Oral evidence: Growing a circular economy, HC 1176Tuesday 13 May 2014
Oral evidence, 13 May 2014.
Witnesses
Ramon Arratia, Sustainability Director, Interface Carpets, Matthew Bulley, Managing Director, Caterpillar Remanufacturing, and Mike Barry, Director of Sustainable Business, Marks & Spencer, gave evidence.
Chair
I would like to welcome the three of you to our session this afternoon, and to what I think is a very frustrating session in the sense that there are a lot of questions and a lot of issues and insufficient time. Just to compound matters, any minute now we are going to have at least one division in the House of Commons so the session is going to get even more frustrating. Thank you for coming along this afternoon. I know that you have sat in for the previous panel. We have had a panel of experts who have been talking about this issue but, from your own business experience and the responsibilities you have, how do you feel this aspect of innovation in design is taken up within business? You all have examples of best practice that you have done. What have you learnt about how we need to make the changes on the ground and how to have the positive environmental benefits that we are looking for? We have three panellists. I think for each set of questions we could almost do with having one lead answer and then very quick supplementaries so that we can be a bit more focused. Who would like to start? No one is going to start because we do have a vote in the House of Commons. I am so sorry. I will have to temporarily suspend the proceedings and we will resume straight afterwards. Thank you very much indeed. Sitting suspended for a Division in the House. On resuming-
Chair
I can announce that we are, thankfully, quorate following the division in the House of Commons. We do expect more divisions but hopefully not immediately. We will just push on, if we may. Without repeating the question, it was the experience that you have within your own company business of innovation, design and lessons learnt from how you have introduced it.
Matthew Bulley
If I can lead off, I am Matthew Bulley from Caterpillar based in Shrewsbury in the UK. We employ about 350 people. From our business model where we are operating heavy pieces of construction equipment, engines, generators, our remanufacturing business in Europe, we are looking to bring product back in from Europe, Africa and the Middle East. I think the key is on the definition of “remanufacturing”. We bring product back in. We are trying to retain the form of the product in its current state. If I take an engine block or a head, we are trying to retain the value in that, the energy that has been put into it, the machining content that has gone in, the design, and trying to retain that form as opposed to taking it down a level and smelt it down or recycle it. In doing that, with the volume we get and the take-back, we are able to see the high value of components that come in. It is a mindset then in terms of innovation: how do we get everybody in the organisation, from the machinists and the assemblers through to the engineers? It is a really good environment then for providing innovation, not only in terms of how we feed that back to the design at the start to design for disassembly and reassembly, but also in terms of cleaning processes. Our salvage technologies: how do I apply metal spray or metal deposition or some welding to a particular area on a component, to be able to do that cost effectively but still retain the value of the original? From a design and innovation point of view, I think it is an excellent practice.
Chair
You mentioned it being a mindset. That is presumably very important.
Matthew Bulley
Absolutely. It is a way of thinking around the end of life and every pound I save is a pound I save that goes back in to support the customer.
Chair
Mr Barry, do you want to give us an example from Marks & Spencer next?
Mike Barry
Yes, sure. We sell food and clothing through 1,200 stores around the world, selling about 2.9 billion items; an item being a piece of food, a piece of clothing. A few examples; I will not talk about them in detail. We have closed the loop on all our coat hangers around the world; 160 million coat hangers now do a closed loop. Store construction: we are specifying the use of recycled aluminium, plasterboard and so on, repurposing trolleys and signs in stores. Packaging: we are working with Somerset County Council now to collect plastic back from the kerbside, the consumer’s home, to take back into our supply chain to make new packaging. Food waste: we have taken out M&S food waste into anaerobic digestion and then buying the electricity back from the renewables site. Clothing: 350 million items of clothing we sell each year. We are now working with Oxfam to bring 4 million of those items back in a closed loop with us. They are just the examples that we are drawing on. The key piece of wording for us: this is not necessarily just about design in the classical sense. This is about business process innovation. If we want to make Marks & Spencer a sustainable business, we have to close the loop on all 350 million items. I can ask 200 individual designers to design things differently, but it is the core business model by which we sell and take back that is the big innovation.
Chair
Can I go back to what you said about kerbside collections? In a previous inquiry that we did, particularly talking about food waste and kerbside collections, it was put to us that different local authorities all over the country have different procedures in place for kerbside collection. How much does that feature or how much is that an obstacle, that lack of consistency across the whole of the country, in terms of trying to move towards this new method of operating?
Mike Barry
You asked the question a little bit earlier as to whose responsibility this is, Government or business. I believe that 80% of it is my responsibility as a business leader to do this, but the 20% that Government can do, the number one thing that it can do to help us is to simplify the collection of waste in the consumer’s home. I will make it as simple as possible. We have reduced from 11 packaging materials to three, but I now need 400 local authorities across the British Isles to consistently collect it, segregate it and give it back to the materials recycling or reuse industry. That is absolutely the heart of the challenge we have.
Chair
Given that our Committee is a cross-cutting committee and able to look across at different Government departments, how much would you say DCLG and the Secretary of State’s policy in respect of waste is assisting this innovation that we are seeking?
Mike Barry
That is a leading question. I will not jump into the politics of this, but I think there are several parts of Government that can join up to work together. It is partly with BIS; it is partly taxation; it is partly DEFRA; it is partly DCLG. This is about creating a horizontal economy rather than a vertical siloed economy. I live in a vertical silo. You lead me in terms of policy in vertical silos. We all need to arrange ourselves a little bit more horizontally. I would ask all parts of Government to participate in a more joined-up approach.
Chair
Thank you. Mr Arratia, did you wish to comment about the business lessons that have been learnt?
Ramon Arratia
We are the company who invented this idea of cutting carpet into tiles, into squares, in the 1970s, which was an advantage to install the floor very, very quickly but also is an advantage to recycle the tiles back. This is the key thing, modularity. We think modularity is key for circularity. For example, how can you recycle this carpet? It is very difficult. It is clunky. Many things in buildings and products are not modular. So modularity is key and we have had an advantage in our product because of that. But then also modularity at the recyclability of the different materials is where we have not been that lucky because we have designed our product to last for a long time. That means that the raw materials are compressed so it is very difficult to separate them. This is what we are looking at, at the product design level. Again, the problem is there are no incentives for product designers or for companies to design those products in a way that they are more recyclable, especially when you don’t get those raw materials back. What is the incentive if this product is then going to end up somewhere and then other parts of the industry are going to reap the benefits? That is why we need standardisation in certain products and that is why we need rules. This is some first analysis from our company.
Zac Goldsmith
Just on that point, my understanding of your own company’s business model is that you got around that problem by becoming a service company as opposed to just selling tiles. Is that right? In other words, everything does come back to you?
Ramon Arratia
This is what we wanted to do in the 1990s and we failed miserably for several reasons. We wanted to become a leasing company. You need to be at the right part of the supply chain in order to take advantage of leasing. Who is going to make the money from leasing a drill? Is it going to be Black & Decker or is it going to be B&Q? Perhaps it is B&Q cannibalising Black & Decker’s business. Being in the right part of the supply chain or the value chain owning the relationship with the customer is key. The other thing is in the carpet industry it has little residual value. When you lease a car, you have some residual value at the end of the cycle, but for carpet it is almost negative. Thus there is little incentive for leasing, but we are doing other services, for example, helping with concept design and offering this service to recycle back. We are charging for that service. Now, if there is no landfill tax, if there are no landfill bans, we cannot compete from throwing away carpet relatively cheaply.
Zac Goldsmith
Initially, I was going to ask Mike. I think you were right there at the beginning when Plan A was launched—because there was no plan B, I think was the phrase—and it was a very radical plan that the company took on. In your submission, Ramon Arratia, you emphasised the radical nature of your own business approach to dealing with these issues. I just have a simple question. What was the driver? Was it PR? Was it CSR? Was it commercial? What was the thing that made that process happen? Let us start with Mike.
Mike Barry
Okay. Two or three drivers for this; first, the resource challenge. We are very clear that resource will become an increasingly precious asset for business to control in the future. We have grown up in a 20th century business model where commodities have been cheap. The cotton, the polyester, the wool that we use, we have always had the whip hand in terms of negotiation in the supply chain. As China and India start to boom in terms of consumption, they will want the wool, the cotton, the polyester we take for granted. It will drive the price up. Extreme weather events are disrupting supply chains, making it more difficult to get hold of materials. There are lots of reasons why we have to be on our toes in terms of resources. There is another big emerging issue for us as an incumbent business and that is the sharing economy and collaborative economy that is emerging, the circular economy. There is an incredible amount of disruption being injected potentially into the economy where small, upstart businesses can now come online, with none of the infrastructure that we have, and just rent clothing and take it back and bring the consumer back with them at the same time rather than the consumer coming to me. There are lots of reasons why Marks & Spencer decided seven years ago to crack on with keeping ahead of this wave of expectation. Consumers are challenging as well. They are not going to pay a premium for greener products but they do expect big business to be taking a lead. We saw last year with horse meat, and also with the tragedy in Bangladesh at the factory, that transparency and expectation of business behaviour is growing. Those pressures are accelerating. I think what is exciting at the moment is that business needs to be ahead of not just Government and regulation that might emerge but competition that will eat it alive if it does not move quickly.
Zac Goldsmith
In terms of your first response—so moving aside consumer attitudes—presumably, given that you were preparing the company in anticipation of trends that would accelerate, i.e. the rising pressure on resources and rising price of commodities and so on, does that mean that initially you did not put yourself at a competitive advantage, that the goal was to be at a competitive advantage later on in the company’s development? Is that correct?
Mike Barry
It is a good challenge—there is a reason I sit here with grey hair—that I have to find a way of marrying the short-term world with the long-term world. We are preparing for a very different business model, a circular business model in the future, but right here and now we are delivering £135 million of net benefit to the Marks & Spencer business model each year from less waste, less energy, less packaging. That is carrier bags and so on. There is a short-term benefit that we invest into today but also use to prepare for tomorrow. You cannot just keep preparing on the promise of tomorrow. You will go out of business.
Zac Goldsmith
From a consumer point of view, have you had a measurable positive impact in terms of consumer response to Plan A and your position?
Mike Barry
Yes, absolutely. M&S is now one of the most trusted brands in the UK. We want that trust in the M&S brand to be even clearer; the customers to be even clearer about our difference. Plan A has helped us retain a huge degree of consumer confidence in a very challenging marketplace. Bangladeshi factory? Not to do with us. Horse meat? Not to do with us. That is a powerful driver and incentive for people to shop with us in challenging economic times.
Zac Goldsmith
Just before I come to Mr Arratia, can you tell me then, in terms of going forward, what further profound changes you anticipate happening in the way you do business?
Mike Barry
M&S has one of the leading sustainability programmes certainly in retail in the world, 180 commitments. We have done 20% of the journey to be sustainable; there is 80% that lies ahead. We have perfected a way of reducing the impact of today’s model: better factories, better farms, better raw materials, better lorries, better stores, and so on. We now need to join it all up into a loop. Each individual bit of the M&S value chain is getting better but it is each individual bit. It needs to be designed differently, and this is my opening point about design. It is not about designing a shirt with cotton or polyester, it is about designing the business differently. That is the next big battleground for us.
Zac Goldsmith
Sorry, I said I would move on but one more question for you. In terms of your business activities today, the shape of the business today, in what area do you say you are least sustainable? Which is the area that causes you most problems in terms of planning?
Mike Barry
I think consistently across the whole package it is this inability at the moment to join everything up. I am pleased that each individual bit is improving at the right pace. Have we made the whole thing tick into a new business model as opposed to a less bad existing model? Not yet, and that is what keeps me awake.
Zac Goldsmith
Can I ask you to respond to the original question?
Ramon Arratia
Yes. For us it was two things. First of all, it was the drive from our founder, who understood that we were doing a “take, make, waste” and for him it was a shock. Ray Anderson understood that we were just filling the landfills all over the world and he challenged us. You know how these Americans are, “Let us go for mission zero, yoo-hoo, yeah”. This seeming naivety of the Americans forced us to look for radical options and think big, and things emerged. We went to the inventors of nylon who told us it was impossible to recycle nylon. Now we have 100% recycled nylon, not only across our company but also across all of our competitors.
Zac Goldsmith
You only use recycled nylon now?
Ramon Arratia
We use 100% recycled nylon in most of our products. In the next few years our suppliers will increase capacity, not only to give us 100% of our products but also for most of the industry. In closing the loop with nylon we were successful. This was the driver. This seemingly naive goal that had been driven by our founder, but also decoupling from the rising costs of raw materials, which is driven by scarcity and also from oligopolies in raw material. If you look at the manufacturing industry, there are rising costs of raw materials and the margins are getting smaller and smaller. It is all about price, price, price. The idea was: how can we break that circle? How can we scavenge raw materials from other industries that perhaps are not that clever at recycling, and then we access those raw materials? That was another original thing. Today we recycle fishing nets into nylon for carpet, for example. Thanks to the EU directive for end of life of cars, now we can access some components that are in the windscreens of the cars. We are taking that raw material and we are substituting latex in our carpet. We have created a raw material without knowing it just by having producer regulation.
Zac Goldsmith
Can I ask you how far you have got in terms of meeting that original aspiration by your boss 20 or 30 years ago? How much have you achieved now and how much is left to achieve?
Ramon Arratia
We have reduced 90% of our own carbon footprint, scope 1, and scope 2, 90%. It seems a lot but when you look—
Zac Goldsmith
Sorry, say that again?
Ramon Arratia
A 90% reduction of scope 1 and 2 carbon, but when you look at the overall lifecycle of the products, that is only 10%. That is why we need the product designers and that is what we discussed before in the earlier session. Product design is key, because in the physical products most of the impact is embodied through product design. By changing your raw materials to alternative raw materials, recycled raw materials, you can slash carbon. If you look at from 2008 to now, we would have cut around 30% of carbon in our portfolio also by shifting—
Zac Goldsmith
Since when?
Ramon Arratia
Since 2008.
Zac Goldsmith
What about things like water and energy?
Ramon Arratia
It is not that big a thing in our company. For example, now we do not use water. It is virtually zero water. Carpet is not a big consumer of water like it is for potatoes or tomatoes. The other thing where we are struggling is redesigning our products so that they can be easily separable, the different materials. I think this idea of purity of materials is absolutely key. But again we need to design systems where the cost of getting the logistics back, the cost of these recycling processes, competes with the cost of, for example, landfill or throwing away for free.
Zac Goldsmith
If you achieve that, if you manage to create a situation where you can separate and reuse all the materials that go into the tiled carpets, would that then enable you to return to your original aspiration of being a service company? Would that make it work financially?
Ramon Arratia
It would help a lot. That would help a lot, but we are a carpet manufacturer. We cannot think—as we started to think in the 1990s—that a manufacturer could be good at service because you have different skills. Thinking back on the drill, Black & Decker will never be able to serve you as a need and rent that drill to you. It is going to be the retailer.
Zac Goldsmith
If you do not manage that then you are always going to be a business effectively that uses resources, produces a product, and that product eventually—some of it at least—is going to end up in landfill. Unless you create the service approach, it is hard to imagine you ever being a circular company. Unless I have misunderstood something.
Ramon Arratia
There are many ways that you can offer services. You do not necessarily need to own the product in order for the product to come back. If you impose a ban on the landfill of carpet across Europe—as it is in Germany and in other countries—effectively the carpet will go back to the best technology. If we have the best technology to recycle, it will come back to us. There are other ways. Ownership of the actual product across the whole life is not absolutely critical.
Zac Goldsmith
Since I am being greedy here, I want to ask you what the driver was that led you to put all your emphasis on remanufacturing. What was the trigger there?
Matthew Bulley
Thank you for stating “remanufacturing” because that is good, we are getting there. Our driver is around supporting the customer. Typically, we are selling large pieces of equipment and we need them to last for many, many years as they are working, and how do we understand how our customers use those products for them to make money? In remanufacturing products, we design products to last as long as they possibly can, but in doing that there is obviously a residual value in those. It was a demand from our customers: how do we take this piece of equipment that has done what it is supposed to have done but through material properties, arduous work conditions, extremes of temperature, very dusty environments; how do we look at ways that we can do that? From the customer point of view, we started to bring product back. We have an extensive dealer network, so slightly different to these gentlemen in terms of their business models. We don’t own the product that is being used by the customer in all circumstances. In certain cases we do use fleet management, and we look to try to increase that as we go through our sustainability goals. But the customer comes back and instead of saying, “Don’t throw that away or we are going to impose a ban” we try to look at a financial incentive. For example, we sell our remanufactured product at the same price as we offer new. Say that is £8,000 for an engine, at the point you bring back your old engine of the same type we will give you what we term a core deposit back. That may be £2,000, £3,000, £4,000. There is a financial incentive for the consumer, the customer, to bring the product back and then we are able to capture 96% or 97% of the products we have available in remanufacture back into our system.
Zac Goldsmith
Does this happen across the whole range of products?
Matthew Bulley
That is the aspiration. When we are servicing some small 1.5 litre engines that is a very different concept to servicing some of the products we have in large mining trucks. There is a scale; there is not a one-size-fits-all. The challenge then is how we look at the economics of the salvage technology on the smaller-scale products where typically there is higher volume. How do we bring those salvage costs down to make that an economic case to be able to provide that to the customer?
Zac Goldsmith
On the smaller engines, is the problem that you are not able to offer a big enough incentive?
Matthew Bulley
We are able to offer an incentive but obviously the less the selling price then the financial difference is challenged, but it is not impossible. The challenge becomes the actual initial sale value of those. By the time I have spent X number of hours disassembling the product and then the energy to wash it and then apply a particular technology, you get into the economics then of, “I can buy a new one more cost effectively than a remanufactured one”. If we can bring the cost of the salvage technology down, make the investment in the research and development there, then potentially we have other avenues to do more.
Zac Goldsmith
The last question from me: how much of that is about the original design? If you were to redesign those smaller engines in a way that they lend themselves more to being remanufactured at the end of their life, is that a big part of this or not?
Matthew Bulley
Yes, although we stand as a separate business unit within a remanufacturing business, we have very close relationships with the original product designers. Probably originally the business model 40 years ago was borne out of safe engineering, so I am going to design something for the worst application in the world. As you went through the cycle we have reached the point of making things as resource efficient to start off with as the initial sale value, but that may only give you one or two lifetimes in a vehicle. We are now at the point of designing things with a slightly larger surface area on an engine block that allows us then to remanufacture.
Zac Goldsmith
I am done. Thank you.
Mrs Spelman
It has been a very interesting line of enquiry, in what has been the Zac Goldsmith Select Committee I think in the last half hour. What Zac’s line of questioning has brought out—which I think is very important for our inquiry—is the subtle differences between the retail-facing company with, what did you say, over a billion products or something scary?
Mike Barry
2.9 billion items a year.
Mrs Spelman
So a huge challenge. My question was going to be whether enough of your customers value what you do. You said very clearly they will not pay more for it, but where the common question comes to all three very different types of business, is the question of how your customers view these products that are completely recycled or remanufactured or partially more circular in their concept. Do you honestly feel that you are doing enough to bring across to those customers what it is you are actually delivering? How do the customers regard these benefits?
Mike Barry
A good question. If I can answer on behalf of the consumer first and then we will talk about different models. Let me turn your question on its head and say, “Why should a consumer pay more for a product that has not exploited the planet and people?” If I am a Marks & Spencer person I would expect that to be the norm. Customers are clever. They turn around to us with arms folded and say, “That is what I expect off you, M&S, and, to a degree, those that regulate you. If you want to extract a premium from me, you have to make that product aspirational quality. I already pay more for Marks & Spencer food because it is desirable food. If you can make what you sell me desirable”—let us just use the word “sexy” for now—“that is why I pay a premium. I do not pay a premium for core compliance and standards”. That is where I think there has been a mistake in the marketplace. Some businesses have been lazy. We have always said there will be no additional costs for sustainability. If better costs us more money, we will use our energy savings to pay for it; no impact on you.
Mrs Spelman
That is a very pithy reply. To Caterpillar particularly, in a way your model, because of the sheer value of your equipment, is subtly different for your dealerships the more you can extend the life of that product. I know when I visited your factory I learnt that you have extended by seven times the lifecycle of those diesel engines that splutter away underneath the two-car carriages.
Matthew Bulley
The sprinter trains, yes.
Mrs Spelman
Do you think you are doing enough to make customers aware of that kind of achievement?
Matthew Bulley
I do not think we are doing enough and that is part of the reason for coming to talk to people like you. It is an area we are actively looking to do more in. Certainly, at an enterprise level, sustainability has been embedded within that. That has now been raised to one of our core values alongside integrity, teamwork, commitment and excellence. There is then a whole set of targets across the enterprise globally, not just for remanufacturing but around what we are going to do right across the piece in terms of energy efficiency and new building design. Remanufacturing is a key part of that and it is not just the engines and components. We have a certified rebuild programme. We have power generation, locomotives and freight trains again that we are doing a significant amount of work on. There is always more we can do.
Mrs Spelman
Are there explicit barriers to the remanufactured product?
Matthew Bulley
There are. I think it was touched on a little bit in the previous session. Within the UK no, but remanufactured from our terminology would be exactly the same performance of the product as new with the same warranty as new but at a fraction of the cost. In terms of imports in certain countries, that is deemed as a used product and then attracts different taxation and import. We think the performance and the price and the warranty is exactly the same so it should not be treated any differently from a new product but it is. Equally then, for our business model to work, getting the core, the old product, out is also a challenge in certain countries around the world. Therefore, some support in terms of that free trade agreement would be extremely helpful.
Mrs Spelman
Yes, I have stumbled on this. Particularly America, I believe. Is it true that if there is any part of a British compound product that contains an American component that you bring back to remanufacture, you have to apply for another licence from America?
Matthew Bulley
Yes, the EPA legislation means that we have to have traceability and control to demonstrate that overall the population of engines at a particular standard has not increased within North America. If we are going to bring product out or product that happens to operate within Europe, Africa and the Middle East that we choose economically to remanufacture in Europe but then want to sell back into North America, there are some additional steps that we need to go through.
Mrs Spelman
I am glad you mentioned that because I think that is an important fact that we need to bring out in the inquiry. Zac wanted to ask you about warranties. You have touched on warranties. With international standards, we have not mentioned the dreadful discussion about how this should operate within the single European market, but is there more the UK Government could do to help the standing of remanufactured products and their acceptance round the globe?
Matthew Bulley
From our perspective, within Europe it is not necessarily a problem in terms of being able to trade remanufactured product. I think the support is around education of the European population and consumers. In terms of Europe that is not an issue for us, but it is as we go more broadly into Russia, as we look at developing nations. Perhaps they do not have the skill set to do a full service item for our customer in those regions and, therefore, a remanufactured product would be a good, cost-effective way but equally balance the skills gap as those nations develop. We also believe that would be beneficial, but the tariffs at the moment are driving a different behaviour.
Mrs Spelman
Anybody else? Is there anything the Government could do to help raise awareness? It is really more of a Caterpillar example, but I know from your evidence that one of your principal customers is the Ministry of Defence. An awful lot of people do not realise that all the Ministry of Defence kit from the theatre of war is remanufactured in this country.
Matthew Bulley
That is right; in Shrewsbury, yes.
Ramon Arratia
Just going back to the question about whether customers pay a premium, I think it is a totally different question whether it is business to consumer and business to business. An Aldi supermarket is not going to be the one self-flagellating for the others to take their free ride. Also, you buy 20 or 200 things in a day and you cannot have the physical time to go through all of that. When people are paid to make a purchasing decision, because it is either public procurement or you are buying big amounts of something for a company, then there is sometimes a premium attached to that. We have seen some of our products achieving more premium because they had more recycled content or lower CO2. That is still not enough and I think we need to look at products in the circular economy at product level with two different lenses. One is: how can we incentivise product with more recycled content, so something that has happened before? We have products today with 5 kilograms of CO2, with 100% recycled nylon, and there are products in the market with 20 kilograms of CO2 with high-pile virgin nylon. Both pay the same VAT. Both pay the same tax. What are the signals that we are giving to the market? I think this is obviously the elephant in the room. Nobody wants to talk about product taxes, but I think that is something that has to be addressed. The other lens is how you incentivise redesign of the product in the first place and how you redesign logistics and business models that make money out of recycling and providing that service. That is where we talk about landfill bans of specific materials as we have seen in other countries. When you talk about landfill, tax escalation was a blunt instrument. I think that is not that bad compared to a landfill ban, which is happening today in Scandinavia. It is happening today in Holland. It is happening in Germany. More and more we are moving into that.
Caroline Lucas
You have talked a little bit already about disruption, and circular approaches can be disruptive to existing businesses. Those businesses often have already invested significant amounts in brands and distribution channels and so forth and might not look all that fondly upon this disruption. How can circular companies compete with that and deal with that problem of disruption?
Mike Barry
I think there are two bits of it. One is in any discussion we have here we have to put the consumer at the heart of this. This is not about the 10% of consumers who are probably a little like you in this room, informed, self-motivated, self-driven. If we are going to get 90% of British consumers to want to participate in this, we have to understand how the product we offer them from a circular model gives them benefits. If you look at the best examples from the circular economy or the sharing economy today—the Zipcars, the Airbnbs of this world—they have dramatically less social environmental impact but that is not what the consumer sees. They see a product that is better for me. It is cheaper; it is quicker; it is more social; why would I not want to do it? Oh, you have lifecycle assessment that says it better? Double win. We are very fixated on how we put the consumer, all consumers, at the heart of this and show them the benefits. That is where you are going to win from fundamentally. There is a degree of disbenefit, as we have just spoken about, about the freeloaders. There are people out there doing nothing, absolutely nothing. I am not looking for some draconian piece of Government legislation—I have already said it is 80% our responsibility—but there are a couple of smart interventions. We have heard about a landfill ban or tax on carpets. You could do the same on textiles and then you would leave it to the marketplace to compete to find the best innovative route not to put clothing into landfill. To me, the consumer, I have to sort that out. I have to sort out what to do with all the material I might bring back because the value creation for me is not just to keep on selling the service or product to the consumer. It is keeping the consumer loyal to me. The single biggest battlefield in the 21st century for business is customer loyalty. In the past, it was utterly driven by: M&S was my nearest store; Tesco was my nearest store. Those days are gone. You can buy anything from anywhere at any price. What makes people want to keep on participating with your business model? Trust, transparency, a model that I keep coming back and participating in. So, 80% me, 20% some degree of support and incentivisation from Government as well.
Ramon Arratia
I think you said there the key word, disruption. If we want change, we need disruption. Disruption is not necessarily a bad thing. We have seen how technology has disrupted, how we have many advantages because that happened. We are seeing disruption with electric cars disrupting the existing market, and perhaps they are the same brands who sell them but under the supply chain they are a huge disruption. There are people with different technologies and there is a big war going on. With the sharing economy there is a disruption already. We are disrupting and in our market we want to have disruption. We invented this idea of cutting into squares because we wanted to disrupt the broadloom carpet, but tomorrow perhaps there is a cleverer way to install a textile floor with something else and we will be disrupted. That is part of the market. We just need to define what we want for the market to deliver and let the market see who wins. We also need to look at disruption of the bigger system because if we look at products, sometimes we look with a very narrow lens. For a circular economy, it is the circular economy that is the service economy. It is creating disruption so that we consume fewer products and we buy and sell less physical products. It is more a service. We spend more money on services and less on product. It is not about just substituting the same product for a service that gives you the same. It is substituting a human need with a service and it might be a different thing than the product. Let me give you an example. I deal with anxiety perhaps by buying another Kit Kat. Perhaps another person deals with anxiety by smoking a cigarette. Perhaps another person deals with anxiety by having a drink. Now, if someone else could come with a service that helps you deal with anxiety, that is the local economy; that is the sharing economy. That is the most disruptive and we need to think at that big system level how we create an economy based on more hairdressers, more history lessons, more music lessons, where we trade on knowledge and where we trade on intangibles.
Caroline Lucas
Can I ask you one specific follow-up? From what you have said, I think you are saying that competition does lead to innovation. We had some evidence from Desso, which I think is a competitor company to your own. Looking at that in particular, would you say that that competition has helped you to innovate or does it get in the way of collaboration, which might be more effective in terms of leading to a more effective circular economy?
Ramon Arratia
I think innovation is good for business and we have—
Caroline Lucas
At the price of collaboration, though.
Ramon Arratia
We are collaborating at different parts of the supply chain and we are competing on who has the product with the lowest CO2, with the highest recycled content, and at the same time we share suppliers. I think it is a good thing but I do not think we are incentivising the market enough in order to make that competition better and more aggressive.
Mike Barry
Just to extend the very good point, the business leader of the future has to be able to deal with a nuanced world of one day you are competing with a company and one day you are collaborating with them and then back into the different rooms. I fundamentally believe that step change will come from competition. I want to see my clothing competitors do more in this marketplace. I need to see more of it so my customers just see it as normal on the high street, and I will help them bring things up. We work very, very closely with the Consumer Goods Forum round the world to lift food standards, the World Economic Forum to lift general business standards. But step change to deliver the sustainable world that we aspire to will only come from breakthroughs—as these guys have spoken about—where they have sought competitive advantage in the short term from being there first. We have to work together but we also have to want to win.
Matthew Bulley
In certain aspects of remanufacturing we do collaborate today, not to the scale perhaps we do within our own business, but certainly in Poland I remanufacture gearboxes for Renault. In France I remanufacture engines for Scania. Now, I will go back to the mindset question again. We have the thinking that allows us to do that. We have some of the technology already proven from our own Cat Yellow products to do that. In terms of a barrier to entry, for a company to suddenly decide, “I am now going to set up my full remanufacturing business” it is quite a heavy capital investment on the engineering side. The reverse logistics loop is key. Therefore, if we can work with that company to help to start that process but we are able to offer the service, it supports our business because it allows me to offset some of my factory overheads in terms of the customer being at the end base and having a beneficial product. But equally we start to help some of those companies get into remanufacturing as well. We get into then the IP debate of how much of their technology they want to share with us, which is absolutely fundamental to have a good, solid remanufactured product. There are challenges there.
Mike Barry
I am sorry, Chair, it is such an important point, just one final example. Business is very good now at collaborating on core standards. A lot of the world’s biggest clothing retailers are working together on the Better Cotton Initiative to produce cotton better in India and round the world. We then compete to get the biggest volume to the marketplace in the most desirable way at the most desirable price point for the customer. There is collaboration behind the scenes and there is competition front of house, and I think you will see more and more of that.
Caroline Lucas
I think you have almost answered the next question, but it was about whether in a formal way under competition law collaboration to set product standards is allowable.
Mike Barry
I chair the Consumer Goods Forum’s work globally on sustainability. It brings together Coca-Cola and Pepsi, Unilever and Procter & Gamble, Marks & Spencer and Tesco. Normally, we try to knock six bells out of each other, but we suspend that to come into the room. Every conversation starts with a lawyer reading out a statement to say, “We will not infringe the market. We will not do anything that is anti-competitive”. I think it is very tightly controlled. You can work within it with the lawyers there to keep an eye on you good and honest. Do we need to find a way of taking it even further? Probably. I am no legal expert but I do sense that if we need to get to the level of broad collaboration in the circular marketplace we might need to revisit that and solve it a little bit better.
Ramon Arratia
I do not believe that we are achieving a huge amount of progress by industry collaborating. When we talk across industry, we always take the minimum standard, the minimum common denominator, which is the performance of the laggards. That is where the Government has to step in to have tough choices, which also means that some of the low-performing parts of the market will be out of the market. We have seen that in the car industry and the market has evolved. If we let just industry collaborate it is very difficult to have really transformative standards.
Chair
Isn’t there a tendency to always go for the lowest common denominator?
Ramon Arratia
I think so. There is a tendency to go for a standard of the lowest common denominator and narrow transformative. What I am arguing is that we can come up with legislation that is also like a Gaussian curve, a bell curve. There are some parts of products in the market we just need to abandon. No industry forum will do that when that part of the industry is present. Then there is about switching the other products towards the higher performing. We have done that with grams of CO2 per kilometre in the car industry, we have done that with REACH, and it requires leadership at policy level.
Dr Whitehead
I am getting a view of almost a platonic product that continues to exist regardless of what is in it or has gone out of it or who owns it, and it carries on. That seems to me to give rise to a number of very difficult business propositions, such as: how you track your product when it is out there, at what stage does it come back to you and how do you deal with your production and remanufacturing arrangements on the basis that that is a different way of doing it, rather than producing a load of stuff you hope you are going to sell and forgetting it. How do you manage to work those different kinds of business models into that different kind of manufacturing and remanufacturing and, obviously, leasing within the service economy?
Matthew Bulley
Typically, with our dealers in territory, we have 180-190 dealers across the globe and their role in life is to be the touch point with the customers. They have a good set of data on what population of vehicles they have sold and they are servicing within region. A slight variance on that is when you have ships and marine craft that tend to go around and arrive at various ports, but that is a small percentage. Historically, we have relied on the dealer knowing what information is there. Because we get a high percentage of our remanufactured product back once it has come to the end of its life, we tend to have a core pile, a stockpile, of old end-of-life engines for us to work through. Therefore, as we are remanufacturing those, we put remanufactured products on the shelf. But if a dealer requires one of those fairly well within 24 hours they can order that part, the same as you would on a normal distribution model, and that part can be available for the customer. The customer is not getting their specific unit back because that then has a long lead time and that is not acceptable in the marketplace, but they get a like for like. Because we warrant the same, and the quality standards and the testing that we run through are all exactly the same as new, and in some cases improved, they then get a very reliable product at the end of it at very short notice. We are able to manage the remanufactured element of supply through our parts distribution side and the stocking. In terms of moving forward and how we further optimise that, we have a product called Product Link, which has telematics on the equipment. That is feeding data back into the dealership and Caterpillar centrally to give us conditions of heat of the engine, emissions, hours of use and how the vehicle is being used. Therefore, we are able to offer servicing and training as well to educate the driver to use the vehicle more appropriately to burn less fuel, but also we have a better indication to optimise our entire system as to when that unit is likely to need a service and/or then a remanufacture at the end of its life.
Dr Whitehead
How does that sort of process take account of innovation within the product itself? If you have a platonic product existing outside of its particular contents or its owner, in principle that then looks like the same product, but presumably that will have to change over a period of time and its design will have to take account of the fact that it can be both remanufactured and innovative at the same time.
Matthew Bulley
At certain points, certainly, a machine that was designed 50 years ago, with advances in hydraulic design control systems, is not applicable today in certain markets. That said, in other parts of the world that technology is absolutely appropriate. Some of our remanufactured products go into a certified rebuild and they get sold on elsewhere. The other piece that plays into that, particularly on engines, is around emissions around the world. There are certain emission standards and a product that was in existence 15 to 20 years ago, because of the emissions now, if we remanufacture it, we cannot resell that because it does not comply with the emission standards. But we can sell that product elsewhere in the world.
Dr Whitehead
Does the collaborative and competitive nature of this new economy extend to either taking back other manufacturers’ products or incorporating part of another manufacturer’s product into your remanufactured product, or does it have its own ecology of protecting what you have? I do not suggest for a moment that you or anybody are in the business of changing the lead on your recharging devices in order to make sure that you have to buy the new one. I do not mention any names here, but that sort of issue as far as how you protect a competitive advantage against a collaborative environment in which increasingly, presumably, the existence of remanufactured modules of products means that those are also, in principle, interchangeable in terms of what a company may make as far as its leased or remanufactured offer is concerned.
Matthew Bulley
Yes, and ultimately I think it will. The technology piece on: are we going to start bringing back other competitors’ engines? At the moment, no, because the platforms and the design of those today is very different. If the economics were such, and it has been the case on certain vehicles that we do not have a Caterpillar engine in those units, we then work with a supplier at that point to look at the opportunity of, if we were to put another manufacturer’s engine into one of our pieces of equipment, do we have the supply agreements in place that will allow us access to the IP to then look at remanufacturing those units? I would not say that our direct competitors have any view at the moment that that is ever going to happen, but certainly as we work through our supply base—similar to Marks & Spencer, where they have suppliers looking at multiple customers in their retail space—we have opportunities there where we can look at sharing the technology and how the scale allows that to be more competitive.
Mike Barry
If I could just add from a very different business model perspective, our shopping model with Oxfam. We will take clothing back from anybody. Oxfam can extract value by selling it in their shops, donating it ethically in Africa or turning it into new fibre for reuse from anybody’s clothing. It is a very different business model from Caterpillar; it is bound to be a little bit easier. The thing that will be the glue for all of us, for UK plc, is the Internet of Things. I talked about M&S selling 2.9 billion items. Walmart is 25 times bigger than M&S, 100 billion items, probably. There are 100 billion items of clothing sold in the world. If we want to make maximum value from the fibre and the ability to bring products back and reuse them, this has to be able to scan that to say, “Sir, you have finished with it. The optimum way to do it is to take it to an M&S store or to here, to there. You will get £1.50 if you return it in this form”. If UK plc is going to innovate on one thing, the Internet of Things will enable a circular economy.
Mrs Spelman
There is a new app in the making.
Dr Whitehead
Does that go for carpets as well?
Ramon Arratia
The same. For us it would be a bit easier because we know where the carpet is installed because we have perhaps installed it or there is a building. You know where it is, but it would also help.
Chair
Okay, our final question is back to Caroline Lucas.
Caroline Lucas
We have touched on this several times already through the afternoon, but just in case there are other examples you could give. We have talked about a landfill ban, for example, but basically what other tax and regulatory changes could Government make to promote the circular economy in your experience that we have not already touched on?
Mike Barry
Just to bullet point it in the interests of time, first is innovation. We have talked about the Internet of Things. I think WRAP and TSB do a very good job on your behalf so I would encourage them to be supported. Finding new use for materials: if I get 6,000 tonnes of wool backing on my suits, who else can use it? It can be turned into compost for use in the agriculture sector. So, innovation. Legislation: we have waste legislation; we need resource legislation. That would be my second point. The third point is simplification of collection of recycling across the British Isles and all these different councils. The fourth thing is landfill bans, so making sure that we ban specific materials. We talked about textiles and carpets. Taxation system is number 5, ensuring we have reduced VAT on recycled materials to encourage their uptake. We have not talked about packaging levies. We pay a packaging levy on all the packaging we produce and put into the marketplace; right thing to do. It disappears into an opaque bucket. When we work directly with Somerset County Council with that money, we have innovated, we have created a great scheme to close the loop and bring plastic back into the M&S supply chain. I cannot do without the noble opaque bucket—
Mrs Spelman
Just pause on that button for a second. Did you do that with Somerset Council with a view to rolling that out across other local authorities? Have you had any wider discussions with the LGA about doing that in other parts of the country?
Mike Barry
M&S, 4% market share on foods. We are not going to do all of the British Isles but we are having conversations with other local authorities to take us towards a point that for every tonne that we put into the marketplace we are able to say we have helped a tonne out back into recycling and reuse. I would hope other supermarkets would then step in and do the equivalent for them.
Chair
That goes back to my point earlier, doesn’t it, that there is not the consistency across the country in terms of collections and waste management policies at local authority level?
Mike Barry
Yes, absolutely. I know how complex it is for you as politicians to deal with decentralisation and support for local authorities, I understand that, but it would help enormously to have consistency across counties.
Caroline Lucas
Were there any others? Those were wonderful bullet points; anything to add?
Matthew Bulley
From our perspective it is just around the treatment of remanufactured goods, that they ought to be treated the same as new across the globe. Equally, just on the work the TSB are doing in terms of the research and development of how we look to get more out of the materials and the form of the materials that we have today, then that is excellent work and please continue to do that. That link between the support there and the universities and academia is a real plus.
Ramon Arratia
At product level we touched on taxes, but I would like to reiterate the link between carbon and recyclability. If today you say that you are going to make decisions based on recycled content, for example, for our products or for this product, higher recycled content will not give you the higher value because perhaps you can have much more volume of the thing that is less value. I think linked with carbon lower embodied carbon sometimes works much better because usually the things that have higher embodied carbon have higher value. If we want to do taxation for the circular economy, it is better to tax carbon at product level. The other one is public procurement. We all talk about public procurement, but it is very difficult for a person buying carpet in a local council to know which is the best. We have the transparency in the car industry because of grams of CO2 per kilometre it is clear which car you buy. You say, “In our local council, you do not buy cars with more than 120 grams of CO2 per kilometre”. For other types of things it is more difficult. That is why we need to increase the transparency for those industries to provide the EPDs, the environmental product declarations. The other one I think is also interesting is performance standards. As we have seen from the EU comment for energy-using products, performance standards can also be applied for embodied carbon products such as whatever, cement or steel or wood, and so on. Then I think the big one—which is where we would make the biggest change, but is also the trickiest—is moving taxation from labour to resources. I think why the circular economy is not making sense is because repair is more expensive than importing resources from China or from Asia. The thing is if we want to create that new circular economy of people who repair, people who remanufacture, sometimes it takes labour and we are taxing labour.
Chair
Fortunately, despite the interruptions, we have managed to get through the questions that we wanted to ask you. We recognise that in the case of each of you, in respect of Caterpillar Remanufacturing, Interface Carpets and Marks & Spencer, you are each giving evidence because you believe in the whole paradigm shift that needs to take place. We would like to thank you for what your companies are doing to promote awareness on this most important agenda. We very much hope that, with the two evidence sessions that we have had this afternoon, there will be an opportunity for us to come up with some recommendations that might help to press Government on the way we go forward on this most important agenda. Thank you all, and to our previous panel—I did not have the chance to thank you previously before the division vote. Thank you very much indeed. Oral evidence: Growing a circular economy, HC 1176 19