Scrappage scheme - here to stay?

I came across an ad this morning for a company which was offering to take old windows in exchange for a discount off new ones. This company has followed the legions of others offering similar promotions - you can now exchange your car, your computer, your washing machine, your mobile phone, and heaven knows what else.

The interesting thing is that besides from the car scrappage scheme, they are all privately financed. So what does this represent? Is it a temporary marketing ploy? Or does it reflect changing consumer values?

The answer is simple, at least in the short term: companies are trying to shift more products in order the beat off the recession. But does this make economic sense?

Unless the product contains rare metals, and/or significant amounts of aluminium, copper or similar materials, then recycling will result in a net loss (for instance, recycled glass is worth next to nothing). In this instance, the margins on the new product must be good for a scrappage scheme to make any sense. Windows fall squarely in to this category.

Some items are borderline - a mobile phone for instance. It will contain rare metals, but the small quantities are hard to extract. Furthermore, most electronic devices have razor thin margins, so the benefits of a scrappage scheme are dubious.

In the case of cars, it would make no economic sense for a manufacturer to offer a scrappage scheme, unless incentivised by the Government.

So where does this leave us when the recession is over and consumer confidence is restored? Unless the markets for raw materials rebound strongly, it leaves us back at square one. Manufacturers have no responsibility for recycling the products which they produce, so increasing land fill tax has negligible effect. And it seems unlikely that consumers will insist on retailers taking their old products - I don’t particularly want to haul my dusty old vacuum cleaner down to John Lewis on a Saturday afternoon.

However, I think that products will increasingly be designed with longevity in mind, and that business models will change. I think there’ll be two main driving factors behind this - one is the move towards platform hardware, and the other is service contracts.

In order for a platform to be successful the installer base must be high. As long as an iPod is being used, the owner will be downloading content. If it flunks out then I’ll throw it away, and may or may not get a replacement. The same is true of game consoles, set top boxes, and even showers. This last example might seem strange, but it’s true. I used to work for a shower company, and they would sell cleaning products especially for their showers. The showers were designed to last for 50 years, during which they’d likely sell a huge amount of specialist cleaning products.

To take a more high tech example, Rolls Royce currently has thousands of engines in operation, and they’re all covered by a service contract. If those engines last 50 years instead of 40 years, then that’s 10 more years of revenue.

Rolls-Royce do something even more interesting - they monitor each of their engines remotely, and can tell when a component is about to fail. When the airplane arrives at its destination, a Rolls Royce engineer is on hand with a replacement component.

What if all hardware was designed this way? What if my iPod battery was showing signs of failure, and it recommended that I order a replacement? This would mean the product had as little down time as possible - giving me greater customer satisfaction, and allowing me to download more content.

We need products to last longer, and in order to do that we’ll need to innovate our business plans, as well as our products. Because what seems clear is that the scrappage scheme is a temporary gimmick, which makes little economic or environmental sense in the long term.