economic issues in recycling end-of-life vehicles

Technovation 20 (2000) 677–690www.elsevier.com/locate/technovation

Economic issues in recycling end-of-life vehicles

Klaus Bellmann , Anshuman Khare*

Universitaet Mainz FB03, Jakob Welder Weg 9, Mainz 55128, Germany

Received 18 November 1999; accepted 8 December 1999

Abstract

This research paper evolves from problems related to the environment as the result of today’s product-based society and especiallythe end-of-life management of cars. The purpose is to identify key elements in car-scrapping approaches with the potential to meetthe following three goals:

O containing the environmental damage from end-of-life cars,O improvement of current end-of-life car management from an environmental and resource utilization standpoint, andO fostering manufacturing of scrap-adapted/recycled cars.

An attempt is made to analyze how financial resources could be organized for the ELV recycling system. A few suggestionshave been made in order to foster attainment of the above-mentioned goals through an extended producer responsibility throughrequisite market oriented financial support.

In short, this paper takes a look at the economic feasibility and ingredients for success of a market for recyclables. It laysemphasis on some kind of transparency at theeconomicand technical levels. 2000 Elsevier Science Ltd. All rights reserved.

Keywords:Automobile industry; Recycling industry; End-of-life vehicles; Polluter pays principle; Economic costs

1. Introductory remarks

The activity of collecting materials for recycling hasalways been practiced by man and recycling alreadyplays an important role in waste management in manyparts of Europe and in many industry sectors. Today,metals are among the most recycled materials and theindustries that are operating in this area are known asthe secondary metals industries. They operate underopen market conditions and, as any other business, theyaim to make profits. The paper and glass industries arefollowing closely.

The factors that determine the recyclability of singlematerials include the purity of the recovered products,the market for the recovered products, the monetaryvalue of the material, the cost of collection and transport,

* Corresponding author. Present address: Centre for InnovativeManagement, Athabasca University, 301 Grandin Park Plaza, 22 SirWinston Churchill Avenue, St Albert AB T8N 1B4, Canada. Tel.:+1-780-459-1144; fax:+1-780-459-2093.

E-mail address:[email protected] (A. Khare).

0166-4972/00/$ - see front matter 2000 Elsevier Science Ltd. All rights reserved.PII: S0166-4972 (00)00012-2

the cost of sorting, the cost of transformation into reus-able material and the cost of disposing of any residualmaterial. In this context, the recycling activities knownto be profitable usually concern material fluxes whichare regular, homogenous, relatively clean, maintain theirproperties over time and provide savings in manufactur-ing processes.

Among the different groups of products today, onegroup is especially distinguishable. It is given the namecomplex goods. Products of this group require specialdesign in connection with their end-of-life management.Characteristic of complex goods is that the products arecomposed of several different components and materialand have a relatively long life span and use. Someexamples of complex goods are electro–technical goods(domestic electronics, appliances, measuring instru-ments, etc.), machines and vehicles (cars, power units,aircraft, etc.), and technical building and constructionproducts. The car as a central part of modern society isa product that differs from others, for example, in itsdocumentation, potential scrap value, and physical size,and, thus, it affords possibilities for a controlled end-of-

678 K. Bellmann, A. Khare / Technovation 20 (2000) 677–690

Fig. 1. Recycling of ELVs.

life management. Against this background the car hasbeen viewed as a well-documented case and, therefore,a suitable main subject for a research paper.

2. Emerging recycling industries

The emerging recycling industries are often linked tocomplex waste streams like electric and electronicwastes or end-of-life vehicles. These industries generallyemerge because of consumer or regulatory pressure andusually do not benefit, at least in the beginning, fromfavorable economics.

Their challenges are often:

O The separation of the various raw materials presentin the product;

O The handling of very different material streams;O The lack of organized collection;O The lack of critical mass;O The lack of design for recycling, making it difficult

to sort;O The lack of specific recycling technologies;O The poor marketability and poorer product character-

istics.

The first, second and the fifth issues listed here can beclubbed together as “increasing complexity of products.”This poses a major challenge today.

Fig. 1 (based on VDA, 1994) provides an overviewof the recycling system as conceptualized in Germany.The ferrous and non-ferrous metals recycling industrieshave been well established in the European Union. Morerecently, paper, glass and textile industries too are

developing fast. Though the principal recycling indus-tries have some common features, they also displayhighly differentiated characteristics due to the differ-ences in the technical and commercial processesinvolved with the recycled material. Apart from thisdiversity of materials and processes, the diversity ofsources is no doubt a decisive element when determiningthe organization of a sector and its profitability. Thereare two major groups (CEC, 1998):

O the industrial source(which generates fairly hom-ogenous quantities of waste at a limited number ofsites) and

O the post-useor post-consumption source(which ischaracterized by a large number of points of origin,a high degree of heterogeneous materials and often ahigh degree of contamination).

Here, in this paper, we focus on the post-use source orELV handling.

2.1. Partners and supporting industries in recycling ofELVs

The industrial actors involved in the ELV problem aremany and very heterogeneous. They are linked togetherby technical and economic variables which can be affec-ted by policy and are at the center of industrial initiativeson ELV.

The car industry is obviously at the center of ELV,especially if design and material adaptations induced byELV are considered, and its role can be even more criti-cal if some orientations of ELV policy will prevail. TheEuropean car industry typically has an oligopolistic

679K. Bellmann, A. Khare / Technovation 20 (2000) 677–690

structure with few producers operating on a large indus-trial scale and international or global geographical scope.During the 1980s and 1990s, the industry was subject torapid technological, industrial and strategic transform-ations which had significant reciprocal connections(Bianchi, 1989; Graves, 1994; Wells and Rawlinson,1994). On the technological side, the integrated use ofelectronics, new materials as well as specific innovationin car design substantially improved car performancefrom the points of views of comfort, safety, energy con-sumption and pollution. From the industrial organizationside, the extensive processes of vertical disintegrationand “lean production” gave rise to the increasing impor-tance of the component industry, which partly becameindependent from major car companies, and the spread-ing out of international production and multi-nationaliz-ation in various forms. From the strategic point of view,a complex combination of search for the global scale,specialization in segmented markets and competitionthrough product differentiation emerged.

The strategic role that the car industry can attach toELV is not critical but can be significant in manyrespects. The observed response of the car industry toELV can be interpreted as defensive in order to complywith foreseeable environmental regulations through themost appropriate — and less costly — solutions. How-ever, the increasing market significance attributed to ren-dering the ELV issue as one component of more generalenvironment-oriented strategies which include the atten-tion to energy saving and emission reduction as driversof future market developments. Responses to ELV, how-ever, can assume importance also on other groundsrelated to the control of the car production system. Forexample, at the design and component industry level, theincreasing independence of component producers andservice suppliers has opened the door to an increasingrole of material producers as well as engineering compa-nies. The ongoing simplification of the relationshipsbetween the car industry and its suppliers can certainlybenefit from ELV developments.

The dismantling industry has a pivotal role in ELVfor reaching substantial increases of recycling rates —given the car technologies. The market structure of dis-mantling industry in Europe is characterized by an greatnumber of operators most of which are small and techni-cally not well equipped — as labor intensive operationsprevail — and with limited geographical scales ofactivity. In some countries, dismantling is still subjectto uncertain or disregarded legislative frameworks aswell as limited technical and environmental require-ments. While in some countries, a significant amount ofillegal dismantling operations occurs. There is however,in each country, also a core of more efficient and wellorganized dismantlers — some of them also integratedwith shredders — and the development of the ELVinitiatives — generally involving dismantler networks

operating under rigorous guidelines — tends to enlargethis core.

Given this dualistic structure, the strategic interest ofthe dismantling industry (the core) for ELV can be inter-preted as the search for creating a new industry structurewhere only the best organized, efficient and regulation-complying operators can survive and enlarge their mar-ket share — although local-regional scale will remain.The start-up of this strategy, however, raises varioustechnical and economic problems which are being facedthrough different solutions (in general economic incen-tives vs. cooperation agreements with the car industry).

Another important partner of ELV is the shreddingindustry which performs the operations leading to metalrecovery for recycling and the generation of AutomobileShredding Residue (ASR). In most European countries,the shredders are a few large companies exploiting planteconomies of scale, and some of them are also integratedwith metal recyclers and producers. The strategic sig-nificance of ELV for shredders depends on:

O the possibility to increase and stabilise the flow ofraw materials processed and thus final products deliv-ered for recycling;

O to reduce the economic and environment-related costsof ASR through its cleaning and reduced amount (orthrough additional economic outlets as ASR energyrecovery).

This strategy is therefore highly constrained by thedevelopments occurring in other parts of the ELV chain.

The other partners in ELV are the material recyclingindustries and the material producers. They can be con-sidered together given the extensive integration betweenrecycling and primary production in many sectors. It ishowever at the level of different sectors that differentstrategies attached to ELV can be envisaged.

Primary and recycled plastics producers are generallypart of big companies of the chemical industry which,similarly to the car industry, has been subject in the1980s and 1990s to extensive restructuring under theeffects of technological innovation, industrial reorgani-zation and globalization. Given the importance of plasticrecycling for solving the ELV waste problem — thealternative being a decrease of plastics among carmaterials — plastics producers and recyclers considerELV as a threat to their increasing control of key seg-ments of the car material market as well as to theirincreasing role in the components’ industry. Theattempts to develop plastics recycling is not importantper se but and it is, instead, instrumental for the possi-bility to preserve and increase the market for primaryplastic materials. The ELV problem can open a newphase of the relationship between the car and the chemi-cal industry.


In general, the strategic role that metalproducers/recyclers attach to ELV is twofold:

O an opportunity to contrast the ascent of plastics in carmaterial market and

O the possibility to stabilize supply of raw materials(scrap) given the importance of ELV for secondaryproduction and thus for an important segment of themetal industry.

These strategic attitudes are obviously differentbetween the different metal industries given the differentimportance of ELV for their operations, with steel andaluminium makers the most involved in the issue. Someimpacts of ELV on non-ferrous industry will also comefrom the policy provisions on heavy metals being intro-duced by ELV regulation.

Given the limited problems of material competitioninvolved, the other material industries interested in ELV(glass, textile, rubber, others) seem to have a relativelypassive attitude towards the problem.

2.2. Polluter pays principle

In dealing with recycling and waste management, theconcept of responsibility is essential. When there is noattributed responsibility, there is a clear tendency not totackle the problem. Thepolluter pays principle isembedded in the European environmental policy andprovides a legal basis for attributing the financialresponsibility for pollution. However, putting it intopractice does not go without difficulty since the pollutioncaused by the generation and disposal of waste cannotalways be attributed to “polluters.” Also, in focus arethe concepts such asshared responsibilityandproducerresponsibility. Shared responsibility means that theresponsibility for handling the waste product at the endof its life is shared between all or some of the variousactors/users. Technically the producer is often the bestplaced to handle the waste stream; however, the usercannot be exempted completely and has to bear a partof the financial clean up cost. Producer responsibilitywould mean the producer bearing the entire burden ofwaste management.

The concept ofextended producer responsibilitygoeseven further as a strategy that attempts to internalize theenvironmental costs of products throughout their lifecycles. This concept extends the responsibility of theproducers from their already assumed (e.g., work safety,production waste management, etc.) to the post-con-sumer stages of the life of a product. The strategy pro-vides an incentive for manufacturers to reduce theenvironmental impacts of their products throughout theirlife cycles and promotes the introduction of the new con-cept of design for recycling. However, compromises are

needed and the issue of fixing responsibility has to beviewed as a multiple goal problem.

3. Handling end-of-life vehicles (ELVs)

3.1. Background

During the 1980s and 1990s, the change in materials’consumption of European cars induced a decreasingshare of easily recyclable materials in end-of-lifevehicles (ELV). Currently, it is estimated that about 75%of the car by weight (the metal fraction) is recoveredor recycled, while the remaining share, the AutomobileShredding Residue (ASR), composed of plastics, glass,textiles, rubber and various hazardous substances, is dis-posed of by landfilling. The amount of ASR is expectedto increase and generate additional costs, at the sametime the potential toxicity of ASR is putting the ELVon the environmental policy agenda.

Various national policy initiatives on ELV took placeduring the 1990s and, in some countries, nation-wideschemes backed by legislation are the framework for theindustrial agreements on ELV lead by car companies.The most significant policy development on ELV, how-ever, took place in 1997 with the Directive proposal bythe European Commission (CEC, 1997).

In this section we briefly look at the landmark devel-opments.

In early the 1990s, although ASR was identified as arelatively unimportant waste stream (equivalent to onlyapproximately 1% of the tonnage of municipal solidwaste), the situation regarding its disposal remainedunsatisfactory. ASR, consisting of a heterogeneous mixof materials, including plastics, fibres, glass (and sometoxic substances such as PCB) could be further reco-vered. Additionally ASR has a high calorific value andcould be used as fuel. The main actors involved in therecycling of ELV were the scrap yards and retailers, theoperators of shredding plants, the steel and non-ferrousmetals industries and the local authorities for the dis-posal of ASR. Additionally, the entire car manufacturingindustry was slowly getting interested and involved inimproving the recyclability of cars (CEC, 1993).

It had to be kept in mind that besides the car industry,various industrial actors (dismantlers, shredders, recy-clers and material producers) were involved in the ELVissue. They all had different strategies and the interac-tions between policy making and industry was con-sidered rather complex.

After shredding the ELV into fist-sized pieces, ferrousmetals, non-ferrous metals and ASR were separatedmagnetically and by air classifiers. Proceeds from saleof the metal fractions were in the order of 90 ECU pervehicle. The shredding costs were approximately 37ECU per vehicle (Pu¨chert and Conradt, 1994). This did


not account for any transport or dismantling cost or ASRdisposal costs. Techniques had been developed both fordraining the various liquids from the ELV to avoid con-tamination and for dismantling valuable parts such ascatalytic converters, batteries or large plastic parts beforeshredding in order to reduce the quantity and the hazard-ous nature of ASR. Because of this ASR, the increasingcost of landfills threatened the profitability of the recy-clers who lived essentially from the sale of ferrous metalfractions, some non-ferrous metals and of dismantledparts. However, other factors also affect the profitabilityof the recyclers:

O the share of steel contained in ELV was expected toshrink due to the increasing use of plastics and com-posites to reduce the weight of new car models. Thesematerials end up mostly as landfilled ASR.

O the price of steel scrap, still the largest part of ELVs,depended on the price set by the world markets andon the imports of cheap steel from eastern Europeand Brazil.

O scrap yards and retailers contribute significantly to thereuse of parts and to the ELV recovery infrastructure,but many of them operated in a kind of legislativevacuum. The development of legislation had to becautious not to threaten their existence.

In the second half of the 1990s, one of the first initiat-ives to regulate the disposal of ELV was the Germandraft directive on ELV. This initiative, in favor, as inthe Netherlands, ofproducer responsibility, proposed tooblige car producers to take ELV back. As a reaction,all European car producers started to work on new con-cepts to improve current ELV disposal practices. Theirgoal was to avoid legislation and solve the problem onthe basis of voluntary agreement.

The European Commission recognized ASR as one ofthe priority waste streams and formed a ELV projectgroup composed of representatives from all concernedindustries, associations and governments. In March1994, this group presented a strategy for the treatment ofELV to Directorate General XI (CEC, 1993). The mainobjectives of this strategy were:

O Disposal (landfill and incineration without energyrecovery) of a maximum of 10% of the weight ofthe ELV for the car models marketed from the year2002 onwards.

O Disposal of a maximum of 5% of the weight of theELV on average per producer by the year 2015.

O Depollute the ELV before shredding so that the ASRmeet landfill standards as of 1995.

The voluntary agreements on ELV recycling acceptedby the automobile industry in France, Germany, Spain

and five other EU countries followed these recommen-dations to a large extent.

The final European directive on ELV (CEC, 1997) isnow being discussed within the European Commissionthat would oblige car manufacturers and importers totake back their used vehicles at no charge and makethem responsible for achieving high levels of recyclingand reuse. This strict application of the producerresponsibility principle is fiercely opposed by the auto-mobile industry. The recycling targets currently pro-posed by the draft directives are:

O To reuse or recover at least 85% of the ELV weightby 2002 while recycling at least 80% of this.

O To reuse or recover at least 95% of the ELV weightby 2015 while recycling at least 90% of this.

PVC, mercury, lead, cadmium and hexavalent chro-mium would be banned from cars starting in 2002 andthe models sold from then on would have to be designedto achieve the above mentioned recycling rates.

The EC Directive includes specific quantified targetsfor recycling and recovery, economic provisions andvarious provisions for direct regulation. Internationalharmonization and the need to overcome the limitationsof national and industrial agreements are the declaredmotivation of this Directive.

3.2. Impediments and prospects

The main bottleneck for the future of ELV recyclingis the cost of dismantling and disposal. Dismantling,because it requires a lot of manual labor and is the mostexpensive stage of the recycling process. Its cost, influ-enced by the current trend towards reduction of thequantity and toxicity of ASR, can be reduced through:

O Design of cars for recycling.1 Many car manufacturershave now developeddesign for recyclingguidelinesand parts suppliers are pressed to include recyclabilityinto their modules, and

O The development of advanced dismantling systems.

Design for recycling is likely to be a strong area ofprogress for car recycling in the future. However, sincetoday’s cars are expected to have a life span of approxi-mately 12-years, designing for recycling, now in itsinfancy, and related advances in the recycling of carsneeds time to show results.

One approach developed in industrialized countriesover the last few years, is to largely automate or simplify

1 The program BRITE EURAM helps funding R&D in this area(e.g., project BRE2 CT92 0.269 No. 5671 on the reduction of the cop-per content of electric motors).


dismantling and recycling to reduce cost (in developingcountries, where labor is cheap, life-time extension andrecycling work very well: the average life time of a carcan be as high as 35 years compared to 12 years inEurope). However, dismantling the thousands of modelsof cars on the market by some type of flexible automatedindustrial scale dismantling and recycling plants is atall order.

An alternative approach under development is todesign a process that can be fed entire cars and churnout reusable materials, energy, and a small amount ofnon-reusable material — Engineering, Separation andRecycling NV in Handzame, Belgium suggested such aprocess (IPTS, 1996). In view of the large variety ofmaterials contained in cars, it is difficult to produce sec-ondary materials of good quality with such a process.

If the producer responsibility proposed directive onELV is upheld, the automobile industry could move inthe recycling and dismantling area and take full controlover it. Additionally, the recycling targets, effectivelylimiting to 5% the amount of material that can be incin-erated, may have the perverse effect of limiting the useof plastics in cars, leading in turn to an increase in theweight of cars and an increase in fuel consumption.

On the other hand, the increasing use of light metalsshould not create too much of a problem for recycling.It requires new thinking. For example, the first full alu-minium chassis are already available on the market andwill be available for recycling in due time (Economist,1998).

However, emerging modular car concepts are nowopening new opportunities for integrated approaches toproduction, repair, upgrading and recycling.

3.3. Assessment of recyclability of an automobile

Another critical issue is the assessment of recycl-ability. A uniform calculation is needed in conjunctionwith the German and European legislation. In order toassist in “measuring” recyclability, the materials used inthe automobiles need to be categorized in one of thefollowing five categories of recycling:

O Recyclable — infrastructure and technology clearlydefined — Part is completely recyclable (or reusable),infrastructure clearly defined and functioning (e.g.,body sheet metal, engine blocks).

O Potentially recyclable, but no infrastructure is avail-able — Collection network not defined or organized(e.g., plastic interior trim).

O Potentially recyclable, but process or material devel-opment is required — Technology has not been com-mercialized (e.g., glass-fiber recycling).

O Energy recovery potential — Knowntechnology/capacity to produce energy with econ-omic value.

O No potential for recycling known — Recyclabilitytechnology not known (e.g., leather trim).

3.4. Economic trade-offs — the cost of being “green”

The costs of recycling are a combination of the costsof the collection of recyclable materials, of the relatedpre-treatment operations (logistics) and of the costs ofthe recycling operation itself.

The degree of efficiency with which the activities ofcollecting, sorting and preparing (treatment) the recycl-able waste are carried out has a significant effect on theprofitability of the whole sector.

The overall costs remain for the large part unknown.Economics form a major concern. The economics ofrecycling has to be viewed in relation to the cost of alter-native waste management options such as incinerationwith energy recovery of landfilling. The high relativeprice of the alternatives clearly helps recycling.

The price of virgin raw materials, which can be seenfrom the perspective of recycling as perfect substitutesfor the secondary raw materials, is another importantfactor for the economic attractiveness of recycling. Thisprice is in general strongly dependent on global tradeand on the world prices of raw materials, regardless oflocal regulations.

In fact, many European car manufacturers havethrottled down on their efforts to create “green” carsbecause they started to realize that there are economictrade-offs. Automobile take-back, dismantling, andrecycling can have large associated costs. Some commoncost factors could be:

O Buy back of car (Cost/car). Typically, this is depen-dent on condition and value of car type. In somecases, there may not be a buy back cost.

O Transportation costs (Cost/km). These costs may alsodepend on weight and amount of damage tolerated.Consider the difference in gas prices between Europeand the USA.

O Tip and storage fees (Cost/car). You typically haveto pay dumping material on a landfill. The propertyon which cars are stored also costs money. Thesecosts are strongly influenced by location of the recyc-ling facility and local legislation.

O Labor cost (Cost/hour). This speaks for itself. How-ever, labor costs also depend on the level of skillsrequired.

O Equipment investment cost (Cost) and operating cost(Cost/car, Cost/hr). Influenced by the need for special(expensive) equipment and the depreciation rate ofthe equipment.

O Time necessary to recover parts and materials(hr/car). This is strongly influenced by the design ofthe vehicle.


In order to obtain a profit, these costs have to be offsetby revenues. Revenues in automobile recycling can beobtained from:

O High value (high demand), undamaged recoveredreusable components. Additional processing(cleaning, inspection, upgrading, re-assembly, andredistribution) adds to costs.

O High value, uncontaminated scrap materials. Anycontamination which reduces material propertiesdepreciates the material value.

O Energy recovered and sold from incineration. This hasthe comparatively lowest revenue of all (steps listedabove).

In the article “Modeling costs of plastics recycling,”a technical cost model approach is given which high-lights the factors involved in recycling automobiles(Dieffenbach et al., 1993). However, investigating oranalyzing the micro-level cost aspects is not of immedi-ate concern. It is, however, important to point out thatrevenues and costs share a relationship and cost has tobe discussed in relation to the purpose for which it isbeing incurred.

3.5. Specific system components

Derived from the system components identified byanalyzing the different systems, the following compo-nents (some, marked with a star, are still underdiscussion) may be emphasized in light of their potentialcapacity to achieve the ELV recycling goals mentionedabove (the countries in which the system elements occur,are shown in parentheses) (Ryden, 1995):

O Car-scrapping premium (Sweden) — When the ownerdelivers his vehicle to an authorized car-scrappingfirm, a car-scrapping premium is given.

O Handing-in duty (Sweden, EU, Germany) — Accord-ing to law, the owner is required to hand in his worn-out car to an authorized or otherwise certified scrapfirm.

O Authorization/Certification of car-scrapping compa-nies (Sweden, EU, Germany, the Netherlands) —Authorization/Certification means that environmentaland professional demands are put upon the car-scrap-ping companies included in the system.

O Scrapping certificates (Sweden, EU, Germany, theNetherlands) — A certificate that is given to the lastcar owner as proof that his car has been scrapped andthat is required in order to de-register the car.

O Cost-free scrapping for the last car owner (Germany,the Netherlands)* — The car owner may hand in hisvehicle for scrapping without cost. The cost iscovered by another party.

O Reclaim and recovery duty (Germany)* — Producers

are responsible, without cost to the last car owner, forthe disposal of their worn-out vehicles. The producerhas a physical and economic responsibility for thefinal handling of its cars.

O Liability to render accounts for individual producers(Germany) — The producers must show how theyhave disposed of their worn-out cars and at the sametime render an accounting of the quantities of materialre-used or recovered, respectively.

O Recovery demands/goals (EU, Germany, theNetherlands) — Demands or goals that are set up forthe parties within the car-recovering sector.

O Differentiated scrapping fees (the Netherlands) —Scrapping fees are paid for every newly registeredvehicle. In order to stimulate car manufacturers toconstruct cars adapted to scrapping, the fees are dif-ferentiated according to the criteria required pertinentto scrapping qualities.

O Subsidized material recycling (the Netherlands) —Certified car-scrappers may apply for allowances toretrieve car components that are difficult to recover.

4. A case for the recycling industry

Recycling is not only an environmental priority but isalso intrinsically profitable in an increasing number ofapplications, thanks to energy savings and economies inmaterials and of other types which recycling permitscompared with traditional processes.

In general, the key factors (CEC, 1998) for func-tioning of the markets and a business framework, thefollowing areas are very significant.

O On the supply side, recycling is subject to pressurecaused by the growing cost of collection and pro-cessing waste, while finding itself in direct compe-tition with corresponding virgin materials. In theseconditions, structural and technical weaknesses con-stitute a significant brake on the competitiveness ofthe sector. Ultimately, the efficiency of recyclingcould be improved by ensuring that product designtakes into account the requirements of post-use/post-consumption collection, sorting and recycling.

O On the demand side, the competitiveness of recyclingis limited by a lack of preference for recyclable andsecondary materials on behalf of processing indus-tries, due to their technical properties, limited applica-bility and/or negative image. Furthermore, recyclingis likely to be hampered by the lack of pertinentindustrial standards, or even by the tendency for somestandards or specifications to ignore or discriminateagainst recycled materials or products.

O Lack of transparency in recycling markets is a majorimpediment for the investment required in order to


Fig. 2. Cradle to reincarnation.

achieve improvements in industrial structure, improveprocedures for treating recyclable waste and developnew applications for recycled products. The issue isfurther affected due to the imperfect transportationsystem in some parts of Europe which makes it diffi-cult for the proper functioning of the market forrecycled products/recyclables and entails high costsfor companies.

4.1. Closing the loop questions

When people talk about recycling, they often refer topost-use (post-consumer) recycling, that is, the recyclingof a product (or material) after it has been used by aconsumer. It is important to note that recycling is notthe only aspect which makes a product sustainable orenvironmentally benign. Recycling can occur at differentstages during a product’s life-cycle. Some organizationsuse the term “pre-consumer recycling” to characterizethe recycling of waste that occurs during the manufac-ture of a product. The phrase “Cradle to Reincarnation”emphasizes the fact that products can be reincarnatedinto new (either higher or lower valued) productsthrough recycling (Fig. 2). The phrase has evolved fromthe term “Design from Cradle to Grave” which emphas-ized the fact that one should think about what happensto a product/system once it has fulfilled its useful life.Another term to consider here is “inter-consumer recyc-ling” which would account for recycling done while thevehicle remains in the hands of the consumer. The termde-manufactureis appearing more and more in the litera-ture to characterize the process opposite to manufactur-ing involved in recycling materials and products after aproduct has been taken back by a company.

4.2. Linear economy vs. cyclic economy

The terms value added in exclusive relation to(production) activities up to the point of sale,valuewrite-off (depreciation) after the point of sale, andwasteat the end of the first (and only) utilization period ofgoods, are notions of a linear industrial economy or rivereconomy (Fig. 3—based on Stahel and Reday, 1981),where the responsibility for goods stops at the factorygate, and where waste — everything that leaves the fac-tory gate — is somebody else’s problem (and cost). Incontrast to such a linear structure, cycles, circles andloops (Fig. 4—based on Stahel and Reday, 1981) haveno beginning and no end. The producer’s stewardshipfor his goods is based on a value concept and neverstops — aneconomy in loopsthus does not knowvalueaddedor wastein the linear sense, similarly to naturalsystems such as the water cycle.

When discussing the benefits of the changes towardsa more sustainable society, and ways to measure them,it is of importance to keep the fallacy of the currentreasoning within the historic reference frame (non-sus-tainable national accounting system, prices of resourcesthat do not exactly relate to the resource value, subsidiesto foster unsustainable development) in mind.

In order to achieve the goal of economic activity basedon loops, a number of changes are necessary in the econ-omic thinking and organization:

O The industrial structure for manufacturing and re-manufacturing activities will have to be regionalizedin order to be closer to the assets in the market; thismeans smaller (re-) manufacturing volumes andappropriate methods using more and higher skilledlabour, the cost of which is financed through the


Fig. 3. The linear structure of industrial economy (River economy).

Fig. 4. Closing the material loop (Lake economy).

strongly reduced purchases of materials, and a virtualelimination of disposal costs.

O Products will have to be designed as technical sys-tems based on a strictly modular master plan, withease of maintenance and ease of out-of-sequence dis-assembly by workers or robots.

Fig. 4 shows the concept of closing the material loops.The loops of a self-replenishing, more sustainable ser-vice economy (or lake economy), and the junctionsbetween these loops and a linear economy (Fig. 3).

The service economy and the recycling economy aresimilar in that they both seek to reduce new materialflows into an existing system. However, there are alsofundamental differences. Promoting recycling strategiesas a way of closing the materials loop (Loop 2 and Loop

3 in Figs. 4 and 5) has the short-term advantage thatit preserves the existing economic structures (based onmaterial throughput) and so is easy to implement. Loop1 represents, to a great extent, inter-consumer recyclingand deals mainly with component recycling. The itemto be recycled still possesses the necessary “value” andrequires very little or no enrichment. The issue of cas-cade recycling also appears here due to possible secondand third hand use. Cascade recycling could take placein the same region or another one depending on factorslike labor cost of the operation, for example. Loops 2and 3 are both basically post-consumer recycling. Loop2 representing material recycling where there is a needfor change in physical dimensions of the item as it hasin the process of use lost a reasonable amount of its“value” and requires enrichment. The last loop denotes


Fig. 5. Closing the material loop (Lake economy).

feedstock recycling where the item possesses very littleto negligible “value” and requires high enrichment.Primarily changes in chemical properties is required. Incase this turns out to be a non-economical activity, theoption of energy recovery too can be considered (Fig. 5).

Ironically, however, recycling becomes less economicas it becomes more widespread. The necessity to enrichin terms of value grows with each recycling cycle andresults in a bigger loop where virgin materials hold adistinct advantage.

Its very success brings about an increase in the amountof secondary resources, causing oversupply of materials.This depresses the prices of both virgin and recycledresources alike, to which producers tend to react by seek-ing export markets. Thus overall material flows remainunchanged or indeed are even increased. Future technicalinnovation in recycling will include improvements in thedesign for the recyclability of goods, and new recyclingtechnologies, neither of which, unfortunately can over-come the basic price-squeeze phenomenon mentioned(Jackson, 1993). Increased recycling furthermore doesnot reduce the flows of material and energy through theeconomy; it does, however, slow down (and not“reduce”) resource depletion and volumes of waste. Inconclusion, recycling is a necessary prerequisite for theservice economy, but recycling alone is not sufficient tosolve the problem of resource overuse. Recycledmaterials are more expensive than virgin materials,whereas remanufactured goods are cheaper than newgoods: the smaller the loop (in Fig. 4), the higher thecompetitive advantage.

4.3. Strategic outlook

In contrast to recycling, strategies for higher resourceefficiency through optimization of the utilization ofgoods, measured as resource input per unit of utilizationover long periods of time, will cause substantial struc-tural changes within the economy. The key to this isclosing the product-life extension loop, which reducesthe volume and flow of resources through the economy.This closure can be achieved through the adoption oftake-back strategies (we can call it “end-of-liferecycling”). Because of the inherent structural changesthey are more difficult to implement than materialsrecycling which can be considered as a “mid-life recyc-ling” of the vehicle. However, as these strategies arebased on innovative corporate approaches, they arehighly competitive and contribute to sustainable devel-opment. They will become even more competitive as thiskind of economic activity develops up the learning curve(Stahel, 1994). Future technical innovations that can beexpected in this field are technologies enabling the useof re-manufactured and technologically up-gradedcomponents and goods, and commercial innovations tokeep goods in use as long as possible (Stahel, 1984).

5. Issues involved in developing markets forrecycled parts

5.1. Creating an efficient and effective automobilerecycling system

To create incentives regarding scrapping-adapted pro-duct development, a system is required that leads in this


direction and, thus, favors car manufacturers andimporters who invest successfully in this area. Such asystem must also be designed in a way that eliminatesthe risk of being regarded as a commercial impediment.In principle, any kind of regulation that is not inter-nationally harmonized, and which imposes costly obli-gations for the industry, has the potential of being lookedupon as a commercial impediment. The use of economicpolicies/mechanisms, which, by the allocation of scrap-ping costs better highlight the environmental propertiesof single cars, should to a lesser degree risk beingregarded as a commercial impediment than direct regu-lation of the construction of cars.

5.1.1. Future strategies for funding ELV recyclingThe demands that need to be placed on an economic

model for handling ELVs are that the flow of moneyfor scrapping be both stable and assured over a long-term period.

In this context, the car manufacturers have a decisiverole to play:

O In their capacity as primary players, the car manufac-turers may influence the activities of other players.

O The activities of the car manufacturers can be guidedby dynamic policies in the area of scrapping-adaptedcar construction.

By making the car manufacturers responsible for theend-of-life management of cars, a feedback mechanismregarding scrapping properties is created. The drivingforce for the car manufacturers in such a system isobtained primarily through the introduction of economicpolicies that favor those car manufacturers who assumeresponsibility. Thus, a car manufacturer who producescars with little environmental impact when scrappedshould be favored economically in the system.

A problem that can arise in a scrapping system basedon extended producer responsibility is that car manufac-turers may disappear from the industry for differentreasons, e.g. bankruptcy, etc., before they have fulfilledtheir obligations. In such cases, there is no responsibleplayer when the worn-out cars are being processed. Inorder to avoid this situation, it is necessary that fundsbe reserved and invested in a suitable way when the carsare sold.

In order to avoid any problems in connection with apossible differentiation of scrapping fees, all car manu-facturers could be asked to pay a uniform fee, which ischarged in connection with the sale of a new car. Thisminimizes the risk of the scrapping fee being regardedas a commercial impediment.

There also arises the question of handling of importedcars. This leads to the significance of harmonization ofnational policies with the European and of the Europeanwith the global. However, this too is a complicated issue

as it appears in the section ahead where we discuss thelegal framework.

5.1.2. Funding of scrap feesThe fees paid could be consolidated in a fund to

ensure that there are means available when a car is tobe scrapped. Fees paid for cars could be linked to a spe-cific car for later use when scrapping. This can be man-aged through fund shares owned by the respective carmanufacturers. The fees could be administered in sucha way that interest is generated. This means that fees tobe paid when a new car is purchased can be set at alower scale than otherwise would have been the case.

The proceeds from the fund could be divided amongthe different fund shares in relation to their size. Restric-tions on the withdrawal of money by the car manufac-turers from the fund share could be built into the systemso that the fees paid into the fund remain in the fundshare and could be used for car-scrapping, even if amanufacturer disappears from the market for one reasonor another.

In order to avoid fees being set at too low a level, aguarantee commitment could be built into the system sothat means are transferred from the fund share of eachmanufacturer to a collective fund, covering any deficitsthat might arise when a manufacturer disappears fromthe market and the scrapping fees deposited for thevehicle are not sufficient. Since no car manufacturerwants to pay in practice for the care taking of the cars ofother manufacturers, this will in itself provide a deterrentagainst fees being set at too low a level.

5.1.3. Agreement with the dismantling and recoveryindustry

Each car manufacturer could negotiate an agreementwith authorized dismantling and recovery companiesregarding the handling of worn-out ELVs. This arrange-ment must provide for the compliance with environmen-tal requirements, as well as fulfil the demand for costefficiency. When the time comes to scrap a car, the lastowner hands in his car to an authorized receiving facilitywhere the car is scrapped according to the methodsspecified by the car industry and the minimum require-ments specified by the authorities. Possible net costs forthe handling of the respective worn-out car are coveredby financial resources from the respective car producer’sfund share, including interest, thus rendering the end-of-life management free of charge for the last car owner.

5.1.4. Incentives for collectionIn order to introduce incentives for the collection of

worn-out cars, a hand-in obligation could be employed.With hand-in obligation, it is meant that the last carowner must turn to an authorized car-scrapper in orderto receive the scrapping certificate required for de-regis-tration. To further increase the incentive for the last car


owner, some form of reimbursement could be granted tocover any net costs that may arise in connection withthe scrapping.

5.1.5. Incentives for scrap adaptationThe opportunity for car manufacturers to make with-

drawals from their fund shares could create incentivesfor the car industry to develop better cars, from a recov-ery and dismantling standpoint. This means that if thefuture scrapping costs for a certain car manufacturer areless than what was estimated, e.g. if the individual carmanufacturer has improved the scrapping characteristicsof his cars or developed better scrapping methods for hisvehicles, the manufacturer should be able to receive arefund equalling the surplus in his own fund share. Like-wise, if a deficit should arise in a car manufacturer’sfund share, it is primarily the individual car manufac-turer who is responsible for payment. To guarantee thatevery car manufacturer can fulfil his obligations, even ifhis company has disappeared from the market, a collec-tive payment responsibility for other car manufacturerscould be required, as mentioned previously. Or as analternative, a form of insolvency insurance could bemade obligatory.

Again, one set of standards may not be effective asthe size of the car is another issue to consider.

5.1.6. The responsibility for the cars in existenceThe system suggested is based on the principle that

for each newly manufactured vehicle a fee reserved forits future scrapping should be paid. The system will,thus, come gradually into force and reach full effectwhen today’s existing cars have been scrapped. Duringthe time period until then, other ways of financing thescrapping must be employed. From a steering point ofview, it is probably of less importance which player willbe charged with the cost. The costs for the scrapping oftoday’s existing cars could be covered by introducingfees or taxes. However, from a cost efficiency point ofview, it might be of greater importance where the feesare charged and who makes the decision about how thecollected fees are to be used.

This big system needs to be administered. This iswhere either the voluntary agreements could be effectiveor the presence of a coordinating body like the Ger-man VDA.

5.2. Problems in the market for recyclables

The basic problem with recycling is that theproducts/cars in use were not designed to be recycled.Recycling has been ignored or, at best, treated as asecond order issue by manufacturers. The result isattempting to recycle products that were designed for aonce through use, such as the plastic in cars.

A second problem is that the market for raw materials

is cyclic with wide price fluctuations (Hendrickson et al.,1996). Raw material producers have very good or verybad years; they rarely have a normal year of business.The market for recyclables is even more cyclic withwider price swings. The extreme price swings mean thatan investor has to time his activities well or else he takesa risk of going bankrupt. The swings require high capi-talization or access to large loans. This is not popularamong recyclers as the average recycler is small andunder-capitalized.

Rapid changes in technology also dampens the wishto build up stocks during the bottom part of the cycle.The technology changes mean that demand for a materialcould disappear leaving the owner of the stocks withworthless inventory.

The timing of supply and demand poses another prob-lem. The demand for recyclables rises in the early upsw-ing of the cycle, climaxing before the height of the cycleis reached (Hendrickson et al., 1995). In contrast, theavailability of recycled materials can lag demand bymonths or even years. Accumulating inventory is anobvious solution to the timing mis-match, but inventoryaccumulation is attractive only if there is reasonableassurance that technology is not going to remove thedemand for this material.

With the exception of metal and paper recyclingindustries, large scale commercial recycling is relativelynew. Until the standardization of recyclables and asso-ciated market institutions is reached, these marketswould continue to require individual assistance with allthe associated transaction costs.

The problem is further aggravated due to the absenceof institutions that could facilitate marketing the recy-clables. For example, if in the car industry, the items aresold with the name of the car maker, it could make aremarkable difference. The direct involvement of the carmakers at one or the other stage is essential for the suc-cess of the recycling industry. Presently there is a lackof free and confident trading of recycable parts due tothe absence of standardization and non availability oflisted prices.

Very few companies believe that recycled productsand/or spare parts could be sold at a high price. Gener-ally, recyclers do not believe that they can gain marketshare by selling products or spare parts with recycledcontent. This means companies buy recycled materialsonly to save money. The recycling decision appears to bestrictly a business decision based on whether a companythinks it can decrease costs by recycling or not.

Technology for extracting materials from natural oresis far advanced compared to recycling technology. Theseextraction processes deliver a product of high purity andknown characteristics. These characteristics simplify theproducer’s task. In contrast, recycled materials are gen-erally less pure and of lower quality. There are some


associated problems as well with recycled products likedifficulty in coloring.

Large scale recycling requires an assured supply andexpensive plant and equipment. Entrepreneurs wouldinvest in these facilities only if they and their financiersthink that there is a stable market and that the risk issmall relative to the profits. Also, there exists the issueof long gestation periods before the revenues start flow-ing in and the setting up of the facilities.

Industries (chemical, petroleum, paper, etc.) devoteextensive resources to market their products. They sup-port technical standards and research that show cus-tomers how to use their products for an expanding rangeof applications. No adequate infrastructure exists yet forrecyclables. It takes years to convince the customers toadopt recycled products (for example, the various oilsfrom cars that can be recycled and reused). The indus-tries themselves have to support such recycled products.Without such support the recycled products will alwayslose out to virgin materials.

Many purchasing standards or guidelines call for vir-gin materials (Lave et al., 1994), regarding recycledmaterials as inferior in quality. Even in the absence ofsuch guidelines, purchasers’ decision is governed bysuch prejudices. Information is needed on the prices andqualities of recycled materials and on whether recyclingthese materials helps environmental quality and sus-tainability. To encourage recycling we need to shelvestandards that specify virgin materials in favor of per-formance standards that specify performance levels ofmaterials.

Cheaper recycled products would be acceptable in themarkets and the producers and recyclers need to thinkhow and where the recycled materials perform best.However, for some recycling one has to think about localmarkets and not national markets (Hendrickson et al.,1996) as the transportation costs may be high, forexample.

6. Concluding remarks: prospects for therecycables market

Laws are being enacted in Europe requiring take backand recycling of packaging materials and a range of pro-ducts. The automobile is one such product. These regu-lations have motivated major car makers to think of rede-signing their products for Europe. The global impact ofthese laws is however limited due to lack of supportinglaws in other countries outside Europe or in east Euro-pean countries. Also, instead of designing and packagingfor the world, these products are being designed andpackaged for specific markets. The take back legislationin Europe mandates recycling. Available markets arenow familiar with recyclables. In Germany, authoritiesare interested in subsidized funding systems funded bythe consumer for recycling and collection of materials.

Laws are leading to changes in the product design.Since designers and companies lose track of productsafter they are sold, it is not surprising that they give littlethought to design for recyclability. The health and well-being of the large industry that reuses components orrecycles materials from products is not of concern to themanufacturer. Products have traditionally not beendesigned to be recycled. In a number of cases, like theautomobile, changes in product design would do muchto enhance product reuse or recycling.

In theory, an efficient market would provide incen-tives for companies to think about their products at theend of their lives because the higher value would trans-late into a higher selling price. However, for durablegoods (like computers, electric appliances, ELVs) thatlast for years and for consumers who are not likely tobe bothered with getting the value of the discarded pro-duct, the manufacturer will not be able to charge much,if at all, more for products that will have great value atthe end of their lives. The question that faces us is —how can society get product designers and manufacturersto pay attention to design for reuse or recycling? TheGermans have provided an answer — the manufacturermust take back the product at the end of its useful life.When the manufacturer is responsible for reuse, recyc-ling, or disposal of a discarded product, there will be adirect incentive to think about the end of a product’s lifeduring disposal.

However, a word of caution. Take back in the auto-mobile industry cannot be interpreted literally, since thecost of getting the ELV to the manufacturer could behigh. Rather, the manufacturer assumes responsibilityfor the ELV and must arrange for reuse, recycling ordisposal. Also, getting back the ELV opens a range ofpossibilities for using more expensive materials thatcould be recovered.

The European Commission and German legislation goa step further mandating that a proportion of the ELVmay be recycled. What has to be kept in mind is thatrecycling is not necessarily good for the environment;especially when large amounts of energy are required tocollect and process the materials to be recycled. If dis-posal and material prices reflect the externalities associa-ted with extracting, processing, and disposing ofmaterials, more recycling will occur. Under these con-ditions, it is unclear what benefit an additional recyclingmandate would bring. This leads to the question of LifeCycle Assessment of the recycled constituent in relationto certain set guidelines like the ISO 14 000 series onenvironment.

There is a chicken and egg situation in case of recyc-ling: until there is an assured supply of recyclables anda market for goods made with recycled materials, no onewants to risk investments to use the recyclables. The firstissue is handled by the recycling laws which guaranteesa large supply of recycled materials. The second prob-


lem, finding a market for recycled materials is more dif-ficult. Short of government or some institutions subsidiz-ing manufacturers to use recycled materials, the demandfor these materials is likely to grow slowly, as recyclerstake small risks and then are rewarded by eventual salesof their recycled materials.

Recycled materials are viewed as inferior to virginmaterials and therefore, purchase of products made fromrecycled materials would be considered a sacrifice forthe environment. The educated and affluent, consideredless sensitive to price, would perhaps be willing to paya higher price, but low income consumers may not bewilling to pay unless there is a price inducement. Labe-ling and branding of the ELV components by majorplayers in the automobile industry could help this causeto a great extent.

There is and will always be a close competitionbetween recycled products and virgin materials. Inciden-tally, in this case too the competing factors are costand quality.

Acknowledgements

This research work is supported by the Alexander vonHumboldt Foundation in Germany and is being carriedout at Universita¨t Mainz with University Professor Dr.Klaus Bellmann at the Lehrstuhl fhr ABWL und Pro-duktionswirtschaft.

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try. St. Martin Press, New York.

Klaus Bellmann is a Full Professor at JohannesGutenberg Universitaet Mainz, Department ofLaw and Economics. His research and lecturesare focused to the fields of business adminis-tration and production management, as well asenvironmental economics and research anddevelopment related to industry. After obtaininghis degree in control engineering and technicalinformatics from Technische Hochschule Darm-stadt, he completed his doctoral research in thesubjects of economics and technology at theUniversity Mannheim. As an Associate Pro-

fessor at Mannheim, he pursued intensively post-doctoral research andcompleted extensive projects for the federal and regional governmentdepartments, industrial associations, and industrial corporations on theeconomics of energy supply, manufacturing, automobiles, and environ-ment. He completed the tenure at Mannheim with his Habilitation. He haspublished eight books and over fifty articles and papers.

Anshuman Khare works as a Research Scien-tist for the University Grants Commission, Indiaand is placed at the Motilal Nehru Institute ofResearch and Business Administration, Univer-sity of Allahabad, India. He teaches QuantitativeAnalysis and Business Policy. His researchinterests are Japanese Business philosophy andresponsible manufacturing. He has done hispost-doctoral research at Ryukoku University,Kyoto, Japan on a Japanese Government Schol-arship (1995–97). He has also delivered lecturesat the Kyoto Institute of Technology, Ryukoku

University, Kyoto, and Kansai Gaidai, Osaka, Japan. Presently he is aResearch Fellow of the Alexander von Humboldt Stiftung at the Johannes–Gutenberg Universita¨t Mainz, Mainz, Germany and works on environmentrelated techno-managerial issues in automobile manufacturing. He haspublished three books and over a hundred research papers and articles inIndia and abroad.

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