle, thanks to its I-Vision concept car. I-Vision is a design based on circular economy principles, with the goal of recovering 100% of materials.

For another example, the Hydrovolt project, Europe’s largest electric vehicle battery recycling plant, is the result of a partnership between Northvolt and Hydro. The plant will have the capacity to process 12,000 tons of batteries a year via a fully automated process recovering up to 95% of battery materials (2030 target: 50% recycled materials used in battery production).

2. Achieve long-term economic value through services that help optimize and preserve the value

To meet long-term sustainability targets, $50bn of investment over the next five years is required, in addition to the current investment in EVs, autonomous vehicles, and digital mobility services. Besides the need to comply with legal and regulatory requirements, expectations about the profitability of sustainable business models are high.

Achieving circularity implies becoming “asset managers” rather than traditional vehicle sellers, to make the most of each product put on the market. Consequently, automakers are urged to transform their ecosystems and massively develop the after-use segments, so that they keep fleets/vehicles/components at the highest value for the longest period (focusing on long-term usage at the expense of selling large volumes of goods). Better consumer desirability and increased lifespan of products result in a more profitable Total Cost of Ownership (TCO) per item.

Recent announcements from Renault and Stellantis reveal that both companies have created dedicated subsidiaries or business units to deliver their circular economy ambition. Through a holistic approach that permits the implementation of revalorization services (retrofitting, repurposing, remanufacturing, recycling…), each company estimates that it can generate around €2bn in revenues by 2030 thanks to the circular economy.

Mobility services have long been in the spotlight because of their ability to increase revenue per passenger seat and optimize overall vehicle utilization (e.g., Mobility-as-a-Service, Car-as-a-Service). Similar initiatives can be applied at the component and battery levels to address the electrification challenge. For instance, the Chinese automotive company NIO meets EVs’ need for electricity not by selling batteries but instead by leasing them and replacing them when empty (Battery-as-a-Service). In other words, instead of the customer waiting for the battery to charge, a full battery is swapped in and NIO charges the empty one.

3. Extend traditional operating models through broader and more local partnership ecosystems

The recovery mechanisms of the circular economy will imply major changes to the supply chain and operations. The challenge is to develop manufacturing chains that can integrate used parts/products and waste in the same way as they need to integrate them into the production process itself, but also complementary capabilities that facilitate vehicle disassembly and recovery. That is the intent of Renault’s Re Factory, the first factory in Europe dedicated to circular economy and mobility. This project engages a broad ecosystem to offer four main activities (retrofit, re-energy, re-cycle, re-start). It aims to retrofit more than 45,000 vehicles each year by 2023, reduce turnaround time for second-hand vehicles from entry into stock to resale from 21 to 8 days, and repair 20,000 electrical batteries per year by 2030. 

Decentralization is key, with local collection points, repair centers, and recycling facilities to decrease transport and supply costs, accelerate operations, and avoid dependencies. It also requires new relationships with partners or competitors – for example, to standardize parts, share assets, or merge flows, optimizing operations and reducing costs. The company is part of a new ecosystem, favouring local or regional partners such as Renault for the Mobilize Share program, which relies on more than 400 garages in France to provide maintenance or repair services.

Furthermore, given the complexity of such operations, product design needs to integrate modularity features to facilitate durability, reusability, repairability, and recyclability to preserve value over multiple lives (product design can drive up to 80% of a product’s environmental impact over its lifecycle). Standardization is a key driver to facilitate the recovery of parts and process automation and to integrate operations across the industry for each vehicle and component category (with partners or even direct competitors).

Finally, anticipating such profound changes means investing significantly in new capabilities and competencies. Attracting and training the right talent will be crucial: not just developers, tech experts, and data scientists, but also software engineers, mechanical engineers, electrochemists, and battery experts. Because the circular economy requires an understanding that goes beyond the traditional borders of our industry, investment will be needed in additional areas: notably in telecoms, mobility, and energy expertise.

And of course, capabilities within sustainability also require an understanding of the interconnectedness between all the components. For example, General Motors is investing $71m in a new campus to support emerging business opportunities, attract world-class talent, and achieve the company’s sustainability goals.

4. Embrace data management and traceability to empower corporate governance

The introduction of new digital and software applications into manufacturing plants and vehicles has unleashed the incredible potential for data collection and processing at every stage of the lifecycle. Companies that break down product lifecycle siloes, merging insights from PLM and LCA tools, will be the ones that achieve end-to-end traceability despite the large number of stakeholders involved in the automotive value chain.

Data can be collected and used at different levels across operations to scale up collection processes for closed-loop supply chains, improve performance tracking, enhance customer services, predict maintenance, or even help forecast future consumer demand. Real-time data collected during usage is also invaluable for anticipating maintenance needs (predictive maintenance) and product obsolescence. Connectivity and data will enable “servitization” – the switch from products to products + services – to achieve its promise to deliver superior value, for longer. 

Some players, such as Stellantis, are already seizing this opportunity by developing referencing, traceability, and accessibility activities so that returned spare parts can be used to renovate vehicles. As a result, it is possible to save up to 80% on new raw materials, and reduce energy consumption by 50% in the production of refurbished engines. Meanwhile, Volvo is implementing global traceability of cobalt used in its batteries by applying Circulor’s blockchain technology.

The shift to a circular model, including the management of new ecosystems, is complex, and therefore requires strong data governance. With new practices – including transparent access to necessary data by all the members of the value chain – it becomes possible to break down internal siloes across BUs as well as those involving external partners. Monitoring the suitable KPIs at the right level not only supports reporting to investors and authorities but also facilitates decision-making. That’s because this type of monitoring makes it possible to measure short-term transformation progress with circular initiatives against the long-term vision. This is how we will accelerate the transition to the sustainability era.

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