By Christian Böhler, Jean-Michel Pinto and Matthieu Noel

As market conditions deteriorate and industry competition intensifies, the pursuit of Circular Economy as a profitable business model may appear to be a lower priority for automotive OEMs. However, deprioritizing circularity would be a risky decision.

For OEMs, circularity should be a key pillar of company strategy and play three major roles:

• Create new profitable revenue streams at a time when margins on new car sales are increasingly under pressure
• Address regulatory requirements and ESG commitments for circularity and decarbonization
• Enhance supply chain resilience in an era where myriad risks threaten the automotive industry's globalized supply chains

Yet, achieving these objectives under today's financially constrained times requires
more than just an overarching ambition.

As with all strategic initiatives that have a far-reaching impact, the deployment of circular initiatives must follow a structured, strategic approach. The logic is relatively simple: accelerate circular activities that are already profitable and incrementally build new circular activities via a partnership ecosystem that reduces upfront costs for future activities—including those that are not yet profitable or may never be, but are necessary for regulatory compliance.

Strengthen foundations: optimize activities and strategically expand the portfolio for OEM remanufactured parts

Circularity has long existed among OEMs through remanufacturing of ICE mechanical parts. Yet, these legacy activities remain highly under-optimized. Core collection can be inefficient and/or unreliable, product development is slow and reactive and go-to-market strategies are often suboptimal — often resulting in an outdated market offering, limited customer adoption, and low penetration of less-mature European markets.

However, with limited investment and certain optimizations, OEMs can significantly expand this business, reach new customer segments, and improve profitability. Furthermore, the traditional Make vs. Buy criteria would also need to be reconsidered, continuing the involvement of tier 1 suppliers, while strategically investing in internal capabilities for strategic product lines.

The OEM’s capabilities that would be enhanced as part of this transformation — demand forecasting, engineering, logistics, pricing, and sales & distribution—will serve as the cornerstone for broader circular initiatives.

Push the boundaries: pursue strategic portfolio expansions into reuse & repair offerings

The European automotive market is witnessing the significant ageing of the car parc, primarily consisting of ICE and/or hybrid vehicles, likely increasing price-sensitivity of customers and likely increasing the Independent Aftermarket (IAM) network’s share of repairs. In parallel, the increasing penetration of electronics in all vehicle platforms today indicate that remanufactured and repaired electronics will represent an increasingly significant opportunity.

Driven by end-customer and intermediary (e.g., insurer) demand, the demand for remanufactured (20-30% more economical), repaired (30-40%) and reuse (up to 50%) parts is therefore expected to grow significantly in the coming years.

Once the foundational capabilities of remanufacturing are in place, OEMs will be well-placed to expand their aftermarket portfolios into Reuse and Repair offerings. While parts for repair can be sourced via optimized channels for reman core sourcing, the Reuse portfolio would require a different approach.

Here, partnerships become a critical lever—whether through commercial agreements, joint ventures, or acquisitions – to scale this business. From partnerships with dismantling centers for collection of “Reuse” parts and cores, to partnerships with distribution platforms for resale, success relies on a well-structured ecosystem. Only OEMs with robust in-house circular capabilities and scale will be in a position to strike these partnerships and make them work efficiently.

For most OEMs, the sale of parts (wholesale or via platforms) of other OEMs – sourced via dismantler partnerships/operations – would support the profitability of the circular model. While for certain players that have significant economies of scale of circular operations, a potential opportunity exists to capture higher value from these parts.

Cautiously enter new territories: expand to material loops to enable higher supply chain resilience

Among the varied proposals of the revised ELV directive, certain requirements are expected to create a significant onus on OEMs for vehicle recycling through revised Extended Producer Responsibility (EPR) requirements, and for creating material loops via mandatory recycled content for Plastics, and potentially even metals.

Unlike circular models for auto components that have significant synergies with existing aftersales operations, circular models for materials (e.g., plastics, steel, aluminum) are farther removed from core OEM operations and carry higher risk. Hence, OEMs should explore these areas selectively — choosing materials that address regulation, align with existing circular activities, offer sound economic potential, and can be efficiently integrated into the supply chain.

Once again, an effective partnership ecosystem is essential — building upon dismantling partnerships for sourcing cores and “Reuse” parts, to include partnerships with shredders and downstream recyclers.

In seeking partnerships, OEMs should look beyond just the automotive sector to ensure sufficient economies of scale for operational profitability. But OEMs must strike the right balance between internalization and outsourcing to ensure enough value is captured to ensure at least a break-even point.

Prepare for the future: evaluate options and deploy battery recycling models once economies of scale can be achieved

If there is one certainty in the battery recycling space, it’s that ignoring it would be a major strategic error. Indeed, as the EU Battery Regulation requires the gradual incorporation of recycled materials into new batteries, access to competitive recycled cobalt, lithium and nickel will become a must have.

Yet the pace of EV adoption, evolving battery chemistries, and recycling technologies create a highly volatile and uncertain landscape.

In such a high-risk environment, risk-sharing becomes the only viable strategy. Building coalitions across the value chain — recyclers, battery manufacturers, technology providers — is key to gaining early traction while limiting capital exposure.

OEMs with a presence in Europe should prioritize two immediate actions:

First, quickly define and deploy a cost-efficient model for collecting end-of-life batteries to secure a stable supply of feedstock. A critical prerequisite is gaining a clear understanding of Battery Extended Producer Responsibility (EPR) regulations, which can differ significantly across EU member states.

Second, support the development of competitive, large-scale battery shredding and black mass refining capabilities within Europe to enable a fully closed-loop system. Forming strategic alliances and securing medium-term supply and offtake agreements with recyclers and chemical companies can help de-risk these projects and build the credibility needed to attract financial backing from national and European public authorities.

Conclusion

For automotive OEMs, adhering to the four key imperatives is essential for building a robust and credible circular business model. However, it should be emphasized that circularity cannot succeed without operational excellence. A profitable circular economy model is, above all, an operational challenge.

While operational excellence spans many areas, three core priorities stand out as foundational pillars:

• Collection: Efficient reverse logistics and product take-back schemes are crucial to securing quality material flows at scale. This is also an area where artificial intelligence can be deployed at relatively low cost, enabling predictive collection planning, routing, dynamic inventory tracking, and sorting optimization — all of which can drive significant efficiency gains and cost reductions.
• Standardization: Circularity is fundamentally about managing diversity — used parts and materials are, by nature, variable and often unique in condition, composition, and provenance. However, achieving scale and efficiency in circular operations requires introducing standardization wherever possible — in components, interfaces, testing protocols, and data formats. This reduces complexity, lowers costs, and enables seamless integration across reverse logistics, 4R streams.
• Partnership Management: Circular ecosystems demand strategic, long-term collaboration — from recyclers and remanufacturers to logistics providers and technology partners.

These partnerships are not static: they must be regularly monitored, adjusted and rebalanced as technologies, market conditions, and regulatory landscapes evolve, all the while remaining mutually attractive and value-generating for all parties involved.

A structured and staged approach to circularity, combined with a
relentless focus on operational excellence, is essential for OEMs to move from ambition to tangible impact. Success will depend not only on strategic intent, but on the ability to execute consistently across collection, standardization and ecosystem partnerships.

Those who embed circularity into their core operations—with the right capabilities, governance, and agility—will be best positioned to lead in a resource-constrained, regulation-driven and margin-sensitive future.