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April 25, 2022

Armed conflicts and the linear economy – Are they interconnected?

Economic actors of the performance economy enjoy a high resilience against “black swan events”, such as natural and man-made disasters, the extreme being armed conflicts.
From an environmental and social point of view, most disasters are a dead loss.

The more a linear economy is interconnected the higher its catastrophe risks. Blackouts – breakdowns of national electricity grids, for example – will make impossible the use of pumps in buildings and petrol stations, IT and telecom equipment. No credit cards, no smartphones and no Internet, no heating systems except open fireplaces and installations with local back-up power generation units.

Armed conflicts and wars are the opposite of sustainability and Circular Economy, negatively impacting natural, cultural, human and manufactured assets. They can hit natural resources, production units and distribution. Often, they will interrupt the functioning of electricity, gas, water and transport networks.

 

The Performance Economy enjoys a high resilience in times of disruptive events.

The worst black swan events are the unknown-unknown, such as 9/11 in the USA or COVID- 19 worldwide. They create havoc in production and logistics – both for physical goods and in digital and financial networks – and often lead to scarcities, which in turn result in higher prices and inflation. In such a situation, fleet managers selling objects as a service (pay per use) may well gain in competitiveness as their rental prices do not increase.

Economic actors of the Performance Economy are OEMs and fleet managers selling the function or use of infrastructure, buildings, equipment and products through for instance rental and operational leasing contracts. By retaining ownership and liability for their objects, they gain a long-term control over their objects; their revenue suffers less fluctuations than revenues of competitors selling similar objects.

From a resource security point of view, the Performance Economy is like a lake, OEMs and fleet managers owning the objects have control over the full service-life of objects, components and materials and profit from high flexibility as to if and when they want to remanufacture, technological upgrade or replace their stock:

the stock of objects in use are the resources of tomorrow at yesteryear’s commodity prices.

 

 So what is the actual problem?

Manufacturers in the linear economy lack this opportunity. After the Hanshin earthquake in Kobe had destroyed the highly efficient unique factory for laptop LCDs, manufacturers were forced to buy back used laptops and reuse the ‘old’ screens in production.

From a financial point of view, fleet managers profit from continued ownership of objects, components and embodied materials by a 40% discount in component remanufacturing and an elimination of the transaction and compliance costs involved in material recovery (recycling). The higher liability in selling objects as a service can be minimized through risk management strategies.

From a vulnerability point of view, the risk of fleet managers becoming victims of black swan events is reduced because their stocks – the main assets – are normally geographically dispersed, a total loss is highly unlikely. However, their success can depend on user behavior – abuse and vandalism impact their profit margins.

The risk of exposure to technological progress can be reduced by designing modular systems instead of stand-alone products: standardization of materials and components enable high reuse rates and minimize financial losses at the end of a service-live.

The linear industrial economy, by contrast, is like a river. Manufacturers are prisoners of a flow process; their main assets – their plants – are concentrated in order to achieve economies of scale. Just in time strategies further increase manufacturers’ vulnerability to discontinuities in supply chains. A supply-side interruption of the flow will lead to loss of business, a reduced demand will lead to markets flooded with objects with reduced price tags and to lower corporate profits.

 

User behavior and performance economy.

But user behavior, abuse and vandalism have less impact on manufacturers selling their goods. Black swan events, such as natural disasters and wars, are even good for manufacturers’ businesses if their factories are not hit, because destructive events will be followed by reconstruction, resulting in increased production, profits and increased GNP.

The Performance Economy may profit from higher rental rates due to shortages of equipment. Witness the rental cost for ISO shipping containers since January 2020.

Submitted By: CEA Team

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