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The high costs of smart garbage bins and automation to sort out recycling have created new headaches for homes and offices 

In just a month, over 1,000 waste management companies were created in China after the Shanghai Household Waste Management regulation took effect on July 1. The new edict for the compulsory sorting of domestic waste caused an outcry on social media during the summer, as households grappled with complex recycling rules to ensure that their garbage are dumped correctly into designated bins.

In response to the need for waste disposal assistance, many startups entered the market to offer garbage sorting, collection and recycling services. The challenge was to find solutions that can cover the high running costs of waste management. Several of the more traditional waste management companies have actually folded up since the legislative move to the recycling of more household goods, 

On the other hand, the new generation of waste disposal and recycling startups have come up with the latest cutting-edge technology to automate and reduce the cost of labor-intensive logistics and sorting processes. 

Alpheus, for example, has just launched a range of smart bins at the World Artificial Intelligence Conference 2019. The bins, equipped with image-recognition IoT and AI-powered technology, are ideal for public facilities like parks and airports. Alpheus will also be targeting private clients who manage office buildings, housing estates and waste treatment plants.

Profitability challenge

The first wave of waste management startups began in 2012 when China published the Ordinance for Administration of Collection and Disposal of Waste Electronic and Electrical Products. Electrical and electronic manufacturers were charged fees to subsidize the electronic waste recycling enterprises. The pioneer recycling companies included Hangzhou-based Langdun, Shenzhen-based Baotel and Ihuigo. The second wave came in 2015, with O2O model startups like Xiandou Recycling that offered door-to-door garbage collections.

But making money from garbage proved to be extremely challenging for many companies. Langdun struggled to survive despite receiving funds of RMB 2m from the Hangzhou city government. Its 2015 data showed that the revenue generated from recycling hardly covered its running costs. Compared with paperboard and used home appliances, Langdun's top three waste collection categories of glass bottles, plastic bottles and batteries generated very little income from the recycled outputs. In late 2016, Langdun had to close down the community garbage collections in Hangzhou. The company's recycling devices became part of the garbage to be disposed by the municipal operators.

Another garbage recycling startup that also went into the red was Yidaireng, a mini-app launched on Alibaba’s Alipay platform in June 2019. Although its door-to-door garbage collection service became very popular when the new Shanghai waste regulation came into force in July, the company could not make the business profitable. “We’ve suffered a loss of RMB 4m–5m,” said Yidaireng founder Niu Peng.

Beijing-based AiFenLei also incurred net losses. Its total revenue of about RMB 700,000 in June 2019 could not cover the monthly operating and labor costs of RMB 800,000 and payments of RMB 200,000 made to external garbage sellers. The revenue comprised RMB 300,000 from the sales of recyclables and RMB 400,000 from the government procurement of AiFenLei's garbage collection services.

But not all recycling businesses were loss-makers. Beijing's Xiandou achieved net profit in the second quarter of 2017. Unlike Langdun, Xiandou focuses on recycling paperboard, old books, magazines and newspapers, in addition to plastic bottles and used home appliances. “Neighborhoods are not our target clients because the running costs there are too high and the profitability model is problematic,” said Xiandou CEO Fang Hao. He said that business clients would generate a larger quantity of recyclables, an advantage unmatched by community residents.

Another success is Aihuishou that secured Series A funding of US$2m in 2012. According to a research report by Everbright Securities, “Aihuishou has realized net profit for several months since August 2016.” Focusing on electronics recycling, Aihuishou has built an online platform and a network of over 600 offline stores. It works as a broker hub for used electronics sellers, disposal factories and secondhand buyers. Safety checks of the electronic items are made by the company's seven operating centers in cities like Shanghai and Hong Kong.

© XHG

Unexpected issues

However, even for Aihuishou, the profit-making outlook is not quite rosy. In September 2019, when Aihuishou began opening offline stores in Hong Kong, some industry insiders doubted its claim that all of its 600 stores were profitable. Sources revealed to Economic Weekly magazine that the company was actually losing money as a whole, due to huge advertising spending and aggressive expansion of the outlets. According to Aihuishou, the 600 stores account for total monthly operating costs of RMB 18m. That’s RMB 216m per year, excluding the costs of offline sales staff.

Another startup XHG also faced unexpected problems. Founded in August 2017, XHG collected recyclable garbage via smart sorting bins in communities. It quickly expanded to over 8,400 communities in 35 cities, servicing 4.3m users by early 2019. But in April, XHG's bank accounts were frozen due to the sudden demise of its owner, Tuandai.com P2P lending platform. That directly led to the suspension of XHG's business, large-scale employee dismissal and finally filing for bankruptcy reorganization in July. Media reports said that the P2P lending platform crash was only a fuse ignited. The major cause of failure was actually XHG's rapid expansion that resulted in high costs for staff, equipment and maintenance.

Even when XHG was running normally, some community users said that the bins to collect metals and plastic bottles often showed the “already full” status. The lack of proper maintenance of the system caused a lot of inconvenience and reduced the usage from local communities. 

One reason for the bins getting full so quickly was due to professional junkmen who had previously sold collected recyclables directly to collection centers. The junkmen discovered that XHG offered a higher unit price for their recyclables and quickly switched to filling the XHG bins instead. This was an unexpected problem since XHG's higher pricing was to encourage more residents to sort their garbage locally using the smart bin system. Instead, it backfired by generating higher running costs caused by payments to the junkmen.

More sustainable business models

In comparison, Chengdu Aobag Environmental Protection Technology Co Ltd operated a different model involving individuals, neighborhoods and institutions. Users must register as members on its website and pay RMB 10 for an Aobag with a capacity of 30kg and can be re-used many times before being recycled. Users can swap the full Aobags for empty ones from Aobag workers who will buy and collect the recyclable items once a week.

Users only need to ensure that the bag items are recyclable by separating all recyclables from the rest of the garbage. This is a convenience for them to stay as registered users of Aobag. They also get paid by doing this, just like selling recyclables through other channels. The items collected are then sorted and processed at the Aobag recycling centers.

Unlike XHG, Aobag saves on the high equipment cost of installing garbage collection bins. It focuses on institutional clients such as schools, government agencies and enterprises, rather than the XHG public user market that entails much higher maintenance costs. In addition, Aobag also partners with shopping malls and residential communities that provide free sites and garbage bins. Aobag provides the tech support, collection and sorting services.

In October 2019, Aobag had secured 48,279 individual users and 347 institutional users in Chengdu, Xi’an and Beijing. It started running trials in Chengdu in June 2017. Aobag is fast approaching its estimated break-even point of 50,000 registered users. 

A mix of B2B and B2C customers can work well if costs are managed effectively, in addition to AI and other cutting-edge technology like smart bins and automation to help cities, businesses and communities sort out their daily recycling chores. Saving the planet doesn't have to cost the earth.

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Edited by Suzanne Soh

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