How the IoT Can Bring About a Circular Economy
The circular economy describes sustainable business principles whereby components and raw materials are continually recycled. Through their reuse, the materials retain their value and this reduces the need to use up more precious resources. Additionally, the price stimulus known as ‘the polluter pays’ is applied consistently. This leads to efficient processes and the use of clean energy.
The benefits of the circular economy are huge. By viewing used products as a source of valuable materials, highly interesting commercial opportunities arise. Additionally, in this way, we pass on a healthy world to our descendants. However, both producers and consumers appear to be having difficulty in applying the ideas of the circular economy in practice. This is a shame, as it means we are passing up opportunities to develop our economies in a beneficial way. In general, there are two main ways to stimulate a circular economy: through legislation and through new business models. Together with my colleagues Elmer Rietveld and Oscar Rietkerk, I believe that the key to achieving new circular business models lies in digital technology. I will explain why.
Take, for example, your hot water boiler at home (assuming you own one). No doubt you chose your boiler in part based on the advertised energy conversion efficiency. But the installation engineer had no real reason to adjust the settings optimally – as long as it worked, he would get paid. And now, you probably have no idea what level of energy conversion your boiler is actually achieving.
The same can be said of cars: last year car manufacturers such as Volkswagen and Mitsubishi had to own up to deceiving their customers with false fuel efficiency data for many years. How were we to know?
In the near future, your hot water boiler will be connected via the internet of things and you will be able to monitor real-time how it is performing. Service engineers will be able to inspect and optimize its performance from a distance, and replace parts just before they fail.
This will change the boiler industry for good. The manufacturer will learn like never before about the functioning of its products in situ. This information will provide invaluable insights into how to improve the design.
But, if you think it through, the end user would be even better off if she did not need to buy a hot water boiler at all. If she only paid for the amount of hot water that she used. Via this business model, the producer remains the owner and is responsible for the operational costs. Which is an extra stimulus to make sure everything is performing optimally.
When the sensor data indicate that the efficiency is declining, the boiler can be replaced and all the parts can be revamped and given a new life in other products. Also, in this way, the producer can learn how to develop the design of their products such that it becomes easy to repair and reuse the components.
As such, by making use of the data from smart products, the circular economy is not only possible, it is also profitable: both for the user and the producer.
This development creates a number of new and very interesting challenges which firms are going to have to face. First, in the area of customer relationship management. The smart boilers, cars, home appliances, TVs, bicycles and you name it, will really become profitable once firms learn how to adapt their products to each consumers’ usage patterns. If a city bike indicates that it is not being used, and is available to others, the customer pays less. For the sport-lover’s weekend cycling break along a part of the Tour de France, the city bike can be exchanged for a racer. Service provision is continually made to measure. Firms will therefore have to create better systems for learning what their users’ needs are at any given moment. And if this is done well, a strong and loyal customer relationship will develop.
A second challenge for new business models based on the principles of the circular economy, is the sharing of data through the supply chain. Firms are now hesitant to do this because they are fearful. As soon as you give another organization access to your data, your competitors might gain an advantage. But this is a debilitating thought that prevents extra value creation. By sharing data through the business ecosystem, according to suitable contractual agreements, it is possible for suppliers and producers to profit from each other’s data, so that the end user is served well.
A highly promising development, recommended by the European Resource Efficiency Platform, is a passport for each product which records the raw materials the product is made of, and how it can be repaired or recycled. Not a paper passport, but a chip with all the necessary information that can be accessed from a distance.
Firms will then be able to showcase their products made from parts that are already enjoying their tenth reincarnation!
In the long term, the only truly sustainable economy is a circular economy. The internet of things offers a practical way to create that future and to create new business opportunities. Increasing numbers of firms are taking steps to lead the way in this direction. Is your firm among them?
Dr. David J. Langley works at TNO, the largest applied research institute in the Netherlands, as senior scientist in the field of internet, innovation and strategy. He received his PhD in 2009 and is also Associate Research Fellow at the department of Innovation Management and Strategy at the University of Groningen. Since 2015 he is columnist for the Dutch Financial Times writing about the societal implications of internet technologies. He is co-chair of the European Alliance for IoT Innovation (AIOTI), Ecosystems working group. Working in the area of internet innovations since 1991, he has set up and led research projects in a wide variety of industries, including telecoms, energy, banking and the public sector. He is the inventor of an award-winning method to predict the adoption of innovative products and services at an early stage of their development. His scientific research has been published in leading journals, including Technological Forecasting and Social Change, Journal of Interactive Marketing and Journal of Product Innovation Management.
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