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Circular economy & production technologies

Business model innovations for rental and service models in the manufacturing sector

The project aims to contribute to a better understanding of the economic and ecological potentials of an implementation of lending and service models in the manufacturing sector in Austria and to show which changes and R&D efforts are necessary so that these can be realized by suitable business models.

Short Description

Status

Completed (September 2022)

Service systems as solutions for a circular economy

In Austria, the manufacturing sectors accounts for about 70% of the national material footprint and about 60% of the CO2 footprint (Eisenmenger et al., 2020). The manufacturing sector therefore plays a decisive role in achieving the goals set out in the Austrian governments' circular economy strategy. In existing markets, the focus is still on product sales and purchases. This creates economic incentives to increase production volumes and counteract the strategy's goals.
Service systems such as rental or sharing models are oriented towards the fulfilment of concrete functions or needs instead of product sales. This can create the necessary incentives for companies to develop circular products and transition towards business models that combine economic success with a reduction in production volume and material consumption.

Contents and methodology

This project defines the economic and ecological conditions under which circular service systems are particularly promising and derives key research and development (R&D) needs for the realisation of circular service systems based on a detailed analysis of the literature and persistent challenges faced by manufacturing firms. The analysis considers R&D needs on three levels: 1) product and service innovations, 2) business model innovations, and 3) market system innovations.

Furthermore, we propose options for public policy along the intervention areas defined in the national circular economy strategy.

The results are based on an extensive review of scientific publications and analysis of secondary statistics as well as primary data from a workshop and 36 interviews with experts from science, manufacturing companies, politics, and industry representatives.

Status quo and developments in the manufacturing sector

Services account for about 10-13% of the turnover of manufacturing companies in Austria (Dachs et al., 2013; Friesenbichler & Kügler, 2022). The range of services is still largely concentrated on product-oriented services such as consulting, spare parts supply, repairs, and maintenance. More extensive services oriented towards use or results, such as leasing or renting, are only offered by a minority of manufacturing companies (Dachs et al., 2013; Mastrogiacomo et al., 2019; Neely, 2011; Pezzotta et al., 2022).

In international comparison, the competitiveness of the Austrian manufacturing sector is based primarily on technological leadership in the production of complex products and high labour productivity. In the United States, United Kingdom, and in Scandinavian countries, the degree of service provision is considerably higher (Friesenbichler & Kügler, 2022).

Promising manufacturing sectors for the deployment of circular service systems
Service systems do not automatically contribute to a reduction of resource consumption. To ensure positive contributions, service systems must be implemented according to circular economy principles and unintended feedback effects must be prevented.

Circular service systems are most suitable for products and production facilities that are highly dynamic, high-risk, easy to repair and transport, resource-intensive to operate, and short-lasting. Circular service systems can create low-threshold and low-risk access to resource-efficient technologies and support companies in building up competencies in dealing with new technologies. This makes them particularly suitable financing instruments as accelerators for technology-based transformation processes in companies.

From an economic perspective, the construction sector and the metal production sector are particularly significant in the Austrian manufacturing sector. From an ecological perspective, metal production as well as paper and printing sectors are noteworthy due to their high energy requirements. Together with the chemical and petrochemical as well as the mineral and glass sectors, they are also responsible for a large share of greenhouse gases emissions. The consumption of fresh water and wastewater in the metal production sector is very high too. The use of renewable energies is low in the manufacturing sector. There is significant potential for direct conversion to renewable energies especially in the supply of process heat below 200°C, which accounts for a significant share of demand for process heat, especially in the sectors "chemicals and petrochemicals", food, and "paper and printing". The analysis of all sectors and their processes shows that there are economically and ecologically promising applications of service systems in the manufacturing industry along the production areas of cleaning of machines and equipment, operation of machines and equipment, energy supply, water and wastewater disposal, chemical-based supply, mobility, and recycling. Because these processes can be found in most manufacturing sectors, they offer high potential for the development of varied circular service systems.

R&D needs

Circular service systems currently find use only in niche segments. Product and service innovations are essential to increase the attractiveness of such systems. To succeed, circular service systems need more intensive efforts towards the development of digital infrastructures, smart and modular products, new forms of collaboration as well as suitable methods for the circular design of service systems.

Business model innovations are needed at both strategic and operational levels to support manufacturing companies in the transition and implementation of circular service systems. There is need for better tools for companies to identify and design suitable business models and to continuously evaluate them in terms of their business and environmental performance.

Furthermore, there is still a lack of suitable tools on an organisational level to be able to shape the transformation processes towards service-oriented companies.

Business models based on circular service models are partly in conflict with existing market conditions. Market system innovations are necessary to improve the competitive conditions for providers of circular service systems on the one hand and to ensure conformity with existing regulations in areas such as competition law and data protection on the other.

Policy options

Service systems are cross-cutting solutions that can contribute to all the goals of the Austrian government's R&I initiative on the circular economy. A public mandate to promote circular service systems can be justified based on location policy considerations, security of supply, and ecological benefits. However, circular service systems can also conflict with environmental goals and existing laws. Therefore, it is critical that the conformity with competition law, consumer protection law, data protection law, and circular economy principles is always examined and considered.

Circular service systems are based on an innovation regime that differs significantly from the prevailing focus of the Austrian manufacturing sector on the development of new, standardised, and scalable products. Following a service logic therefore requires a great deal of mental training and learning. The implications of a stronger service orientation for the Austrian business location have hardly been addressed at a strategic level so far. To be able to define a suitable economic and innovation policy framework for manufacturing companies, a more intensive discussion at a strategic level is therefore required. This could take place in the formulation of the new Austrian location strategy and in the implementation of the new circular economy strategy.

Among the political measures for the promotion of a circular economy, an extension of producer responsibility and tax relief on labour are particularly significant for supporting circular service systems. In addition, various political instruments of direct relevance can be used to support circular service systems. In the area of research funding, the focus needs to shift from "technology openness" to "solution openness" as an approach that places the development of innovative solutions instead of products in the foreground. Furthermore, there are still thematic gaps in public R&D programmes that need to be closed to support the development of circular service systems.
The transformation to a circular economy requires also private capital. Circular service systems represent an interesting financing instrument that receives little attention in the context of this transformation compared to other instruments such as loans. To lower investment hurdles for providers on the one hand and to increase the attractiveness of the instrument in procurement on the other, both supply- and demand-based measures are needed.

Sources:

Project Partners

Project management

  • DI Sarah Meitz

Institute/Company

  • AEE - Institute for Sustainable Technologies

Partners of the project consortium

  • Austrian Institute for SME Research

Contact Address

AEE - Institut für Nachhaltige Technologien
A-8200 Gleisdorf, Feldgasse 19
Tel.: +43 (0)3112 5886-451
E-Mail: s.meitz@aee.at
www.aee-intec.at