singaporeen
Circular solutions – a triple threat for supply chain challenges

Circular solutions – a triple threat for supply chain challenges

16-06-2022 | Insight

The certainty of climate change combined with the uncertainty of geopolitics means risks to supply chains are greater than ever. Circular solutions can help companies increase resource security, reduce supply chain complexity and create sustainable long-term value.

  • Natalie Falkman
    Natalie
    Falkman
    Portfolio Manager

Speed read

  • Supply chains are increasingly concentrated offshore
  • Recent crises have revealed supply chain vulnerability
  • Circular solutions help reduce supply chain risks and increase resource security

Geographic complexity, dangerous dependency

The impact of supply chain disruptions has been inescapable for businesses, consumers, and economies. Covid contagion continues to roil regions globally, triggering lockdowns that shutter factories, jam ports, paralyze trucking fleets, and reduce the flows of goods internationally.

Supply shortages underscore just how fragile and vulnerable manufacturing supply chains have become. They have grown so long, complex and fragmented that many downstream customers have no real read on the root causes of bottlenecks and breakdowns. It is typical for inputs to be mined, processed and assembled upstream across multiple manufacturing players in multiple geographies before final shipment to downstream customers. For example, a solar PV cell starts with mining quartz-sand in China. From there it is melted and cast into ingot blocks, sliced into wafers, and finally assembled onto solar panels by workers in factories spread across Malaysia, Cambodia, Vietnam and Thailand.

Over the last two decades, China’s manufacturing might has increased considerably. It is now the world’s largest exporter, representing 12% of a global merchandise trade market valued at USD 28.5 trillion in 2021.1,2 Though global consumers benefit from more goods at lower prices, it also means the world’s manufacturing activity is increasingly concentrated in and dangerously dependent on Chinese suppliers.

Moreover, the availability of cheaper inputs has made it easier for manufacturing to follow a linear production path that begins with the extraction of virgin resources and ends with their disposal by the end-user. Not only is value embedded in the product lost, but new production pathways are initiated, requiring more raw materials, processing, and logistics. A new cycle of environmental and supply chain risks begins again.

Stay informed on our latest insights with monthly mail updates
Stay informed on our latest insights with monthly mail updates
Subscribe

Breaking the chain

In contrast to linear production, circular business models loop production cycles. Products are not discarded but rather reintegrated into product supply chains. As a result, production and sales are less dependent on procuring offshore quantities and more focused on innovation for onshore quality. That means designing products that are not only built to last but also exhibit a competitive edge.

With circular models, production and sales are less dependent on procuring offshore quantities and more focused on innovation for onshore quality

Circular solutions come in many shapes and sizes that can be adapted based on each industry’s features and flows. Equipment refurbishing allows manufacturers to fix up and re-sell high-end equipment to customers in lower market segments. Products as a service (PaaS) models lease physical products so that customers can rent-a-service rather than own-a-product. Manufacturing and repair organizations (MROs) provide customers with vast inventories of small parts so customers can repair rather than replace costly machinery.

At the heart of each of these solutions is the circular principle of keeping products in use longer so their value can be used to generate satisfaction from customers and revenues for companies. Moreover, keeping products in service longer has the added benefit of de-materializing and de-risking manufacturing supply chains.

Keeping products in service longer has the added benefit of de-materializing and de-risking manufacturing supply chains

Out with the new, in with the old

Though it borders on the basic, some of the world’s most sophisticated industries are using refurbishment in manufacturing. Semiconducting equipment manufacturers (SEMs) routinely disassemble, repair and refurbish machines from high-end customers for use in less sophisticated market segments. This enables them to supply bleeding-edge technologies (think metaverse and cloud systems) while still providing capacity to lower-end customers (passenger cars and electric appliances). One leading SEM boasts that even after three decades, 90% of its machines are still used in semiconductor fabrication plants (fabs) around the world.3 For SEMs, circular production provides additional revenue streams with minimal need for the raw materials, processing, assembly and transport logistics typical of manufacturing phases.

Figure 1 | Reducing the length, strengthening the chain

Refurbishment, PaaS leasing, and MROs help reduce manufacturer’s dependence on offshore suppliers. As a result, upstream inputs are reduced, supply chains are simplified and disruptions minimized.

Source: Robeco

A similar method is increasingly being employed by manufacturers of less sophisticated but nevertheless technologically advanced products in healthcare and life science research. From MRI scanners for diagnostic testing to mass spectrometers for drug discovery, refurbished machines provide an easy way for hospitals and science labs to combat rising costs without compromising outcomes. The global market for used medical devices is anticipated to reach USD 10.5 billion by 2027 (CAGR of 10.3%).4 Moreover, in some industries, margins for circular product lines exceed those of new ones and we are seeing commitments to increase revenues from circular products from major business-to-business players.5

Capitalizing on the intangible

Embedded sensors and cloud technologies mean manufacturers using PaaS models can stay digitally connected with their physical products, capturing data and enabling customized services like never before. In this way, profits are generated not from producing higher volumes of tangible products but by enhancing the quality and value of those already in circulation. From the mundane (light bulbs, carpets, and tires) to the complex (jet engines, electric grids and wind turbines), companies are embracing the PaaS model, creating diverse opportunities across retail, commercial and industrial suppliers.

Industrial supermarkets

Maintenance and repair organizations (MROs) are like one-stop supermarkets for industrial manufacturers, providing massive inventories spanning millions of parts and technical know-how via dense networks of engineers and technicians. If a machine or part breaks, manufacturers can trust their MRO to fix it instead of ordering it anew from a supplier based in a distant location. Moreover, near and onshore presence means procurement and manufacturing and logistic risks from offshore suppliers can also be reduced, if not eliminated entirely. From utilities and power distribution to robotics and industrial automation, building materials and construction to chemicals and packaging, specialized MROs are providing diverse investment opportunities across sectors.

As the examples above demonstrate, circular solutions are best suited for industries with high-margin products that have significant IP and R&D costs. Most interesting for us are the investment opportunities at the business-to-business level. Due to their fast-moving, low-margin nature, food and fashion are currently not in scope. That may change along with shifting consumer preferences. Younger generations are demanding more flexible purchase options, superior service features and sustainable processes that are free of carbon emissions or human rights abuses. Circular supply chains equipped with digital intelligence could help companies stay in front of these building forces. As a result, we could begin to see innovative products emerge even in the retail space.

Circular economy models are turning out to be not just a triple threat but an all-out arsenal for combatting multiple risks and discovering diverse opportunities.

1 UNCTD (United Nations Conference on Trade and Development). 2022
2 Bloomberg, 2022. China’s Covid crisis threatens global supply chain, chaos for summer 2022.
3 ASML Annual Report 2021
4 i-healthcare Analyst, 2022. “Global pre-owned medical devices market.”
5 McKinsey, Remaking the Industrial Economy, 2014. Toward the Circular Economy, Ellen MacArthur Foundation, Philips Annual Report 2021.

Important information

This information is for informational purposes only and should not be construed as an offer to sell or an invitation to buy any securities or products, nor as investment advice or recommendation.
The contents of this document have not been reviewed by the Monetary Authority of Singapore (“MAS”). Robeco Singapore Private Limited holds a capital markets services license for fund management issued by the MAS and is subject to certain clientele restrictions under such license.
An investment will involve a high degree of risk, and you should consider carefully whether an investment is suitable for you.

Logo

Important Information

Warning/Important note: This website contains information which is only available to qualified investors as defined below. If you are not a qualified investor, please click “I Disagree” to leave the website.

By clicking on "I agree", I declare that: 

  • I am a qualified investor as defined under 1
  • I have read and understood the Terms and Conditions and Disclaimers as described under 2

1 - This website may only be accessed directly or indirectly by the following persons in Singapore:

1) “institutional investor” under section 304 of the Securities and Futures Act (Cap.289)(“SFA”), which means:
(i) the Government; (ii) a statutory board as may be prescribed by regulations made under section 341 of the SFA; (iii) an entity that is wholly and beneficially owned, whether directly or indirectly, by a central government of a country and whose principal activity is (A) to manage its own funds; (B) to manage the funds of the central government of that country (which may include the reserves of that central government and any pension or provident fund of that country); or (C) to manage the funds (which may include the reserves of that central government and any pension or provident fund of that country) of another entity that is wholly and beneficially owned, whether directly or indirectly, by the central government of that country; (iv) any entity (A) that is wholly and beneficially owned, whether directly or indirectly, by the central government of a country; and (B) whose funds are managed by an entity mentioned in sub-paragraph (iii); (v) a central bank in a jurisdiction other than Singapore; (vi) a central government in a country other than Singapore; (vii) an agency (of a central government in a country other than Singapore) that is incorporated or established in a country other than Singapore; (viii) a multilateral agency, international organisation or supranational agency as may be prescribed by regulations made under section 341 of the SFA; (ix) a bank that is licensed under the Banking Act (Cap.19); (x) a merchant bank that is approved as a financial institution under section 28 of the Monetary Authority of Singapore Act (Cap.186); (xi) a finance company that is licensed under the Finance Companies Act (Cap.108); (xii) a company or co-operative society that is licensed under the Insurance Act (Cap.142) to carry on insurance business in Singapore; (xiii) a company licensed under the Trust Companies Act (Cap.336); (xiv) a holder of a capital markets services licence; (xv) an approved exchange; (xvi) a recognised market operator; (xvii) an approved clearing house; (xviii) a recognised clearing house; (xix) a licensed trade repository; (xx) a licensed foreign trade repository; (xxi) an approved holding company; (xxii) a Depository as defined in section 81SF of the SFA; (xxiii) an entity or a trust formed or incorporated in a jurisdiction other than Singapore, which is regulated for the carrying on of any financial activity in that jurisdiction by a public authority of that jurisdiction that exercises a function that corresponds to a regulatory function of the Authority under this Act, the Banking Act (Cap.19), the Finance Companies Act (Cap.108), the Monetary Authority of Singapore Act (Cap.186), the Insurance Act (Cap.142), the Trust Companies Act (Cap.336) or such other Act as may be prescribed by regulations made under section 341 of the SFA; (xxiv) a pension fund, or collective investment scheme, whether constituted in Singapore or elsewhere; (xxv) a person (other than an individual) who carries on the business of dealing in bonds with accredited investors or expert investors; (xxvi) the trustee of such trust as the Authority may prescribe, when acting in that capacity; or; (xxvii) such other person as the Authority may prescribe.

2) “relevant person” under section 305(1) of the SFA, which means:
(i) An accredited investor; (ii) a corporation the sole business of which is to hold investments and the entire share capital of which is owned by one or more individuals, each of whom is an accredited investor; (iii) a trustee of a trust the sole purpose of which is to hold investments and each beneficiary of which is an individual who is an accredited investor; (iv) an officer or equivalent person of the person making the offer (such person being an entity) or a spouse, parent, brother, sister, son or daughter of that officer or equivalent person; or (v) a spouse, parent, brother, sister, son or daughter of the person making the offer (such person being an individual).

3) any person who acquires the units [in a collective investment scheme] as principal if the offer is on terms that the units may only be required at a consideration of not less than $200,000 (or its equivalent in a foreign currency) for each transaction, whether such amount is to be paid for in cash or by exchange of units in a collective investment scheme, securities, securities-based derivatives contracts or other assets, and if the following condition is satisfied: (i) the offer is not accompanied by an advertisement making an offer or calling attention to the offer or intended offer; (ii) no selling or promotional expenses are paid or incurred in connection with the offer other than those incurred for administrative or professional services, or by way of commission or fee for services rendered by any of the persons specified in section 302B(1)(d)(i) to (vi) of the SFA; and (iii) no prospectus in respect of the offer has been registered by the Authority or, where a prospectus has been registered (A) the prospectus has eAccxpired pursuant to section 299 of the SFA; or (B) the person making the offer has before making the offer 1. informed the Authority by notice in writing of its intent to make the offer in reliance on the exemption under this subsection; and 2. taken reasonable steps to inform in writing the person to whom the offer is made that the offer is made in reliance on the exemption under this subsection.

4) Or otherwise pursuant to, and in accordance with the conditions of, any other applicable provision of the SFA.

If you are not any of the types of persons described above, you are not authorized to enter this website and you should leave this website immediately.

2 Terms and Conditions
You acknowledge that you have read these Terms and Conditions (“Terms”) prior to accessing the website located at www.robeco.com/sg (“Website”) and you agree to be bound by the Terms.  If you do not agree to all of the Terms, you are not an authorised user and you should not use the Website. The Website is owned by Robeco Singapore Private Limited (company registration number: UEN. 201541306Z), which is licensed by the Monetary Authority of Singapore (“MAS”) pursuant to the Securities and Futures Act (Cap.289) (“SFA”) of Singapore, and is managed by Robeco Singapore Private Limited and/or its affiliates (collectively, as “Robeco”). The Website is intended for and should be accessed by institutional investors or accredited investors (as defined under Section 4A of the SFA) of Singapore.  The Website is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would subject the Robeco to any registration or licensing requirement within such jurisdiction.  It is your responsibility to observe all applicable laws, rules and regulations of any relevant jurisdiction. The content contained in the Website is owned by Robeco and/or its information providers and is protected by applicable copyrights, trademarks, service marks, and/or other intellectual property rights.  You may not copy, distribute, modify, post, frame or link the Website, including any text, graphics, video, audio, software code, user interface, design or logos.  You may not distribute, modify, transmit, reuse, repost, or use the content of the Website for public or commercial use, including all text, images, audio and/or video.  Robeco may terminate your access to the Website for any reason, without prior notice. Neither Robeco, nor any of its associates, nor any director, officer or employee accepts any liability whatsoever for any loss arising directly or indirectly from the access of the Website.  You agree to indemnity and hold Robeco, its associates, directors, officers or employees harmless against any and all claims, losses, liability, costs and expenses arising from your use of the Website due to violation of the Terms. Robeco reserves the right to change, modify, add or remove any parts of the Terms at any time and for any reason.  The Terms shall deemed to be effective immediately upon posting. The Terms shall be governed by, and shall be construed in accordance with, the law of Singapore.

Disclaimers
The Website has not been reviewed by the MAS. Accordingly, the Website may not be accessed directly or indirectly to persons in Singapore other than (i) to an institutional investor under Section 304 of the SFA, (ii) to a relevant person pursuant to Section 305(1), or any person pursuant to Section 305(2), and in accordance with the conditions specified in Section 305, of the SFA, or (iii) otherwise pursuant to, and in accordance with the conditions of, any other applicable provision of the SFA. 

Nothing in the Website constitutes tax, accounting, regulatory, legal or investment advice.  The Website is for informational purposes only and should not be construed as an offer to sell or an invitation to buy any securities or products, nor as investment advice or recommendation or for the purpose of soliciting any action in relation to Robeco’s businesses, or solicitation by anyone in any jurisdiction in which such an offer or solicitation is not authorised or to any person to whom it is unlawful to make such an offer and solicitation. Any reproduction or distribution of information from the Website, in whole or in part, or the disclosure of its contents, without the prior written consent of Robeco, is prohibited.  By accessing to the Website, you agree to the foregoing.  

The funds referred to in the Website are for information only.  It is not a recommendation or investment advice, nor does it mean the funds is suitable for all investors.  The contents of the website is not reviewed by the MAS.  Any decision to participate in the funds should be made only after reviewing the sections regarding investment considerations, conflicts of interest, risk factors and the relevant Singapore selling restrictions.  You should consult your professional adviser if you are in doubt about the stringent restrictions applicable to the use of the Website, regulatory status of the funds, applicable regulatory protection, associated risks and suitability of the funds to your objectives.

Any decisions made based on the information contained in the Website are the sole responsibility of yours.  Any investments made or to be made shall be with your independent analyses based on your financial situation and objectives.  The investments and strategies contained in the Website may not be suitable for all investors and are not guaranteed by Robeco.  

Investment involves risks and may lose value.  Historical returns are provided for illustrative purposes only and do not necessarily reflect Robeco’s expectations for the future.  The value of your investments may fluctuate.  Past performance is no indication of current or future performance.  The Website may contain projections or other forward looking statements regarding future events or future financial performance of countries, markets or companies and such projection or forecast is not indicative of the future.  The information contained in the Website, including any data, projections and underlying assumptions are based upon certain assumptions, management forecasts and analysis of information available on an “as is” basis and without warranties of any kind, whether express or implied, and reflects prevailing conditions and Robeco’s views as of the date published or indicated, and maybe superseded by subsequent events or for other reasons.  The information contained in the Website are accordingly subject to change at any time without notice and Robeco are under no obligation to notify you of any of these changes.  Robeco expressly disclaims all liability for errors and omissions in the information presented in the Website and for the use or interpretation by others of information contained in the Website.

Robeco Singapore Private Limited holds a capital markets services licence for fund management issued by the MAS and is subject to certain clientele restrictions under such licence.  An investment will involve a high degree of risk, and you should consider carefully whether an investment is suitable for you.

I Disagree