The E-Scrap Industry in Transition – A U.S. “State of the Union”

By Henry Leineweber, E-Scrap News & Plastics Recycling

Did you get a shiny new TV, Kindle or iProduct over the holidays? Is last year’s must-have gadget collecting dust in your basement? More than likely, the answer to both of those questions is “yes.”

To deal with the increasing proliferation of electronic gadgets, and the inevitable electronic scrap they become, the electronics recycling industry has exploded over the past decade. This growth has been fueled by the need to both keep potentially harmful materials out of our landfills, environment and water systems, as well as growing concerns over the many bits of sensitive data we store on our devices. Electronics recycling businesses have popped up across the country, often aided by local or statewide recycling mandates.

For the past five years, E-Scrap News has surveyed electronics recycling and refurbishment organizations on their business practices and overall industry trends.

In 2011, the general assessment of the electronics recycling industry is that is a sector in transition. E-scrap recycling is still dominated by new firms and programs, but some of the early entrants and more savvy companies are already rising to the top.

The Big Picture for E-Scrap: Consolidation and Competition

Barriers to entry in the e-scrap industry remain low, but even as more companies are getting into the electronics recycling business, most of the significant growth over the past year has come from mergers, acquisitions and industry consolidation.

M&A activity spiked in 2010, with 84 percent of survey respondents reporting they had been approached in the past year to sell their business, versus 57 percent in 2011. Over 60 percent of respondents reported they had been approached about a merger in 2010, versus 45 percent in 2011. Meanwhile, companies reporting they were in discussions to partner or link their business with another firm increased from 63 percent to 80 percent between 2010 and 2011.

Additionally, over the last four years, the e-scrap recycling industry has gone from being dominated by smaller firms, to one where several larger firms are clearly on the rise. For example, 63 percent of electronics recycling firms operate just one facility, but the remaining 37 percent operate an average of four recycling plants.

There are also indications of increasing average annual sales. The number of surveyed firms reporting less than $1 million in annual sales has declined 20 percentage points over the last three years, while the $1-5 million annual sales bracket, and the over-$10 million annual sales bracket, both showed increases of approximately 10 percentage points. Demanufacturing, material sales and resale account for the largest shares of annual sales for most firms.

Industry growth has led to intense competition between firms, with securing volumes identified as the top challenge and general competition coming in a close second. In fact, even while the total volume collected for recycling has increased substantially over the last several years – the EPA estimates between 3-4 million tons of electronics were processed last year – there is less material to go around. Respondents processed an average of 6,739 tons over the past year, down from 10,097 tons the previous year. Furthermore, the average capacity utilization for e-scrap plants is only 57 percent.

Trends: Lower Collection Volumes

But competition between firms does not tell the whole story. Consumer electronic product design, and product category market share, increasingly contributes to lower collection volumes.

For example, the 2011 desktop PC market share for e-scrap is 27 percent, compared to 61 percent share for laptops and 13 percent share for tablets – which is expected to increase to 23 percent by 2015 according to Forrester Research. The average weight of a PC is between 20-30 pounds, while the average weight of a laptop is only 3-7 pounds, and tablets are lighter still, tipping the scales at just over a pound, on average. With consumers replacing their primary computing device approximately every two years, the incredible shrinking computer has already had a dramatic effect on the volume of electronics entering the reuse and recycling stream.

Displays are another excellent example of how market shifts affect the electronics recycling industry. Changing consumer preferences, drops in the prices of flat screen displays and the mandated switch from analog to digital broadcasting completely wiped out the demand for CRT televisions and computer monitors. After an initial surge of CRTs entering recycling facilities, the volume has begun to decline. At the same time, 54 percent of firms report problems finding markets for recovered CRT glass. The markets that are available for recovered CRT glass increasingly rely on its use as construction aggregate and other low-end applications.

In another sign of the times, the volume of flat-screen (LCD/LED/Plasma) displays entering recycling facilities increased 64 percent in 2011, compared to the previous year.

Trends: Refurbishment

Reuse and refurbishment are often the first and greenest steps in the recycling process, but in many ways, they are also the most challenging.

While the popular image of e-scrap reuse and refurbishment involves hand-me-down computers to family members and thrift stores, the vast majority of refurbishment involves enterprise assets. Accordingly, the volume of computers and other IT assets in the refurbishment stream has fluctuated wildly over the last several years. With high unemployment and reduced procurement budgets, demand for IT assets has fallen significantly.

Furthermore, the price of new IT assets has decreased dramatically in the last several years. Modern desktop PCs can be purchased for $200-$400. Netbooks and laptops fall into the same price category. Add to the mix increasingly powerful tablets and smart phones and refurbished technology from one to two years ago looks much less attractive.

Despite this overall slump in asset demand, services associated with refurbishment are definitely on the rise.

Refurbishment presents unique technical challenges as well, with some devices more likely to malfunction in specific ways than others.

Take optical drives, for example. Out of all the computers organizations refurbished in the past year, 11 percent of refurbishers reported issues with the optical drives on MSI computers, followed by 7 percent who reported problems on HP machines and 3 percent on Toshiba computers.

Another OEM that was identified to have a higher failure rate for components was Dell. In reporting bad capacitors on computer motherboards, 28 percent of refurbishers reported issues with Dell PCs, followed by 12 percent who had issues with HP computers and Apple coming in third, with just under 4 percent of refurbishers reporting that specific problem.

Power supplies also seem to be prone to failure, with 12 percent of refurbishers reporting problems with these components in HP computers and 11 percent reporting the same problem in Dell machines.

In some situations, such as problems with a physical drive, RAM or add-on board, non-working parts can simply be swapped for working ones salvaged from other machines. However, failure of the main board or CPU typically means the computer cannot be refurbished.

Trends: Data Security

In the wake of periodic, high-profile data security breaches, many companies are now insisting that retired assets be processed securely. Most are simply following consumer demand for more robust data security practices and accountability and this trend shows no signs of slowing down. For example, 76 percent of companies polled by E-Scrap News in 2011 reported they offer secure data destruction services in addition to resale and refurbishment.

In fact, growing concerns over data security have impacted e-scrap recycling and refurbishment companies and organizations in a variety of ways. Over 60 percent of those surveyed reported they had adjusted their internal demanufacturing procedures, and 64 percent were forced to make changes to the way they handle refurbishment and resale as a result of stricter data security practices. Additionally, 46 percent reported seeking downstream partnerships with data security consultants or asset management firms. Overall, about a third of those surveyed reported a drop in the quality of donations, as consumers and enterprise clients removed hard drives and other components, prior to releasing equipment.

As companies and organizations become more comfortable with proper data security management techniques, many are finding ways to accommodate reuse and refurbishment. While shredding and physical destruction are still the dominant form of data security, it dropped approximately 10 percentage points as a service offering from companies, to 86 percent in 2011. Meanwhile, secure and verified overwrite of hard drives has more than doubled in popularity, with 78 percent of refurbishers and processors now offering the service.

There’s a New Sheriff in Town: Certification

Electronics recycling has, until recently, been more or less an unregulated free-for-all. But this is quickly changing, following several high-profile recycling scandals, revelations about the appalling conditions in which many exported electronics are processed, and e-scrap businesses sick of competing with bad actors.

Several facility-specific certifications have been widely used for some time now – most notably ISO 14001 and ISO 9001. Also available is the CHWMEG facility audit, which includes an independent review of companies that store and manage waste. For data security and asset management firms had available NAID certification and International Data Corporation’s GRADE certification.

The development of both the Basel Action Network-backed e-Stewards standard and the multi-stakeholder Responsible Recycling (R2) standard was an attempt to address many of the problems in electronics recycling, such as lack of best-practices, export-controls, EH&S practices, and other issues. As of this writing (in mid-December, 2011), 21 companies, with 62 processing facilities, are certified to the e-Stewards standard and 85 companies, with 145 facilities, are certified to R2.

R2 and e-Stewards have different appeals, however. Of those pursuing R2 certification, 72 percent say they are doing so because the standard is the best fit for their firm’s business model. Meanwhile, of those pursuing e-Stewards, 78 percent said they were doing so because it was the preferred certification of their clients.

Reasons not to pursue a specific certification varied, but the two most common justifications not to pursue the R2 standard were lack of client preference (38 percent) and the cost of auditing (36 percent). Reasons not to pursue e-Stewards were a little more cut-and-dry for processors, with 57 percent concerned about the cost of auditing and 38 percent saying the standard simply didn’t fit their firm’s business model.

While the competition that has emerged between R2 and e-Stewards has been highlighted by trade press and advocates for each standard, the reality is that many firms – especially larger processors – are simply opting for dual-certification. The rapid growth of these two certification standards over the past two years is the industry self-regulating in the absence of any binding federal legislation governing its conduct. Whether or not that develops, the e-scrap industry is quickly moving toward two-tier services: those that are third-party certified and those that are not.

Where to Next?

Even as the e-scrap recycling industry continues to self-regulate through third-party certification standards, a parallel trend of legislative action has also gained momentum over the last several years. Already, 25 states have an electronics recycling law on the books, with more joining the ranks every year. Additionally, Congress is currently considering several bills that would regulate the flows of electronics and implement tougher data security standards for recovered items. While the previous versions of the bills have not been able to gain traction in the past, that may be changing as more states implement their own programs and OEMs seek coordination and guidance at the national level.

There are also other challenges ahead for e-scrap recycling. In addition to combating irresponsible processing, the industry will continue to face high competition and growing pains for the near future. Add to that the continued miniaturization of many common electronics and many recycling organizations find themselves being squeezed from both ends.

These are just a few of the challenges that we will need to address as electronics recycling matures as a business.

About the Author

Henry Leineweber is the Program Director for Sustainable Electronics Recycling International.