Energy Transition

Why strategic partnerships are a business model for the green transition

The green transition could mean businesses no longer chase a low-cost model.

The green transition could mean businesses no longer chase a low-cost model. Image: Unsplash/Sander Weeteling

Hilde Merete Aasheim
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  • Intensive cost competition under globalization has led to highly decentralized, complex and often vulnerable supply chains.
  • With the emergence of the green transition, the trend toward chasing low costs may be turning.
  • Increasing competition based on climate, environment and social parameters may now favour strategic partnerships, representing a shift to outsourcing and home sourcing industries.

The pursuit for lower costs has led to decentralized supply chains enabled by globalization. This current system has meant increased productivity, cheaper products and more choices on store shelves. It has also, arguably, lifted many countries and populations out of poverty and into the global middle class.

At the same time, the harms related to greenhouse gas emissions and social standards along the value chain have meant that supply chains may have become excessively dispersed and vulnerable. For example, a typical motor vehicle contains approximately 30,000 parts sourced from multiple suppliers across the globe.

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Vulnerabilities exposed

This decentralized model has come under significant pressure. The coronavirus pandemic revealed the precarious supply chain as lockdowns led to backlogs followed by congestion at ports when everyone scrambled to catch up. That insecurity in the supply chain was further evident after the Russian assault on Ukraine led to ports being blockaded and resulting in product shortages.

Escalating trade wars are disruptive. Most of all, it is far from certain that a model of scattered and split supply chains based on transportation crisscrossing the globe is the most viable response to the greatest challenge of our time – the global climate crisis.

As the pendulum swings, home sourcing emerges as a way to reverse decades of outsourcing, aiming to build entire value chains “at home,” often heavily subsidized. But another way could be to rethink business models where cost competition is not only the focal point – they should also prioritize the race to achieve a new level of sustainability standards, including zero climate emissions, positive nature impact and more social goals. Such a race could impact business models in the future.

Strategic partnerships for sustainable value-chains

The green transition drives fundamental changes, from the rapid build-out of renewable power generation to the switch from combustion engines to battery electric vehicles. Consequently, the world will need significantly more raw materials and different, lighter materials, such as aluminium, to build the greener infrastructure of tomorrow.

For new technologies to solve the climate crisis, attention must broaden from emissions during the use phase to include embedded emissions. Hence, in addition to speeding up the rollout of transformative technologies, we also need to think about how these raw material-intensive enablers are produced. Demand for materials like aluminium, steel, and cement to build the infrastructure needed for the green transition is growing. But it matters where and how materials are produced; all production comes with a footprint.

Today, these materials represent roughly a quarter of the world’s carbon footprint, which is still produced using fossil fuels. Electric vehicles, modern energy-efficient buildings and renewable power infrastructure only do half the job unless the materials they are made from are decarbonized. While the previous decade focused primarily on carbon emissions, the next decade will see an increased focus on our impact on nature and societies around us, ensuring a just transition for all.

It may seem a paradox that what the world desperately needs more of is often more costly than products produced in ways that the world desperately needs less of.

Hilde Merete Aasheim, President and Chief Executive Officer, Norsk Hydro ASA

The green transition requires us to rethink business models by replacing the traditional vendor-purchaser relationship with strategic partnerships to get to zero. Critical metals and other raw materials needed for the green transition must be produced sustainably and responsibly.

This shift would allow a paradigm shift in business models through partnerships with raw materials providers that may have a lot of the value chain in-house (while still across borders), thus securing complete control and enabling transparency at every step of the value chain. By bypassing many layers of sub-suppliers and going directly to upstream producers, manufacturers can gain comfort in the provenance and sustainability credentials of the materials they purchase.

Greener as a path to long-term profitability

Partnerships between industry frontrunners help to establish joint roadmaps and push the frontier of what is possible and affordable. One such example is the Polestar 0 project, which aims to eradicate all emissions from production by partnering with raw material providers to produce the first truly climate-neutral car by 2030.

The aluminium industry has taken the first steps on this journey, with frontrunners looking beyond their supply chain to reach their sustainability goals. Leading automotive players such as Volvo Group, Porsche, and Polestar choose to partner with fully integrated aluminium producers such as Hydro to pioneer this shift.

Strategic partnerships will be a crucial enabler for increased demand for low-carbon metal for the green transition alongside an overdue awareness of the broader implications of metal and mining activities on nature and societies as a united and mutually dependent value chain.

Increasing access to sustainability

It may seem a paradox that what the world desperately needs more of is often more costly than products produced in ways that the world desperately needs less of. So, how can we lower the risks and encourage suppliers to scale up critical emerging technologies for the green transition?

The World Economic Forum, with some of the world’s leading brands, has formed the First Movers Coalition to enable competition based on sustainability credentials rather than just cost. By using their purchasing power to create early markets for innovative clean technologies across hard-to-abate sectors, they aim to help suppliers overcome a major hurdle for the green transition by softening the most severe risks and costs of innovating and investing.

When the bold, green investments are made, helped by the predictability of pre-arranged off-take agreements and the new technologies prove successful, the costs of producing will consequently fall and create sustainable products increasingly more competitive compared with conventional mass production, letting regular market mechanisms work in favour of the green transition.

Transition for good

The vulnerable supply chains and the increasing importance of cutting emissions and raising sustainability standards may make strategic partnerships the new trend, benefiting the security of supply and sustainability standards. It may even enhance cost control and the ability to build greener brands, potentially achieving better market prices.

The green transition is here to stay, and new business models – improving the security of supply and demand – may enable the pioneers to take the lead and drive up their speed and force.

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Related topics:
Energy TransitionNature and BiodiversityBusiness
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