Could chemicals be leased? Business Model research by Board of Innovation.

Arne Van BalenBusiness Model Innovation

As you may have read in my previous blogpost , companies are destroying value in their ecosystem by implementing the consumption economy. Cradle-to-cradle and closing-the-loop business models have abortively been trying to fix the negative environmental impact inherent to the consumption economy. The real solution is a functional economy – an ecosystem in which companies sell the service of a product rather than the product itself.

Board of Innovation worked together with Solvay, Johnson & Johnson, Tessenderlo Chemicals and several Belgian government entities to prove the viability and scalability of a functional business model with a closed loop in the chemical industry. In my opinion, a functional economy can be implemented in any industry if it’s feasible for the chemical industry.

What is chemical leasing?

A functional service model in the chemical industry is known as ‘chemical leasing’.
Both chemical leasing and car leasing build on the trend of providing a service. A functional economy is rather abstract in the context of a B2B context, but the idea is similar to a B2C environment. The key aspects are that the client pays for the result of a service and the service provider as the owner of the product during its lifecycle.

Let me give you a more detailed look into the paradox of the chemical industry. Suppliers want to increase their sales, while the buyer wants to decrease the use of the chemical product. It makes no sense for a supplier to make a better product as it would only result in a decrease in sale volume. In other words, the inefficient use of chemicals is rewarded. In a functional economy, the supplier and buyer would be willing to decrease the amount of chemicals used. The supplier becomes a service provider paid on the basis of what the chemical product delivers. No matter how much  the product is used, the agreed price for a functional unit would be paid.

Screenshot 2014-04-03 15.56.11

Several pilot projects on Chemical Leasing initiated by UNIDO took place in 2004, including Wijeya Newspapers from Sri Lanka.

Wijeya Newspapers has a Chemical Leasing contract with its ink supplier. Payment is based on printed copies of newspapers rather than on the kilograms of ink used. The ink supplier remains the owner of the ink. Both parties will be motivated to consume less ink with financial, environmental and, in this case, even internal health benefits as a result. Long-term contracts and the sharing of expertise are some of the prerequisites of chemical leasing.

Download our PDF: The business model of Wijeya.


Waste regulations will be part of history

The pilot projects validated the assumption that a service model creates benefits for both parties and the future of Chemical Leasing seems to be bright! The next step is closing-the-loop. All chemicals used while servicing a client will remain the service provider’s property. Taking back chemicals after use eliminates the waste processing cost and allows the supplier to recycle part of it. Waste regulations have always been a burden in the recycling of chemical products but, since ownership is not changing, in a legal sense no waste is being created and a whole new world is opened up for a conservative industry.

Regulators are often only able to criticise change. I’m curious how legislation will try to ‘fix’ this evolution.