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Speaker 1: Hi, this is Dana Perkins and you're listening switched on

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Speaker 1: the bn F podcast. As promised, we have another interview

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Speaker 1: from one of our b an F summits. This one

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Speaker 1: is from our Munich event a couple of weeks ago

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Speaker 1: in May. Colin mc character, head of Advanced Transport at

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Speaker 1: B and e F, interviews Arena Fage, head of Climate

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Speaker 1: Strategy and Circular Economy at BMW Group. They discuss what

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Speaker 1: it takes to design a circular economy vehicle. Arena is

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Speaker 1: engaged with setting the strategic roadmap for making BMW's products

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Speaker 1: sustainable and she looks at how to reduce c O

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Speaker 1: two resource consumption and bio diversity loss, among other things.

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Speaker 1: In Colin and Arena's discussion today, they focus on several

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Speaker 1: aspects of the automotive supply chain, from green steel to

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Speaker 1: high quality artificial leather, as well as localization of manufacturing

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Speaker 1: and the associated emissions. As a reminder, b ANF does

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Speaker 1: not provide investment or strategy advice, and we have a

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Speaker 1: more complete disclaimer at the end of the show. And

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Speaker 1: if you want to find out more about bn F summits,

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Speaker 1: head to about dot bn EF dot com, Forward slash

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Speaker 1: summit and also for those who are interested to hear

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Speaker 1: more about how transportation is changing. Our next show will

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Speaker 1: focus on BNFS Electric Vehicle Outlook. And now let's listen

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Speaker 1: to Collins conversation with Irena from BMW. Hello everyone, and

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Speaker 1: thank you to be for joining us on this. Thank

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Speaker 1: you so much. So we hear a lot about electric

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Speaker 1: vehicle adoption, but we all know that sustainability is more

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Speaker 1: than just switching out the drive train. And so in

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Speaker 1: your role at BMW, is there a kind of big

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Speaker 1: three or big five set of things you think about

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Speaker 1: beyond the drive train when we talk about a sustainable

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Speaker 1: vehicle or a circular economy vehicle. So to be clear,

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Speaker 1: the first thing you do obviously is to change the

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Speaker 1: drive train. But when you change the drive train, this

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Speaker 1: means that emissions go from your scope street downstream, so

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Speaker 1: from the space they go to your supply chain. So

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Speaker 1: the emissions in the supply chain actually increase because of

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Speaker 1: the high sor two footprint of the battery. So it

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Speaker 1: becomes much more important to decarbonize your supply chain. It's

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Speaker 1: the largest part that remains when you have an electric vehicle.

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Speaker 1: That means you look into what can you do with

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Speaker 1: together with your supplier, you ask your supplier to use

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Speaker 1: green energy for example. That's the easiest part of it.

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Speaker 1: Usually in countries where you have green energy, you put

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Speaker 1: that in the contract. And actually we have a new

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Speaker 1: criteria for choosing a supplier based on CU two for example,

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Speaker 1: so they know that it's important to us when we

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Speaker 1: look into to choose which supplier that we choose. Also

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Speaker 1: on the criteria of you tube you change gray heat

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Speaker 1: to green heat. That's the next thing you do. And

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Speaker 1: then it comes into processes like producing steel. We try

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Speaker 1: to get green steel, we try to get steel made

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Speaker 1: with hydrogen, for example. And then it gets more complicated

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Speaker 1: and complex when it comes to going circular to introducing

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Speaker 1: new materials into the car, for example by your based materials,

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Speaker 1: and there you have like a range of possibilities. For example,

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Speaker 1: when you want to get rid of leather, which we

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Speaker 1: already decided to do, we also looking into leather free

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Speaker 1: options for BMW and those options obviously should be much

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Speaker 1: more attractive than a conventional plastic leather, so it should

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Speaker 1: be an alternative that is by a base that has

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Speaker 1: an attractive appeal. There you can look into dozens of

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Speaker 1: different materials just for leather. So imagine all the materials

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Speaker 1: that you have in a car and you try to

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Speaker 1: substitute them with other materials by your based materials that

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Speaker 1: you needed totally new research into these materials and into

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Speaker 1: how you can actually apply these materials. One of the

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Speaker 1: things as you go through that list that I'm struck

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Speaker 1: by is just how many new kind of fast moving

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Speaker 1: things you have to be on top of. Right, if

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Speaker 1: we look back and history the automobile, yes they're these

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Speaker 1: adjacent industries, but the touch points are relatively straightforward. And

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Speaker 1: now it feels like the boundary conditions of what you

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Speaker 1: have to draw a circle around or a box around,

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Speaker 1: and say, I have to worry about this that's gone

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Speaker 1: way way up both in complexity and in sheer scope.

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Speaker 1: How do you approach that in your group specifically and

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Speaker 1: then just generally from an automobile industry perspective. So in

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Speaker 1: my group, what we actually do is we set the

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Speaker 1: goals for the company wide goals, and then these company

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Speaker 1: white goals are translated into car specific goals, so like

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Speaker 1: every product line gets a seal to targets for the

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Speaker 1: supply chain that they need to abide by. And then

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Speaker 1: the product line. Together with purchasing, they look into what

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Speaker 1: kind of materials can they buy in order to fulfill

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Speaker 1: the story at how much hydrogen still do they need

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Speaker 1: to buy, what do they do with the battery, how

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Speaker 1: many secondary materials they need to use in order to

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Speaker 1: reach that seal two targets. So it's at lee it's

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Speaker 1: an optimization task between engineering and purchasing in order to

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Speaker 1: fulfill these targets. And what we also see at the

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Speaker 1: moment is secondary material targets. Actually, I mean they buy

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Speaker 1: into the CEU two target at the same time. But

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Speaker 1: I think you need both because for some materials it's

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Speaker 1: just also important not only to look in to see

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Speaker 1: you two, but to go beyond to reduce your footprint.

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Speaker 1: Also in terms of mining, the less mining you need

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Speaker 1: the battery is right. So and even if it's not

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Speaker 1: only for the CEO to footprint and you try to

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Speaker 1: reduce your overall ecological footprint when you set up the

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Speaker 1: team that needs to deliver that. Again, I think back

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Speaker 1: to auto purchasing departments in the past. You didn't really

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Speaker 1: have to understand how steel was made to buy a part.

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Speaker 1: Do you have to change the sort of the people

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Speaker 1: and the composition of the team in order to do

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Speaker 1: this well now absolutely, So for example, we have a

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Speaker 1: new team in purchasing right now that only takes care

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Speaker 1: of sustainability. They look into see you two, They look

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Speaker 1: into all the east criterias, so they look into toxicity

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Speaker 1: of materials, they look into social aspects of the supply chain,

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Speaker 1: they look into biodiversity. So it's extremely brought the knowledge

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Speaker 1: that you need, and it's a totally different knowledge that

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Speaker 1: usually someone who's in the purchasing department would have. Yeah,

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Speaker 1: I imagine that attracts a very different group. So when

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Speaker 1: you then think about all these different suppliers, so we've

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Speaker 1: sort of expanded the scope of what what you care

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Speaker 1: about and have to think about and have to consider

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Speaker 1: in the purchasing Automakers have had typically very good visibility

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Speaker 1: of their Tier one suppliers and maybe Tier two and

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Speaker 1: then a little bit beyond there it gets kind of fuzzier.

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Speaker 1: But what you're talking about now is is really trying

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Speaker 1: to decarbonize all the way up the supply chain in

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Speaker 1: some cases to the mine head for raw materials. How

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Speaker 1: do you ensure that you have that visibility in those

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Speaker 1: processes to say, look it can't just be a black

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Speaker 1: box above one of our supplier, So how do you

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Speaker 1: how do you ensure that you have that visibility of

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Speaker 1: the suppli You usually make a list of materials that

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Speaker 1: you consider to be the most problematic ones, and those

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Speaker 1: you try to control yourself directly. So either it's owned

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Speaker 1: by us directly, or we try to go there at

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Speaker 1: least ourselves directly and look into what the mine is

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Speaker 1: really doing. It's basically categorized in terms of how dangerous

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Speaker 1: that material is and how much do you really need

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Speaker 1: to look into it yourself, because otherwise you can't rely

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Speaker 1: on it safely. There's this visibility question, is the scoping question.

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Speaker 1: The immediate next thing I think about is the sequencing

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Speaker 1: of it. So it feels like the electric mobility part

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Speaker 1: of it is that's kind of now everybody's going full

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Speaker 1: speed on that. You talk to any automaker, there's nobody

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Speaker 1: who's asking questions about whether that's going to happen. Now,

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Speaker 1: it's all just about the speed and how it's varied

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Speaker 1: by different markets and the battery sizes and things. But

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Speaker 1: what are the other things in your wheelhouse that are

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Speaker 1: sort of in the five year horizon? The ten year horizon,

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Speaker 1: the twenty horizon or I guess also the right now timeframe,

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Speaker 1: so the right now definite at least our own production.

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Speaker 1: So what we ourselves have the responsibility for. We have

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Speaker 1: a goal of minus per car until for our own

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Speaker 1: scope one and two emissions. That means a radical decarbonization

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Speaker 1: of our own plants by using green energy and green heat.

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Speaker 1: We're going to have a plant that is that uses

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Speaker 1: only see you two free energy, so there's only a

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Speaker 1: very very small residual emissions from a special process that

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Speaker 1: you can't get rid of. But it's basically a c

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Speaker 1: U two free plants and depots in that we will

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Speaker 1: going to have for our new class. So that's also

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Speaker 1: to show our suppliers, hey, it's possible, you can do that.

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Speaker 1: You can have a plant that does not emit any

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Speaker 1: CU two. But that's of course only possible when you

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Speaker 1: start from scratch. For our existing plants, we try to

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Speaker 1: shift away from natural gas, for example, as fast as

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Speaker 1: we can. We try to get green energy wherever possible.

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Speaker 1: We have an energy concept for every plan, so it

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Speaker 1: depends on where the plant is located. We look whether

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Speaker 1: it makes sense to have solar or wind or cheal

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Speaker 1: thermal is a big thing also for heat, so we're

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Speaker 1: strongly looking into chill thermal energy. There is a wide

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Speaker 1: variety of things that we are doing for our own plans,

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Speaker 1: and then when it comes to the supply chain, what

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Speaker 1: we're doing right now is that we we tell our

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Speaker 1: suppliers what's important to us, just as I said that

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Speaker 1: they need to go down in there's U two footprint.

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Speaker 1: And also when we buy a primary materials. For example,

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Speaker 1: we have looked into nickel and the c U two

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Speaker 1: emissions per ton of nickel it varies by a factor

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Speaker 1: of two to three depending on on where the mine

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Speaker 1: is located and what kind of mining process you have.

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Speaker 1: So even if you mine a primary material, there's a

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Speaker 1: lot of room for buying more sustainable than than other nickel.

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Speaker 1: Even the best thing, of course to do is to

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Speaker 1: to get secondary nickel. But as we know, as battery

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Speaker 1: production is ramping up so strongly, you can't only rely

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Speaker 1: on secondary material. There's going to be a strong share

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Speaker 1: of primary in there. So you need to look into

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Speaker 1: how can I actually ensure that the primary material that

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Speaker 1: is in my car is the most sustainable primary material

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Speaker 1: that makes sense? How are those conversations received with some

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Speaker 1: of your suppliers. Because some of them are very large,

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Speaker 1: very well capitalized, publicly listed companies, and some of them

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Speaker 1: are our family owned mom and pop shops, and their

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Speaker 1: capability to to pivot is very different. How do those

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Speaker 1: conversations go. I think that's a very good point. But

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Speaker 1: it not only depends on their ability, it also strongly

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Speaker 1: depends on their culture. And that's also what we see internally. Right,

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Speaker 1: it depends on whether you want to or you don't

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Speaker 1: want to. There are still some suppliers to think, oh

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Speaker 1: that's going to pass. We just wait and it's gonna pass.

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Speaker 1: But it's not going to pass, right. So I think

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Speaker 1: it's a cultural issue and for some it's easier to

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Speaker 1: change than for others. I think change definitely comes both

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Speaker 1: from the top as well as from the bottom. That's

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Speaker 1: what I also perceive within our company that it's you

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Speaker 1: see a lot of change happening also everywhere. I think

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Speaker 1: everything that you do and when it's it's a mindset question,

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Speaker 1: how you approach that topic. It's not just any topic.

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Speaker 1: It's something that either concerns you or it doesn't concern you.

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Speaker 1: And I think it's it's very hard. If a company

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Speaker 1: just sticks to, oh, we need to do that because

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Speaker 1: they want us to do that. I think a company

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Speaker 1: that intrinsically wants to do it has a much better

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Speaker 1: chance in succeeding long term. So that's a good message

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Speaker 1: to any supplier parts suppliers out there. It's not going away,

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Speaker 1: it's not a fad. This is a long term commitment

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Speaker 1: that's being made. You touched on this briefly, But we

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Speaker 1: often end up in these very specific discussions about c

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Speaker 1: O two and and measuring everything in c O two,

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Speaker 1: and there's there's good reasons for that. In some ways,

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Speaker 1: that's a fungible, sort of understandable unit across across industries.

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Speaker 1: But there's also a lot of other environmental and sustainability concerns,

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Speaker 1: so ocean health or biodiversity. You touched on that in

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Speaker 1: the leather the point about leather, can you just expand

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Speaker 1: a bit about how you how you think about those

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Speaker 1: non c O two related ones, because some of those

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Speaker 1: are a bit harder to measure, or maybe the ways

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Speaker 1: we measure them are not as far advanced as we

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Speaker 1: have on CEO two emissions from say electric power. Yeah,

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Speaker 1: a lot of issues are hard to grasp and it's

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Speaker 1: very diverse. So let's look into plastics. For example, is

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Speaker 1: a big discussion out there on plastics and how can

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Speaker 1: we reduce plastic waste. Of course we also think of

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Speaker 1: how can we put plastics out there back into our cars.

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Speaker 1: We'll be looking too, could it be ocean plastics that

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Speaker 1: we put back in there. So we have a lot

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Speaker 1: of exploration of of what is possible and and I

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Speaker 1: think there's so many startups out there that are looking

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Speaker 1: into all these different fields that we are cooperating with.

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Speaker 1: So I think we need to look way beyond c

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Speaker 1: you two, and we need to look into where does

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Speaker 1: that material really come from, how is it produced, how

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Speaker 1: is its sourced, and how can we really reduce the

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Speaker 1: overall footprint. Also on biodiversity for example, that's I think

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Speaker 1: one of the big issues for leather going lead fly

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Speaker 1: was not only the methane emissions, but also the big

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Speaker 1: biodiversity issue around how leather is produced and where it's produced.

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Speaker 1: Leather is one of the materials that's hard to source sustainably,

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Speaker 1: and so we we also try to avoid materials where

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Speaker 1: it's very hard to source them sustainably. So either kind

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Speaker 1: of with them up or you try to source them sustainably,

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Speaker 1: and the latter it is more difficult to do. Actually,

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Speaker 1: So I think everything that you can avoid upfront is

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Speaker 1: not there to secure in your supply chain. So we

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Speaker 1: need to have a very strong group that works together

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Speaker 1: between engineering and our purchasing department and so that we

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Speaker 1: don't have these materials in the car that are problematic.

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Speaker 1: I think that's a very important point because it's not

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Speaker 1: just about saying here's the car now, piece by piece,

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Speaker 1: we have to swap it out because some of those getficult, right,

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Speaker 1: So then you need to go back and design something

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Speaker 1: that designs around the ones that you know are more problematic.

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Speaker 1: You sort of had a request there, or maybe I

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Speaker 1: made it into a request for the supply chain. I

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Speaker 1: want to come back to green steel because that's something

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Speaker 1: we've been talking a bit about. It seems like automakers

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Speaker 1: can be the sort of thin edge of the wedge

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Speaker 1: in catalyzing a green steel industry that can help show

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Speaker 1: that there's demand and that it's it's a viable approach.

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Speaker 1: Do you have anything you'd like to share on the

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Speaker 1: challenges because BMW has made some aggressive announcements, very positive

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Speaker 1: on trying to create a market for green steel and

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Speaker 1: the automotive sector, as have a few other automakers. Anything

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Speaker 1: you want to comment on the journey on trying to

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Speaker 1: get more green steel into cars. I mean, we tried

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Speaker 1: to put that into the contract and we tried to

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Speaker 1: get the material ass as best as we can, but

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Speaker 1: it's I mean, those are long term investments, so so

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Speaker 1: it might also take time, and we are kind of

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Speaker 1: dependent on the carbonization of these industries. Like we can

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Speaker 1: try to invest there in terms of paying maybe a

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Speaker 1: little more per ton of steel. We can give an

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Speaker 1: incentive by signaling that's what we're interested in, but still

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Speaker 1: we are kind of dependent on on what is happening

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Speaker 1: in these sectors. So I think we need to work

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Speaker 1: very closely together also with suppliers. That's why we are

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Speaker 1: also investing in some future technologies where we think that

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Speaker 1: is important for decarbonization. I think it's it's only possible

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Speaker 1: by means of corporation. We talked a lot about all

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Speaker 1: these different areas that you're tackling, and I want to

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Speaker 1: ask a question about factors are clearly shaping the way

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Speaker 1: bmw X cars and the way you design cars and

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Speaker 1: the way you do purchasing. Do they at some point

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Speaker 1: start to influence where you make cars? Not just the

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Speaker 1: car you make, but where you locate a plant. Do

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Speaker 1: the sustainability factors around, say a decarbonized grid or access

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Speaker 1: to clean, green produced batteries nearby, did those start to

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Speaker 1: affect where you make the car or does that still

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Speaker 1: get overwhelmed by decisions around tariffs or labor costs and

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Speaker 1: those sorts of things. So localization strategies is a very

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Speaker 1: complex issue, and there are like hundred things that you consider,

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Speaker 1: but definitely sustainability is one aspect that that we look into,

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Speaker 1: and that aspect is getting more important also in terms

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Speaker 1: of getting independent from from certain supplier countries and also

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Speaker 1: of having a secure supply coming into your plans that

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Speaker 1: is kind of diversified and not only dependent on one

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Speaker 1: or two countries. So I think reducing this dependency is

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Speaker 1: one of the big issues, and that goes hand in

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Speaker 1: hand usually with with sustainability. So, you know, we could

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Speaker 1: talk about many of these individual areas for quite a

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Speaker 1: long time, and we could have a whole conversation just

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Speaker 1: about green steel or leather replacements or bioplastics and things,

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Speaker 1: but we're going to run out of time. So I

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Speaker 1: want to ask you sort of two closing questions, and

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Speaker 1: and one of them is around where we are on

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Speaker 1: this journey. So if the journey towards a fully circular

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Speaker 1: economy car is step ten on a ladder, where are

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Speaker 1: we now? And and where is your where's BMW on

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Speaker 1: this on that ladder? So I think you need to

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Speaker 1: differentiate whether you're talking about CEU two. I think there

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Speaker 1: were very far on our way of the carbonize nicing,

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Speaker 1: and we also know how to do it, so I

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Speaker 1: think there were maybe at seven or eight because the

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Speaker 1: way is clear. I think for circular it's much more

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Speaker 1: difficult because we depend on the material flow going into

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Speaker 1: um into our cars. So we need the quality of

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Speaker 1: the steel, that of the secondary steel that we can

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Speaker 1: put in our course that we can be sure that

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Speaker 1: it's it meets our quality criteria. And we also need

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Speaker 1: to have the quantity and have an assurance that we

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Speaker 1: get that quantity. And that's actually the biggest issue when

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Speaker 1: when it comes to circular. We can decide a circular car,

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Speaker 1: design a circular car right now, and we can also

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Speaker 1: build it right now, but we can't put it in

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Speaker 1: serious because the materials just are not there, and I

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Speaker 1: think there we need a much more stable material flow.

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Speaker 1: We need better sorting technologies. At the moment, a car

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Speaker 1: and air conditioner, a fridge, everything is put into one

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Speaker 1: better and what comes out of this threader is not

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Speaker 1: a very clean material. And as long as we have

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Speaker 1: that kind of sorting technology, it's it's going to be

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Speaker 1: very hard to reach higher secondary material quotas for an

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Speaker 1: industry that has the highest standards in terms of quality.

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Speaker 1: So what goes out of our cars actually ends up

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Speaker 1: in the cement and in the in the in the

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Speaker 1: building industry, so it's going to be uh steel for

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Speaker 1: the building sector, for the construction, So that's down cycling.

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Speaker 1: So when you want to close the loop in your

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Speaker 1: own industry, we need a much better sorting technology. So

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Speaker 1: we're further along on the CEO two journey, but some

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Speaker 1: of the stuff around getting second life materials back into

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Speaker 1: the vehicles is further back for a few a few

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Speaker 1: runs further down the ladder. Yes, So the last question

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Speaker 1: I wanted to ask is just if there was one

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Speaker 1: thing on this topic. You've been working this for many,

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Speaker 1: many years, and that perspective that those many years give

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Speaker 1: you a different perspective. Is there one thing you'd think

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Speaker 1: everyone should watch in the year ahead where you think

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Speaker 1: it's gonna we're going to see a big movement, or

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Speaker 1: just one thing you think people should watch around particular economy,

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Speaker 1: And I don't think that there's one thing. I think

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Speaker 1: what we see is that the movement is kind of

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Speaker 1: everywhere and it's very hard to predict where the change

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Speaker 1: is going to be very fast in the next year.

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Speaker 1: Just to give you my story from our company that

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Speaker 1: I actually experienced in my everyday life is our canteen,

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Speaker 1: which was extremely meat dominated some years ago, and now

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Speaker 1: there's like, out of four meals that you get there

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Speaker 1: every day, three out of them usually or vegetarian. And

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Speaker 1: it's not that it's a crazy chef that thinks we

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Speaker 1: need to eat vegetarian, but the queues at the vegetarian

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Speaker 1: lines are much much longer, actually, and that's something that

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Speaker 1: has changed only two years and it didn't come from

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Speaker 1: above where anybody telling us to eat differently. So I

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Speaker 1: think watch how for the change in your communities and

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Speaker 1: what's going on there, and keep your eyes open. I

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Speaker 1: think you're going to see things that you would not

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Speaker 1: have thought about. Well, thank you for a fascinating discussion.

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Speaker 1: We've covered everything from biodiversity and leather alternatives to green

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Speaker 1: steel parts supply. Managing this transition from an automaker perspective

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Speaker 1: is challenging, but it's great to see groups stepping up

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Speaker 1: to the challenge and pushing this topic forwards. Today's episode

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Speaker 1: of Switched On was edited by Rex Warner of gray

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Speaker 1: Stoke Media. Bloomberg an f A is a service provided

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Speaker 1: by Bloomberg Finance LP and its affiliates. This recording does

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Speaker 1: not constitute, nor should it be construed as investment advice,

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Speaker 1: investment recommendations, or recommendation as to an investment or other strategy.

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Speaker 1: Bloomberg an e f should not be considered as information

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