Circular Business Models and Global Value Chains: The Case of MagProtein

Abstract

Global value chain research has focused on the governance of diffuse modes of production and trade that travel in a single direction, however Circular Economy business models are by definition closed economic systems, where it is possible for two parties to act as both buyers and sellers. How then should Circular Business models be understood within the context of international trade systems? Based on an approach which explores the principles that businesses make decisions to set business strategy and the processes through which businesses establish and build external relationships, this chapter examines the case of MagProtein, a company based in Nigeria that produces protein for animal feed and fertilizer using black soldier flies. This chapter finds that although MagProtein’s business model centered on local production and distribution, improving operational efficiency and scale depended upon the activities and organizations participating in global value chains.

1. Introduction

Global value chain research focuses on spatially diffuse, uni-directional trade relationships between organizations. However, because Circular Economy approaches are by definition “closed” economic systems that can also blur the lines buyers and sellers, the relationship between global value chains and circular business models is unclear. To date, the global value chain literature has addressed the circular economy as a topic of theoretical interest, with the question of how circular business models are connected to global value chains figuring as a critical topic. Regardless, empirical work that examines the linkages between global value chains and circular business models is limited, given that trade which can be classified as “circular” is very low.

Through the case of MagProtein, a company that produces protein for animal feed and fertilizer using black soldier flies in Nigeria, this chapter explores the principles and processes that link global value chains with circular business models. This chapter begins with a discussion of how the circular economy fits within the global value chain literature and the questions that have been raised about circular business models in global value chains. Following a description of the research methodology, this chapter describes why the insect rearing sector is important to the circular economy and the types of business models that have been identified to develop the market for insect protein in developing countries. Next, it describes the business model of MagProtein and the process it went through to identify and integrate multinational companies as key partners in its business. This chapter concludes that even in cases where circular business models are designed for local production and consumption, they are interdependent with global value chains and the organizations that participate and support them.

2. Global value chains and the circular economy

Global Value Chain (GVC) literature emerged as a result of the “globalization” of trade, a phenomenon which describes the “functional integration and coordination of internationally dispersed activities” ([1], p. 41). GVC analysis focuses on mapping and explaining the relationships between organizations that participate in globalized supply chains.

One of the first distinctions made of GVCs is between those that are “buyer-driven” and those that are “producer driven” [2]. The significance of this distinction is that it helps to explain the political and social relationships between participants in the chain. For example, it helps to explain why and how producers comply with environmental and social standards set by “lead” buyers [3, 4], sets expectations about the conditions under which economic and environmental upgrading of the value chain occurs [5, 6] and helps to explain why increases in labour costs do not necessarily lead to changes in value chain organization [7, 8].

GVC analysis was developed to describe and explain the organization of and relationships in spatially diffuse value chains, where purchasing and supply relationships flowed in one direction. By contrast, “circular economy” challenges the idea that trade of materials flow in one direction [9]. Terms such as “industry symbiosis” furthermore describe how waste materials from one industrial process may be converted to other economically productive uses. This has primarily, but not exclusively been observed to take place within shorter geographical distances such as eco-industrial parks, where waste is most efficiently converted into productive energy or material inputs [10]. The “symbiotic” dimension of circular value chains also means that value chain relationships are more complex, as the lines between “buyer” and “supplier” are blurred.

Another distinction of circular economy approaches is on business model innovation that focuses on principles of “dematerialization”, “sufficiency” and “efficiency”. This calls for significant changes in terms of the way we conceive of producer and consumer relationships. For example, concepts such as “sharing economy” and “product-as-a-service” reconfigure ownership and purchasing structures [11, 12, 13] and the emphasis on business model innovation as a means to achieve circular economy goals increases the importance of business eco-system development [14]. This involves different organizational relationships than the producer networks described by Gereffi [1] in sectors such as garment and toy production.

It is the dramatic changes in the definition of value chain relationships that make Circular economy approaches appealing from a “Global South” perspective. “Closed loop” concepts favor local economic development vis-a-vis spatially distributed chains, creating more potential to develop and retain more value-add activities in developing countries. The emphasis of circular economy business models on knowledge retention, digitization and innovation reinforce this point of view and is the rationale by which organizations such as the African Development Bank have set up Circular Economy programmes. Some authors, such as Wellesley et al. [15] also point out that developing countries are inherently more circular in terms of consumption behaviors and so can also act as models for developed countries. Furthermore, the priority of effective waste management to enable circular processes creates a space for the interests and voices of vulnerable economic participants such as waste pickers and the informal sector to be represented [16, 17, 18]. This helps to establish Circular Economy principles as ones that are intentionally more egalitarian and socially inclusive compared to alternative trade models.

As a proportion of material production, circular activities are relatively limited [19]. By the estimate of the consultancy Circle Economy, which calculates the volume of waste produced and subtracts from the volume of materials recovered, circular economic activities represent about 9% of total economic activity globally [20]. Thus, with limited empirical cases available, the exploration of circular value chains through a GVC approach has been primarily focused on developing research agendas and theoretical pathways to shape our understanding of the ways that the circular economy approaches influence value chain relationships [21, 22]. The question of how organizational forms and business models are suited to the circular economy on a global scale is one among a number of questions connected to the emerging research agenda ([22], p. 24). By exploring the case of MagProtein, a Nigeria-based company that produces animal protein and fertilizer using black soldier flies, which sought to develop partnerships with leading multinational food manufacturers operation in Nigeria, this chapter helps to develop an empirical foundation to help us to understand the linkages between circular economy business models and the global economy.

3. Methodology

This chapter uses a single case approach to examine the question of how business models are suited to the circular economy on a global scale. According to Yin [23], there are three types of case-based research, which include 1) Exploratory, that is intended to develop insights into relatively unknown subjects; 2) Descriptive, deployed to describe the function of known phenomenon and 3) Explanatory, which is used to establish cause and effect between variables. Having selected a case that has established linkages with a multinational company, the case can be classified as descriptive insofar as it seeks to describe how these linkages developed but it does not seek to establish cause and effect. Given there is a diversity of business models that can be classified as “circular” and each have different structural characteristics, it would be presumptuous to make generalizations from this case about circular business models and their relationship to global value chains more broadly.

The descriptive approach is structured around two assumptions. Firstly, that organizations pursue opportunities based on a logic or “knowledge structures” [24]; that is their decisions are driven by principles which shape their external relationships. The second assumption is that cross-organizational relationships are developed through iterative steps and these relationships are dynamic.¹ In other words, a process of interactions also governs how organizational relationships form and grow. These assumptions, that organizational principles drive decision-making, and that interactive processes shape how those decisions are implemented and change are the dimensions that are used to examine how MagProtein’s business model evolved to develop linkages within a global value chain.

Data collection centered on the case itself. One telephone meeting and three face-to-face meetings were held with MagProtein. Face-to-face meeting locations were at the administrative office of MagProtein in Ikorudu, Nigeria at their facilities, in Epe, Nigeria and at a third location in Lagos, Nigeria. Further online interviews were carried out with black soldier fly eco-system organizers, based in Ibadan, Nigeria and Groningen, the Netherlands and with an international beverage company that is a strategic partner of MagProtein. While the sample size of interviews is small, comprising 5 people interviewed between 2 and 4 times, the primary intention of the case is to map business decision-making principles, processes and interactions, key of which was between MagProtein and its international partners. Interviews beyond the scope of this interaction would not have yielded insights relevant to the case. The saturation principle was used throughout the interview process to assure that there was adequate data to support themes emerging from the case and to identify conflicts in the information gathered.

Public data about the black soldier fly, animal protein and fertilizer sectors in Nigeria is limited. Interviewees were asked to share available documents about these sectors, which were used to triangulate the study. Topics raised in the interviews were likewise cross-referenced with publicly available materials. Where figures are referenced in this study, they come from publicly available sources.

4. Business models for insect protein in Africa

Black soldier flies are primarily reared to produce protein for animal feed. Bio-waste from insect production, called frass, can be sold as organic fertilizer. From an environmental perspective, black solider flies are seen as a promising protein alternative because organic waste can be used as a substrate to grow flies in a hygienic way [26] and the space needed to rear flies is marginal compared to other types of protein. As such, insect protein production can address issues such as carbon emissions from food wastage, food security and land use concomitantly [27, 28, 29, 30]. As Soma [31] points out in her article advocating for the development of black soldier fly protein sector in Africa, the fact that larvae feed on a wide range of organic waste materials, the waste that they produce in their lifecycle can be applied back to agricultural activity in a hygienic and safe way means that black soldier fly rearing is a critical part of a “circular animal system, where the total protein supply is increased without the need for additional resources” ([31], p 59).

The potential market for insect-based protein across Africa is argued to be significant. According to a report by Manufacturing Africa, a Foreign Commonwealth Development Office (FCDO) programme, the growth potential for insect-protein in Africa is substantial, with the report authors estimating annual revenue generation of 500–700 million USD for the sector by 2030. This estimate is noteworthy because insect-based protein currently represents a tiny fraction the total market for animal feed protein in Africa, with very few companies across the continent producing above 100 kilograms of protein per day. The argument that the market is ripe for substantial growth stems from a view that insect-based proteins are highly cost-effective alternatives imported animal feed [32].

The market for insect-based protein in Nigeria is only beginning to take shape. While research on the viability of black soldier flies for fish meal were carried out as early as 2000 [33], it was not until 2016 that actions were taken to develop the sector, through the establishment of the Insect4Feed Cluster, a Dutch-funded programme that was set up to help reduce the costs of feed to farmers. Without much interest from international feed companies to invest in Nigeria, the Insect4Feed Cluster decided to focus on developing opportunities for small-hold farmers and young entrepreneurs in addition to supporting the development of technical standards (Interview with Technical Expert December 2022).

While insect protein production is highly technical, with capital investment needs at the industrial scale [34], it is possible to deploy business models that are suitable for micro and small-scale producers. For example, one technical expert interviewed likened setting up a black-soldier fly rearing business to purchasing furniture at IKEA insofar as there is standardized set of equipment and relatively low capital expenditure needed for a small producer to set up an insect rearing operation (Interview with Technical Expert November 2022).

At the small-holder level, three types of business models that reduce feed input costs for small-scale farmers have been identified by Soma [31] and Chia et al. [35]. This includes models where:

1. Existing local feed companies incorporate insect protein as a feed ingredient, cutting the costs of feed inputs for farmers;

2. Farmers cooperate with local feed companies by producing and selling larvae to feed companies, with the feed being sold back to farmers;

3. Farm-based production of larvae and feed.

At the farm-production level, technologies such as feeding apps help to create “recipes” for farmers to combine with other accessible ingredients to create feed that is the optimal nutritional value (Interview with Technical Expert December 2022).

Still, while many aspects of black soldier fly rearing make it accessible to small producers and farmers, it is very challenging to produce insect protein at an industrial scale in Nigeria because it is technically difficult to maintain a stable insect population and to manage its lifecycle. Infrastructure issues such as unstable electricity make the work of lifecycle management challenging. It is nevertheless industrial scale production of black soldier flies at the local level that will make cheaper protein alternatives more widely available to farmers in Nigeria.

5. MagProtein: global value chains and local production and consumption

MagProtein is among the largest producers of insect protein in Africa and is the largest producer in Africa, with production output of 800 kg per day and capacity of 1.2 tons per days in 2022.

The business was established in 2017 by George Thorpe and Feyi Akinlotan. Having been trained as an accountant and working in the financial services industry for several years, Thorpe was focused on setting up his own enterprise. Initially focused on a cold chain operations, a chance meeting between Akinlotan, who was developing a business plan for black soldier flying rearing, and Thorpe’s father, led Akinlotan and Thorpe to partner.

Based on research in the aquaculture sector, Akinlotan and Thorpe saw an opportunity to provide lower-cost inputs to fish feed. With a view that there was a market need for feed products and the fact that Akinlotan and Thorpe believed insects were in abundance across Africa, the team was convinced there was a strong business case and so decided to pilot production.

The goal of the pilot was to determine whether the duo could produce high quality feed for fish from black soldier flies. The piloting stage was highly experimental. Knowledge about black soldier fly rearing was mainly collected through online research and trial and error. In fact, at the time there was no black soldier larvae available in the Nigerian market, so Akinlotan traveled by bus to Benin to acquire the team’s first sample. Akinlotan and Thorpe also experimented with variables such as lighting, mass balance, and temperature. For example, it was by accident that the team found that larvae reacted to light and through experience that the team found that even very slight changes in temperature affected the insect lifecycle.

Results from their early pilot produced 100% insect based feed with for catfish a growth performance of 75% compared to traditional feed, which the MagProtein team saw as very promising, given that additional ingredients could be added to the insect meal at a relatively low cost to achieve comparable growth yields.

However, a problem the team had to contend with was the stability of the yields of the insects they were rearing. MagProtein’s initial business plan had set a target of one ton of feed production per day. This was based on the investment they were making into the facility and their assumptions about running it, but did not take into account the technical and logistical issues associated with acquiring substrate for the insects and managing their lifecycle. Accordingly, the production yields of MagProtein were one tenth the order of magnitude of their projections in 2018.

Falling short of their targets, the MagProtein team searched for help from technical experts outside of Nigeria. The first set of experts MagProtein consulted was Jeffrey Tomberlin, a Professor of Agri-life research at Texas A&M University. According to Thorpe, in meeting Tomberlin, “we realized there are many things we don’t understand; that there were problems in the breeding and we didn’t know how to control factors and keep them stable” (Interview with MagProtein December 2022). Tomberlin referred the MagProtein Team to the EVO Consortium, a research consultancy that specialized in black soldier fly rearing. Working with the Consortium, MagProtein set up and implemented technical specifications and processes for its production that were designed to produce the optimal yield of insect larvae. While the MagProtein team found the technical support was an important developmental step, “it was not enough to take us to the next level. We needed the technology, to install equipment and to set up the production flow” (Interview with MagProtein December 2022) and so the team began to search for alternative operational support.

In parallel to Akinlotan and Thorpe’s work to improve the technical aspects of their operations, other developments were taking place which led the team to reconsider their business model. The first development was related to how the team was procuring organic waste. Initially, MagProtein purchased market waste, however this was logistically complex, expensive and the moisture content of the waste was too high to be used without additional processing. MagProtein subsequently turned to procure spent grain from traders. However, MagProtein found that the quality of deliveries was inconsistent. This was due to the fact that traders sold grain that was mixed with other materials or they did not deliver the grain at all as MagProtein competed with companies who used the grain to produce animal feed. Furthermore, spent grain needed to be handled in specialized storage facilities so that it would not go bad, which MagProtein did not have the capacity to handle.

The difficulties of sourcing a consistent supply of organic waste led MagProtein to determine that it would be more efficient to work directly with industrial producers of organic waste such as food and beverage manufacturing companies.

The second development was that an encounter with a local farmer led MagProtein to turn insect excretion, called frass, into another product category. While the team was aware that frass could be converted to fertilizer and, based on the advice of the EVO Consortium, were allowing frass to stockpile, they did not invest in frass production until they met a local farmer who came to their facility for a visit. MagProtein agreed to provide a couple of bags of the frass at the end of his visit, with the farmer returning a short time later to procure a “boatload” (Interview with MagProtein November 2022). Further research undertaken by the team helped them to understand the commercial potential of frass, which was a high potential fertilizer that was competitive with imported products.

The conclusion that industrial waste producers were the optimal business partners to MagProtein and that there was commercial value to frass helped MagProtein’s founders to redefine its business model towards 2020. Importantly, they determined that by working closely with large manufacturers, they could optimize the management of their own supply chain and help large manufacturers with their waste streams. They also concluded that in addition to supplying waste, corporate partners could also act as clients, either by purchasing insect protein as a feed ingredient or by purchasing fertilizer for food growers that were supplying manufacturers. Based on these revelations, the company redefined its business plan to seek industrial scale manufacturers as both suppliers and clients.

Understanding that they also had to improve facility operations to expand breeding capacity, MagProtein sent an email to Avaro Manzanares Rosenberg, who ran a Dutch-based business called Insect Systems. To the surprise of MagProtein, Manzanares was “enthused by the big ambition” of MagProtein (Interview with MagProtein December 2022) and decided to visit Nigeria within two weeks of their first correspondence, arriving in early 2020. Manzanares was impressed by MagProtein’s production volumes and introduced the founders to New Generation Nutrition, a Netherlands-based insect protein specialist that was leading the development of the Insect4Feed Cluster in Nigeria.

The introduction came at an opportune time for MagProtein as the company had been unsuccessfully trying to get in touch with an international food manufacturer to find a reliable supply of spent grain and New Generation Nutrition had direct links to the organization and so facilitated a direct meeting.

The multi-national company had set global “zero waste-to landfill” reduction targets for its factories and production sites and it was the responsibility of local organizations to determine how to meet these targets. Among the waste streams produced by the company were spent grain and spent yeast. While the applications for spent grain were more developed; in addition to insect-rearing; spent grain could be used as a direct input into animal feed and so the company had a productive way to valorize spent grain, the company believed that it’s disposal of spent yeast needed to be optimized. At the time of meeting the MagProtein team in early 2022, the company was delivering its spent yeast to a composting company. However, composting yeast into fertilizer was time consuming and, in the view of the company, the composting process produced unnecessary greenhouse gasses. Due to the corrosive nature of spent yeast, the alternatives to convert spent yeast into other products were more limited. Based on the interests of the company, to minimize the environmental impact and maximize the valorization of all its waste streams, and the interests of MagProtein, to identify a stable supply of feedstock for its insects, the company recommended to trial delivery of spent yeast, a proposal which was accepted by MagProtein.

The results of the pilot were positive, with the initial pilot volumes expanding from one thousand to twenty thousand liters of spent yeast per day. Because spent yeast has a high proportion of water content, which larvae also need for growth and reproduction, MagProtein was able to reduce water and energy expenditures. The reductions of input costs meant that the insect protein produced by Magprotein was approximately 50% cheaper that fishmeal on absolute terms and 15–20% cheaper based on its protein value, making it a highly competitive feed input. Secondly, from the perspective of the multinational company, the application of spent yeast to rear black soldier flies was more environmentally efficient and logistically straightforward compared to composting.

The company’s interests to maximize the operational and environmental efficiency of their supply chains also meant the company was open to explore how the fertilizer produced by MagProtein could be distributed through the company’s outgrower schemes. According to the company, this level of efficiency was attractive because “one process is being used to create two resources” (Company Interview December 2022). At the time of writing, yield trials were underway, serving as validation that the strategy it had developed from its production ambitions, its early experience procuring organic waste streams and its decision to produce fertilizer, was an achievable growth path.

6. Discussion: principles, processes and the integration of circular business models into global value chains

The chapter explores how circular business models are linked to global value chains, through the case of MagProtein. Because circular business models have several characteristics that contradict our assumptions about the structure of global value chains, specifically that trade is more likely to take place in “closed loops” and parties in a trade relationship may take on the roles of both buyers and sellers, it is valuable to interrogate whether linkages between circular business models and global value chains exist, as well as the structure of these linkages.

The chapter has selected the case of MagProtein because insect rearing is a quintessentially “circular” business insofar as it produces valuable forms of energy from organic waste, using a very small environmental footprint. While possible business models have been identified that are possible to deploy at the small-holder level in Nigeria, MagProtein pursued a business model that was designed to be industrial in scale. The implications of this were that MagProtein needed to work with industrial-scale partners to secure stable volumes of waste resources.

Potential industrial scale partners were international companies because it was international companies that were producing the volumes of waste that MagProtein needed. International companies also had globally established targets that centered on zero-waste manufacturing principles, which made them more likely to be open to partnering with MagProtein. Thus, while MagProtein’s entry into the “global value chain” of a multinational food manufacturer was very local because production and distribution it’s products remained within Nigeria, it was the presence and activity of industrial scale production that enabled the business model of MagProtein to materialize.

Another aspect of the development of MagProtein’s business model that is notable is the extent to which global value chains are not just global in relation to trade but also in terms of research and development and market access.

International linkages supported the development and growth of MagProtein’s business. Outreach to international organizations was an essential part of the company’s early business development in terms of technical, operational and market linkages. In this respect, the study of the integration of circular business models into global value chains, especially those which emerge in developing countries, should consider the role played by international technical experts and the ways that they support circular businesses to integrate into global value chains.