Is obsolescence good for business?
Why we need to stop sweeping e-waste under the carpet.
Rathbones’ stewardship director Matt Crossman takes a look at the problem of e-waste, a difficult challenge facing businesses, policymakers and investors in the move towards a more responsible capitalism.
There’s a fine line between a robust product, and a product so robust no one ever needs to replace it. This is the conundrum at the heart of today’s short-term capitalism and one which came into sharp focus when I recently visited a company that produces a sector-leading safety product. This product was truly best in class — it did the job better and was more trusted and more reliable for longer than its competitors. Yet the company has failed to grow, and was eventually bought out at a fraction of its real value.
The product was too good; it lasted too long and was too reliable. Sure, that’s nice — but it isn’t what investors want to hear. People bought it once, and then didn’t need the company in any meaningful sense. There was no ongoing revenue stream, and investors demand quarterly data and ever-increasing profits.
These are the strange incentives that lead us to make unsustainable or sub-optimal choices. Consumer goods companies are incentivised to make their products wear out faster, and it’s a real problem. Figure 7 shows how much waste from discarded electronic appliances such as mobile phones, computers, televisions and electrical appliances — collectively known as e-waste — is being generated around the world. Alongside that, it shows the comparatively small amount of recycling of this waste that’s currently happening.
There are four main ways companies can build in a faster replacement cycle – what’s known as built-in obsolescence: ‘contrived durability’, software updates, ‘perceived obsolescence’ and prevention of repair.
Here are a few examples, which may sound familiar. Contrived durability is a weakness in a key part of a product, leading to reduced durability and regular repair or replacement. Two years ago, in the same week baby Crossman entered the world, our three-month-old washing machine broke down. Newborns require a lot of clothes washing so I was straight onto the repairman who gently broke the news that I was his fifth repair of the week on this model with this part. What was perhaps unusual about this example was that the machine was still under warranty.
You’ve probably had the experience of a barely old phone that can’t run the latest versions of the manufacturer’s operating software. These almost untarnished products can do all the things that the most up-to-date device can, but they drive no revenue stream for the company and its shareholders.
Perceived obsolescence is a fascinating area. It’s basically clever marketing, where companies create the impression that a device is obsolete when it actually has years of use left in it. Once again, mobile devices are right in the middle of this issue. You have a smartphone that can perform tasks a, b and c; but this shiny new one has an extra megapixel camera, with a 5%-longer battery life. Smart marketing creates a need where there is none, using up more raw materials and creating more waste.
Making obsolescence obsolete
How can we address this deeply embedded and counterproductive characteristic of our economic system? One concept that is gaining traction involves changing the nature of ownership to reduce these perverse incentives.
Look at my washing machine, for example. Imagine that instead of buying a product, I bought a ‘product service system’ — a mixture of product and system. Instead of paying £400 outright for the product every three years and then for all the repairs, I could pay £10 a month and £1 a wash. This would mean the company has an incentive to deliver me a machine that works more reliably and is more easily repaired.
This is just one of many potential solutions that may help businesses and economies grow, providing jobs and generating sustainable returns for investors — all while looking after the planet.
In future editions of InvestmentInsights, we’ll continue looking at some of the challenges and opportunities of moving towards a more responsible capitalism.