The Future of European
Commercial Spacecraft Manufacturing
Report 58 May 2016
Cenan Al-Ekabi
Short title: ESPI Report 58 ISSN: 2218-0931 (print), 2076-6688 (online) Published in May 2016
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ESPI Report 58 2 May 2016 The Future of European Commercial Spacecraft Manufacturing
Table of Contents
Executive Summary 5
Introduction – Research Question 7
1. The Global Satellite Manufacturing Landscape 9 1.1 Introduction 9 1.2 Satellites in Operation 9 1.3 Describing the Satellite Industry Market 10 1.4 The Satellite Industry Value Chain 12 1.4.1 Upstream Revenue by Segment 13 1.4.2 Downstream Revenue by Segment 14 1.5 The Different Actors 15 1.5.1 Government as the Prominent Space Actor 15 1.5.2 Commercial Actors in Space 16 1.6 The Satellite Manufacturing Supply Chain 17 1.6.1 European Consolidation of the Spacecraft Manufacturing Industry 18 1.7 The Satellite Manufacturing Industry 19 1.7.1 The Six Prime Contractors 21 1.7.2 The Smaller Commercial Prime Contractors 23 1.7.3 Asian National Prime Contractors in the Commercial Market 23 1.7.4 European Prime Contractors’ Relative Position in the Global Industry 23
2. The Changing Landscape 24 2.1 Maintaining a Competitive Advantage 24 2.2 Intensity of Rivalry amongst Existing Competitors 26 2.2.1 Barriers to Entry 28 2.3 Threat of New Rivals 31 2.3.1 China 31 2.3.2 India 33 2.3.3 Smaller Emerging Geostationary Satellite Manufacturers 34 2.3.4 Russia 36 2.4 Bargaining Power of Suppliers 37 2.5 Bargaining Power of Buyers 38 2.6 The Availability of Substitutes 41 2.6.1 Non-Satellite Substitutes 41 2.6.2 Small Satellites 42 2.7 Sounding the Competitive Environment 45
3. Risks and Opportunities for European Manufacturers 46 3.1 Introduction 46 3.2 What Is the Strategic Value of Having a European Commercial Satellite Manufacturing Sector? 46 3.2.1 The Necessity of Commercial Business for the European Space Sector 46 3.2.2 The European Institutional Framework Supporting the Competitive Environment 47 3.3 Improving the Competitive Position of the European Satellite Integrators in the Global Satellite Market 48 3.3.1 Internal European Cooperation and Measures in Place to Collectively Improve the Competitive Position 48 3.4 External International Cooperation to Improve the Competitive Position of European Satellite Integrators 49 3.4.1 Broader Alliances/Cooperation with the Traditional Competitors 51 3.4.2 Broader Alliances/Cooperation with Emerging Low-Cost Satellite Manufacturers 54
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3.5 What About Outsourcing or Offshoring the Low-End Technology to Low-Cost Countries? 60 3.5.1 Outsource or Offshore Subsystems and Equipment 61 3.5.2 Components 61 3.5.3 Outsourcing and Offshoring Lower-Tier Technology to Central and Eastern European Countries? 62 3.5.4 Lessons from the Automotive Manufacturing Industry in Outsourcing 64 3.5.5 Lessons from the Aircraft Manufacturing Industry in Outsourcing and Offshoring 65 3.6 Potential New Paradigms for Europe? 67 3.6.1 Small Satellites 67 3.7 Conclusion 67
4. Findings and Recommendations 69 4.1 ESA Interest in Space Industrial Policy 71 4.2 EU Interest in Space Industrial Policy 71 4.3 Industrial Response to EU Interest in Space Industrial Policy 71 4.4 Applying a SWOT Analysis to Europe’s Prime Contractors 72 4.5 Assessing Alternative Roadmaps for European Competitors: Trade-off Considerations on Forming Alliances and on Outsourcing / Offshoring 74 4.5.1 Alliance Building among European Competitors 75 4.5.2 Alliance Building with Traditional Rivals 75 4.5.3 Alliance Building with New Rivals 76 4.5.4 Outsourcing / Offshoring Low-End Technology to Low-Cost Countries 76 4.5.5 Outsourcing / Offshoring Low-End Technology to CEE 77 4.5.6 Summary 77 4.6 Recommendations 79
Annex 81 A.1 COCOM, Wassenaar, and European Export Control 81
List of Acronyms 82
Acknowledgements 86
About the Author 86
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Executive Summary
This report assesses the future of European Maintaining the competitiveness of Europe’s commercial spacecraft manufacturing of sat- prime contractors is essential to sustain the ellites that are bought through open competi- critical mass of European space industry as a tion in situations where European bidders are precondition for Europe’s space ambitions. faced with non-European competition. This Yet, remaining competitive might require a study aims to inform and provide recommen- change in industrial strategy, with a focus on dations to decision makers and actors within building stronger ties with Western manufac- the European space sector, but is also meant turers in addition to accessing their industrial to engage all persons interested in the indus- markets. Similarly, competitiveness might trial aspects of space. benefit from allying with rapidly emerging nations with low cost manufacturing capabili- European prime contractors are in a water- ties, or outsourcing or offshoring to these shed period, faced with increasing competi- countries. A further consideration might be to tion from traditional U.S. competitors, while foster low cost internal capability in Europe simultaneously being pressured by low cost by seeking to relocate parts of the manufac- manufacturers targeting emerging regions turing chain to CEE countries - this having that seek less sophisticated technology at a the dual advantage of providing highly skilled discounted price. Moreover, competitors in labour at a lower cost and greater geographi- the U.S. have the luxury of being able to cal proximity. This last approach has the fur- draw on a giant well of domestic institutional ther benefit of being more likely to push for- investment when commercial demand ebbs; ward Europe’s goal of technological non- while new commercial competitors in China, dependence in components and parts. India, and Russia are state-financed and thus to some extent cushioned from commercial Uncertainty is the hallmark of predicting the pressures. European manufacturers must rely future evolution of commercial spacecraft much more on commercial revenue, espe- manufacturing, and in assessing how to re- cially from export markets. Considering the main competitive in an increasingly globalised scarcity of new contracts, the level of compe- society. While the competitive environment tition, and the marginal profits to be earned, can be plotted from a historical perspective, maintaining a significant role in this domain and its current dynamics captured in the will require new and forward-looking ap- frame of Michael Porter’s Five Force model, proaches. the picture is likely to change as time pro- gresses. The risks and opportunities envi- Using Porter’s Five Forces Model, an assess- sioned in this report attempt to provide an ment of the competing forces and how gov- initial sample of the range of options that ernments impact these forces enables Euro- could be pursued by European prime contrac- pean competitor strengths and weaknesses to tors in response to changes in the competi- be identified. As traditional rivals fight for tive environment; however they are not ex- market share by developing new technolo- haustive, are often complementary, and do gies, and new rivals increase the stakes not give a definitive answer to what is in the thanks to their lower cost manufacturing base best interest of Europe’s prime contractors, and strong government support, Europe’s which also depends on the delicate compro- prime contractors will need to position them- mise between commercial and government selves according to where they possess com- actors. Answers for individual companies petitive advantage to remain successful must necessarily be found with reference to within the global commercial satellite manu- the specifics of each company and as part of facturing industry. Moreover, they must be an overall commercial strategy. Answers ready to take on other competing forces, must thus also consider the specific risk ap- such as the bargaining power both of their petite and financial buffers of the company. suppliers and of their buyers, which are likely So even if binary answers are not available, to change in the future due to reduced export this report has sought to be helpful by sur- restrictions and further globalization within veying the landscape and describing many of the industry. And they must also be ready to the tools available for European satellite compete with substitute products that could manufacturers. Moreover, this report can one day become game changers. hopefully be a useful tool for decision makers
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to help them be better informed about the provide more immediate factor cost ad- benefits and burdens before selecting the vantages). It should be noted, however, best strategies for their companies. that both outsourcing and offshoring re- quire strong and engaged management The analysis in this report leads to the identi- to be successful. fication of the following elements to be con- sidered when formulating responses to the • Outsourcing/offshoring production of very substantial changes in the competitive non-essential technologies will create environment of European satellite manufac- greater price bargaining power with turers: lower-tiered suppliers, but it will not eliminate Europe’s dependence on for- On Alliance Building eign suppliers and locations, and this could be critical, unless multiple sourcing • European prime contractors should de- strategies are pursued. cide whether to form alliances with tradi- tional competitors and/or low-cost com- On the European Non-Dependence Strategy petitors to benefit from respective and Competition economies of scale, technology transfer, the spreading of risk among partners, • To maintain European technological and shaping the nature of competition in competitive advantage, and also reduce the industry. European prime contractors’ vulnerability to U.S. ITAR restrictions, Europe’s space • European prime contractors should also industry should continue to indigenously consider forming alliances with other develop key Electrical, Electronic, and European competitors which would pro- Electromechanical (EEE) components un- vide the added benefits of 1) collectively der the European Components Initiative enhancing European bargaining power in (ECI), along with technologies developed bidding for international contracts, 2) through ESA’s ARTES programme and enabling specialization and standardized the EU’s Horizon 2020 space research manufacturing processes, and 3) reduc- and development programme. ing geo-return requirement interference with competition, as participants would • As the timeline between investment and be able to gain access to a larger share return on investment typically extends of European institutional funding. over 10 years, investors should expect to sacrifice some short-term returns for lar- • Throughout the life-cycle of an alliance, ger payoffs in the future. prime contractors should monitor that the arrangement does not become com- • To remain at the forefront of competi- petitively disadvantageous, i.e. the point tiveness, European industry should seek at which the costs in terms of coordina- to acquire technology from other leading tion, the erosion of competitive position, competitors, and hire highly skilled la- and the creation of an adverse bargain- bour trained outside of Europe to develop ing position, disproportionately offset the new synergies. benefits of the alliance. • To stimulate the growth of the entire • Regardless of the type of alliance, to pre- European space sector, more institutional empt the creation of an adverse bargain- spending is needed to lower costs in the ing position, European prime contractors long run through further economies of should aim to maintain an entire vertical scale, and bring Europe’s industry closer supply chain within Europe to ensure that to being on an equal footing with U.S. external alliance investments can be re- and low-cost competitors. versed. • To remain competitive with low cost On Outsourcing/Offshoring Subsystems, Equip- countries selling in-orbit delivery pack- ages using export credit mechanisms, ment, and Components Europe’s industry should seek to adopt a • European competitors should seek to similar approach when marketing satel- place more focus on the critical European lites to emerging countries. capabilities, by outsourcing/offshoring non-essential technologies (e.g. low-end equipment and components) to low cost Central and Eastern European (CEE) countries (which will help to maintain the European industrial base), or outsourc- ing/offshoring those technologies to low cost non-European countries (which will
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Introduction – Research Question
Does Europe have a future as a home of very high market entry threshold. And third, » commercial spacecraft manufacturers, Russia, surprisingly, did not develop a com- and, if so, what steps should Europe take petitive satellite manufacturing industry, in to ensure or improve such a future? contrast to its successful commercial launcher industry - and this despite great capability Until fairly recently, the main threat to and more than twenty years having passed Europe’s spacecraft manufacturers came from since the end of the Cold War. their United States counterparts as global competitors in the commercial satellite manu- The current threat for the European commer- facturing industry. Now the growing rele- cial spacecraft manufacturing industry has vance of low cost manufacturers, mostly from arisen because technologies have become Asia, should give European manufacturers more manageable and the low cost countries cause to reassess their relative position in the have had time to develop industrial capabili- global industry. While the number of global ties. Whether this poses an existential risk competitors in the commercial satellite manu- must be determined in relation to a number facturing industry is concentrated, with two of factors. One such factor, discussed in the ‘prime contractors’ in the EU and four in the first chapter, is whether the risk applies U.S., pickings are slim for European manu- equally to the production of commercial tele- facturers that do not have the luxury of communication satellites and commercial courting the lion’s share of the world institu- Earth observation satellites. Following this tional market that is concentrated in the U.S. introduction which presents the main re- and accessible only to U.S. companies. With search question, the first chapter provides an one to two dozen commercial contracts for overview of the global satellite manufacturing telecommunication satellites (and some Earth landscape, distinguishing satellites according observation satellites) negotiated on a yearly to markets and to the position in the up- basis, some being earmarked to replace heri- stream or downstream segments of the satel- tage models, new contracts for satellites are lite industry value chain. The chapter then scarce and in high demand by satellite mak- focuses on the different actors purchasing ers, creating a vigorous level of competition satellites, thereafter honing in on the satellite in a market with marginal profits. manufacturing supply chain and satellite manufacturing industry competitors. Emerging space nations are now expanding into the market, peddling low-cost alterna- Another factor underpinning the second chap- tives (enabled by favourable factor endow- ter is whether the risk is posed only by low ments such as low-cost labour) to commer- cost manufacturers in Asia or also by radical cial operators who critically evaluate cost new approaches in the United States, such as versus quality and reliability. European those of SpaceX when it begins producing its manufacturers must fight to remain at the own satellite constellation. Here, the second cutting edge of this industry, producing state chapter looks at the changing competitive of the art technologies (such as electric pro- landscape of the satellite market in terms of pulsion systems, high throughput satellites, maintaining competitive advantage. Michael and greater functional flexibility), while also E. Porter’s Five Forces Competitive Model reducing manufacturing costs to compete analysis is applied, focussing on the position with low-cost manufacturers in China, India of European Prime Contractors vis-à-vis the and Russia that can cater to the needs of global industry. The model assesses the in- aspiring space-faring nations, such as Nige- tensity of rivalry amongst current competitors ria, Venezuela, Pakistan, Bolivia, as well as to in the U.S., the threat of new rivals from the big operators eventually. In the past, China, India, Russia, and select emerging European as well as U.S. spacecraft manufac- countries, the bargaining power of lower- turers had been fairly shielded from competi- tiered suppliers, the bargaining power of tion from low-cost manufacturers. There were buyers, and the availability of substitutes, in several reasons for this; first, even common order to identify strengths and weaknesses platform manufacturing for telecom satellites and provide a vivid picture of the competitive had not been fully commoditised, requiring environment. significant inputs of specialised knowledge. Second, export control regulations made for a
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The third chapter then addresses the risks The final chapter describes the interests of and opportunities faced by European satellite the different European stakeholders (ESA, manufacturers. Existential questions on the EU, and Industry) in terms of European overall importance of the commercial satellite commercial satellite manufacturing, and manufacturing sector and its necessity are groups the strengths, weaknesses, opportuni- considered first, including whether to con- ties and threats outlined in the previous tinue as low margin prime contractors of chapters into a SWOT analysis matrix. It then commercial satellites or become high margin, compares the trade-offs in choosing one or niche providers of subsystems - and how that several alternative roadmaps to remain com- would impact Europe’s space ambition in petitive in the future, contrasting benefits to other domains, noting that other issues at burdens over the near- and long-term. The stake are Europe’s position as an innovation chapter ends with a conclusion and a set of leader, and European space technology non- recommendations. dependence. The chapter then identifies The central question in this report is solely methods to improve the competitive position the future of European commercial spacecraft of European satellite integrators in the global manufacturing, by which is meant whether satellite market. These methods look both to satellites are bought through open competi- internal European cooperation and measures tion in situations where European bidders will in place to collectively enhance Europe’s be faced with non-European competition. The competitive position, and to external interna- customer will normally be a commercial op- tional cooperation to improve the competi- erator but, particularly in emerging econo- tiveness of individual European prime con- mies, could also be an institutional buyer. tractors. The trade-offs between forming an alliance with traditional competitors or with This study aims to inform and provide rec- the emerging low-cost satellite manufacturers ommendations to decision makers and actors are discussed – along with outsourcing or within the European space industry, but is offshoring subsystems, equipment and com- also meant to engage all persons interested ponents to manufacturing bases in low-cost in the industrial aspects of the global space and CEE countries. Furthermore some com- endeavour. parisons are made with the automotive and aircraft manufacturing industry that have also weathered many competitive challenges.
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1. The Global Satellite Manufacturing Landscape
1.1 Introduction 1.2 Satellites in Operation
The term ‘satellite’ existed long before Rus- As at 31 December 2015, the Earth was or- sia’s Sputnik was launched on 4 October bited by 1381 active satellites, positioned in 1957. Deriving from the Latin term ‘satelles’ different orbits according to their respective meaning ‘attendant, companion, courtier, functions, and operated by actors from vari- accomplice, assistant’1, the term was used by ous countries.6 Of these operational satel- German astronomer Johannes Kepler to de- lites, 534 (38.7%) had been developed for scribe Jupiter’s four moons, which were first commercial communications purposes, while observed by fellow Italian astronomer Galileo 75 (5.4%) had been developed for commer- Galilei on 7 January 1610.2 In the centuries cial Earth observation. that followed, the term ‘satellite’ expanded Most telecommunications satellites operate in into the realm of geopolitics (i.e. satellite geostationary orbit (GEO); a fixed distance states)3 and also to biology (i.e. satellite vi- from Earth’s equator (some 36,786 km), in rus).4 Yet arguably, the most common use of the same angular velocity of rotation, which ‘satellite’ is in reference to a natural celestial enables the satellite to maintain its position body (i.e. moons and planets) orbiting a lar- relative to the Earth’s surface for ongoing ger body, or an artificial (machine) object signal transmission to satellite antennas that launched into space to orbit a celestial body. are pointed permanently toward the satellite. The first definition of a theoretical artificial Due to the convenience of GEO positioning, satellite was recorded in 1936, while the slot positions in attractive orbit regions have launch of Sputnik transformed that definition become partially crowded. In part, this has into a factual one in 1957.5 As the space in- contributed to the placement of some tele- dustry developed - nurtured initially by mili- communication satellites in lower orbits such tary interests - artificial satellites were built as medium Earth orbit (MEO), or low Earth for navigation, Earth observation, communi- orbit (LEO). According to Kepler’s laws, satel- cation and scientific purposes. In this study lites closer to the surface of the Earth travel the focus will be on commercial satellites at progressively higher angular velocities to (particularly telecommunication satellites, maintain orbit, so many satellites working in and to a lesser extent Earth observation concert are needed to maintain coverage commercial satellites). Telecommunication over the same location. The specific advan- satellites are the primary issue, as this seg- tages associated with the different orbit re- ment is the most mature and generates the gions will be further explained in the descrip- majority of European satellite export reve- tion of state-of-the-art technologies in the nue. following chapter.
1 “Satellite (n.).” Online Etymology Dictionary 20 Aug. 2014
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Figure 1.1. Global Space Industry in Context (Revenue in 2014, Source: SIA)
Figure 1.2. World Satellite Industry Revenue ($ Billions, Source: SIA)
the SIA’s State of the Satellite Industry Re- 1.3 Describing the Satellite port, the satellite industry is listed as a sub- set of the global space industry accounting Industry Market for about 63% of the total revenue earned for that year. This subset groups commercial The Satellite Industry Association (SIA) has operator and institutional spending on up- estimated that the total value of the global stream commercial space products and sup- 7 space industry was $322.7 billion in 2014. In port industries (i.e. satellite manufacturing, launchers, and ground infrastructure), as well 7 as downstream spending on commercial “2015 State of the Satellite Industry Report.” 15 Sept. 2015. Satellite Industry Association and The Tauri Group space products and services (i.e. ground 23 Feb. 2016
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came from non-satellite industry space observatories, non-orbital spacecraft etc. spending, mainly from government space (Figure 1.1). budgets relating to human spaceflight, space In 2014, the satellite industry was estimated ducted within each reporting year. Rather, to have generated $203.0 billion in revenue. these revenues were generated by numerous The industry has grown considerably over the satellite undertakings, each at a different past decade, more than doubling the $88.8 stage of operational life, which continued to billion generated in 2005 and increasing over contribute to the revenue generated in each five-fold from the $38.0 billion in industry year. revenue reached in 1996. This consistent However, revenues generated by the satellite growth trend does not show signs of slowing manufacturing and launch industries are down (Figure 1.2). counted in the year that they are launched Revenue in 2014 was derived from four main into space. Unlike with satellite services and segments of the satellite industry, i.e. satel- ground equipment services, these gains are lite manufacturing (7.8%), launch services not compounded into subsequent years, as (2.9%), ground equipment (28.7%), and the activities from these segments do not satellite services (60.5%). However, the rela- directly benefit from increased satellite ca- tive share of revenue generated in each seg- pacity already in orbit. Yet, while indicative of ment reveals substantially higher growth in the overall growth of the satellite industry, some segments over the years covered (Fig- viewing the segments separately reveals only ure 1.3). Moreover revenue growth in the a partial picture of how the entire value chain period 1996 to 2014 cannot be attributed results in industry growth. solely to the business activity that was con-
Figure 1.3. Satellite Revenue Share by Segment ($ Billions, Source: SIA)
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rounds of inputs from contributors specific to each segment within the value chain (Figure 1.4). While simplified to serve as an overall 1.4 The Satellite Industry outline, it should be noted that the internal Value Chain composition of each segment depends on the intended function and purpose of the space- In the broader context of the satellite indus- craft being developed. The final outcome is a try, the satellite value chain has the following space infrastructure that delivers services to sequence of interconnected segments where end customers. additional value is created through successive
Figure 1.4. The Value Chain of Commercial Telecom, Earth Observation, and Navigation Satellite Applications8
The first stage in the space value chain is the The satellite industry value chain can be sepa- design and manufacture of the satellite. A rated into an upstream and a downstream satellite operator places an order for one or segment. The upstream segment is where more satellites with a selected satellite manu- space infrastructure is developed, involving facturer. Based on the requirements of the the design, manufacture and launch of space operator, the manufacturer designs and builds elements, along with the production of neces- the satellite. Upon completion of assembly, sary ground equipment to control the satellite integration and testing (AIT), the satellite is from Earth. The downstream segment de- placed in its operating orbit by a launch ser- nominates the satellite services that are en- vice provider. Following the launch and early abled through the space infrastructure as well orbit phase (LEOP) of the satellite, where di- as the ground equipment, essential for the end agnostic activities are conducted to ensure the customer to receive the satellite’s services. proper operation of subsystems and deploy- The lion’s share, almost 90% of the revenue, ment of any appendages, control of the satel- is found in the downstream market. As will be lite is handed to the operator to begin direct described below, the largest portion of private use of the capacity or the lease/sale of that commercial business lies in the downstream satellite capacity to organizations that market part of the satellite industry value chain as satellites services to the end consumers. there is relatively more profit to be earned there than in the upstream segment. A hallmark characteristic of the value chain for space products is the long development and Necessarily, the value chain for commercial utilisation cycle. A typical communication sat- Earth observation satellites differs from com- ellite lifecycle lasts on average between 14 munication satellites. The upstream segment and 19 years. The period between the ap- does not generate commercial revenue as proval of the business case for a space infra- governments fund most of the production of structure and the start of operation (Phases A these satellites. However, there is much com- – D) spans at least 2 to 4 years. During that mercial revenue in the downstream segment, time, the satellite undergoes a series of severe as value added services generate economic and challenging tests with the goal of an op- activity from users. Commercial downstream erational lifetime (Phase E) of between 12 and revenue generated by Earth Observation 15 years in orbit.9 When there is a business reached $1.6 billion in 2014, whereas com- case for renewed or additional capacity, new mercial downstream revenue generated by capacity is purchased by the operators and communication services (including voice & this is how the value chain is sustained.10 data transmission and broadcast services) was $104.2 billion.11
8 Regarding navigation satellites, the sale of capacity (or time) is currently not applicable. See further Ozgur Gur- tana. Fundamentals of Space Business and Economics. SpringerBriefs in Space Development. 2013. p.12. 9 “Economics of Satellites.” 7 Feb. 2012. The European Satellite Operators’ Association (ESOA) 15 Sept. 2014 11 “2015 State of the Satellite Industry Report.” 24 May
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Figure 1.5. Satellite Development Lifecycle
Figure 1.6. Satellite Manufacturing Industry Revenue ($ Billions, Source: SIA) and Number of Commercial Communication Satellites Launched Per Year (Source: The Spacecraft Encyclopaedia)
revenue compared to the past ten years 1.4.1 Upstream Revenue by Segment (2003-2012).13 These revenues, generated from both com- Satellite Manufacturing mercial and government customers, reflect The revenue realized from satellite manufac- the amounts earned only by prime contrac- turing is modest when compared to the reve- tors who integrate individual subsystem com- nue earned from downstream satellite ser- ponents into a complete satellite; payments vices. And in terms of profit margins, satellite to subcontractors are not directly reflected to manufacturers typically operate at below avoid double counting. 10%, especially when their business is pre- dominantly commercial, involving more strin- Launch Industry gent terms and conditions than for institu- While the commercial launch industry gener- tional customers, due partly to the intensity 12 ates the lowest revenue of the segments, it is of competition for commercial contracts. of critical importance for the global space Despite the burst of commercial communica- value chain as it is essential in deploying tion satellites launched in the 1990s, rather space infrastructure. Traditionally, this up- than having a consistent increase in revenue, stream segment has placed spacecraft into global satellite manufacturing revenue shows orbit with the use of expendable launch vehi- a cyclical growth trend with an upsurge in cles and related launch support. During the recent years. This surge is confirmed by the design and manufacturing phase of a satel- Euroconsult report, Satellites to be Built & lite, the cost and capability of an intended Launched by 2022, which forecasts an in- launch service provider can have a substan- crease in the global demand for satellites tial impact on the size and operational life- within the next decade. According to Euro- time of a satellite. consult estimates, around 1,150 satellites will With several launcher options available for be launched between 2013 and 2022, which any-sized satellite, the launch services indus- is a 26% growth in satellite manufacturing
13 Henry, Caleb. “New Euroconsult Report Forecasts Exciting Changes in the Satellite Industry.” 8 Nov. 2013. Via Satellite 30 Oct. 2014
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try operates in a highly competitive environ- mal revenue growth within this segment. Yet, ment. This competitive environment among as in satellite manufacturing, a similar cycli- established launch providers and new en- cal growth trend is visible, as they go hand- trants such as SpaceX has resulted in mini- in-hand.
Figure 1.7. Launch Industry Revenue ($ Billions, Source: SIA)
1.4.2 Downstream Revenue by Segment to the end consumers. The downstream com- ponent of ground equipment is the consumer Ground Equipment equipment used by satellite service custom- ers to receive satellite TV, radio, broadband Ground equipment, depending on its nature, signals in homes, and mobile communication can be considered as part of both the up- terminals, in addition to satellite navigation stream and downstream segments in the equipment (not including chipsets in smart- space value chain. In the upstream compo- phones whose primary use is not satellite nent, ground equipment consists of network navigation). As ground equipment functional- equipment, where the service provid- ity increases year-by-year, the revenue gen- ers/network operators lease bandwidth from erated by ground equipment has been grow- the satellite operators and use the network ing steadily in tandem with the increasing equipment to set up a network in order to economic impact of satellite services. provide a full assortment of satellite services
Figure 1.8. Ground Equipment Revenue ($ Billions, Source: SIA)
Satellite Services mobile satellite communication services (FSS & MSS), and remote sensing.14 With the growth of satellite capacity over four decades, telecommunication services have Increased global demand for satellite ser- become the leading commercial space market vices, particularly in emerging countries, has among the other services provided by com- driven growth in this market. mercial satellites, such as remote sensing. Figure 1.9 presents the SIA’s estimate of revenue generated from commercial satellite services including Direct-to-Home (DTH) broadcasting (including satellite television, 14 “Satellites to be Built & Launched by 2022.” 2013. Euro- radio, and broadband services), fixed and consult: 30.
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Figure 1.9. Satellite Services Revenue ($ Billions, Source: SIA)
In the commercial space industry, satellite Considering Downstream and Upstream Seg- communications are clearly the most attrac- ments tive and lucrative revenue-generating com- mercial space application. The sector is also Ground equipment and satellite services the most mature of the space applications, as revenue have witnessed consistent growth in over the decades it has developed into a the past two decades, while the space infra- highly privatized and commercial market.15 structure segments, i.e. the manufacturing and launch industries have been a more con- servative market where revenues have re- mained relatively flat. This is likely because the market entry threshold is much higher due to the high initial investment needed for space infrastructure. Consequently large players dominate. Moreover, the extreme Year environmental conditions of space necessitate Satellite Satellite Revenue Revenue Revenue Revenue
($ Billions) ($ Billions) ($ Billions) ($ Billions) high quality technology and expertise, and Manufacturing Launch Industry
Satellite Services long development and qualification cycles, Ground Equipment while there is strong customer demand for 1996 8.3 4.2 9.7 15.8 on-time delivery and proven long term reli- 1997 10.6 4.8 12.5 21.1 ability. Nevertheless, a key element is that 1998 12.4 4.3 13.9 24.4 with the same investment in space infrastruc- 1999 10.4 4.3 16.0 29.7 ture, a rapidly expanding service sector can 2000 11.5 5.3 18.5 28.9 be served. This is both because of the better 2001 9.5 3.0 19.6 32.3 use of data, and especially because the price 2002 11.0 3.7 21.0 35.6 per transponder/per bit has declined signifi- 2003 9.8 3.2 21.5 39.8 cantly to an average transponder price of 2004 10.2 2.8 22.8 46.9 $1.62 million per year for 36 megahertz of 2005 7.8 3.0 25.2 52.8 capacity in August 2012, with further declines expected in the coming years as some mar- 2006 12.0 2.7 28.8 62.0 kets soften with new satellites entering ser- 2007 11.6 3.2 34.3 72.6 vice.16 2008 10.5 3.9 46.0 84.0 2009 13.4 4.5 49.9 92.8 2010 10.7 4.4 51.6 99.2 2011 11.9 4.8 52.8 107.8 1.5 The Different Actors 2012 14.6 5.8 54.9 113.5 2013 15.7 5.4 55.5 118.6 1.5.1 Government as the Prominent Space Actor 2014 15.9 5.9 58.3 122.9 A distinction can also be made between Table 1.1. Satellite Revenue Share by Segment ($ Billions, Source: SIA) commercial and institutional spacecraft manufacturing. Different business models exist within the space value chain, distin- guished by the interaction between govern-
16 De Selding, Peter B. “Rising Transponder Prices Mask 15 “Economics of Satellites.” The European Satellite Opera- Regional Disparity.” 23 Aug. 2012. SpaceNews 1 May tors’ Association (ESOA) 15 Sept. 2014 2016
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mental, industrial and scientific space actors. orbit, the United States was asked to launch It should be noted that a variety of actors Symphonie. As United States policy at the participate in the global space value chain time sought to limit foreign competition in nowadays. Yet historically, governments have satellite telecommunications, it agreed to been the driving actor in space activities. launch the two satellites system as long as Beginning with the launch of Sputnik 1 in they were not used to provide commercial 1957, the space race between the United services. The United States eventually did States and Soviet Union boosted the space launch Symphonie in 1974 as experimental capabilities of both nations since space was satellites, however, the experience spurred considered as a strategically important sec- Europe to develop its own Ariane launcher tor. The initial policy rationales for govern- system to place European satellites in orbit.19 mental involvement in space activities cen- Commercial satellite manufacturing took a tred on national security, national prestige, substantial step forward in the early 1980s, scientific interests, and industrial policy ob- with the maturation of the space industry and jectives17; and these expanded in the follow- the United States’ policy shift toward eco- ing decades to include strategic interests in nomic deregulation of the domestic space access to space, and overall increased na- manufacturing industry. During this period tional space capability. manufacturers that provided space equip- In recent decades, the rationale for govern- ment for domestic government customers ment activities in space has grown to include began competing with independent offerings increased reliance on space assets that pro- of space components and systems for the vide socio-economic benefits. private sector. However, while the United States sought to expand its private sector Socio-economic benefits have encouraged involvement in space, commercial deregula- many emerging countries to own their own tion would not be at the expense of its na- space assets so as to provide a domestic tional security.20 infrastructure for space services and enable better utilization of the country’s resources. By the late 1980s, the increasing space ac- Space as a high-end technology sector has cess capabilities of new entrants suggested a become acknowledged as an engine for eco- new playing field, yet U.S. concerns about nomic growth, i.e. growth through invest- undue technology transfer led to a strength- ment in innovation and new technologies. By ening of the International Traffic in Arms leveraging the benefits of space technology Regulations (ITAR). This strengthening con- for socio-economic development, a nation can veniently also provided a high degree of pro- hasten its transformation into a knowledge- tection for incumbent launch providers. ITAR based economy. also increased entry barriers for emerging space actors. 1.5.2 Commercial Actors in Space Against this backdrop of regulatory protection and the overall increase in global wealth, the In recent decades there has been a paradigm Western commercial space industry flourished shift in the space business, with space under- in the 1990s while ties to the military de- going a process of privatization. Prior to the creased.21 More recently, in the past decade 1980s, governments were the only customers governments have faced severe budget con- of private aerospace contractors and suppli- straints, reducing institutional space spend- ers of space infrastructure. One very notable ing, which had otherwise been on an up- exception was, however, the licence granted swing. Consequently, spacecraft manufactur- by the United States to the terrestrial tele- ers started to look more to commercial op- communications giant AT&T, giving AT&T the erators for growth. right to develop and commercially use tele- communication satellites to complete their Today there are at least 57 commercial com- monopoly as a long-distance service pro- panies providing satellite applications mostly 22 vider.18 AT&T launched its two-satellite Tel- in the field of satellite telecommunications. star system in 1962.
In 1967, France and Germany began joint 19 development of their own European tele- Hertzfeld, Henry R. “Commercial Space and Space- power.” Towards a Theory of Spacepower: Selected Es- communications satellite system, Symphonie. says. Eds. Lutes, Charles D., Peter L. Hays et al. Wash- However, as Europe still lacked a launcher ington D.C.: National Defense University Press, 2011: p. capable of launching these satellites to GEO 230. 20 Ibid. 225. 21 Brennan, Louis, and Alessandra Vecchi. The Business 17 Munsami, V. “South Africa’s National Space Policy: The of Space: The Next Frontier of International Competition. Dawn of a New Space Era.” Space Policy 30 (2014): 115- Hampshire: Palgrave Macmilllan, 2011: p. 18. 120: p. 118. 22 Satellites to be Built & Launched By 2022.” 2013. Euro- 18 Ibid. consult
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The customer base of spacecraft manufactur- 1.6 The Satellite Manufactur- ers has thus expanded significantly. ing Supply Chain The space domain has not only been com- mercialized and privatized, but has also The spacecraft manufacturing supply chain opened up to international competition. has a ‘tiered’ structure. This structure of tiers Space companies now directly compete with defines the commercial distance in the rela- many foreign entities in all the space value tionship between the system integrator and chain segments. The technological capability the supplier. It can be represented as a to build and operate sophisticated space in- pyramid hierarchy, with system integrators at frastructure has spread from an initially U.S. the top, whereas the remaining suppliers are and Russian competency to a globalised organized in relatively larger numbers in one.23 other levels in the supply chain (Figure 1.10).
Figure 1.10. Pyramid Supply Chain from System Integrators to Tier n
System Integrators, known also as Prime Following successful assembly, integration Contractors, deliver either complete space and testing (AIT) of the subsystems of both systems or complete spacecraft to their cus- the platform/service module and payload(s), tomers. Within an overall system design, the satellite is delivered either on the ground satellite integrators design a satellite accord- or in-orbit to the customer. ing to the needs of the customer, followed by Both horizontal and vertical integration is the selection of subsystems provided by sup- common within the satellite manufacturing pliers in the first tier of the satellite manufac- supply chain in order to secure the supply of turing supply chain. These companies include critical components, while also providing large subsystem contractors, which design, competitive advantage in terms of standardi- manufacture and deliver the subsystems sation and the development of common plat- contracted for by the system integrator. forms and technologies.24 This notwithstand- Likewise, subsequent tiers of contractors and ing, system integrators may also divest their suppliers supply equipment and component interest in space subsidiaries that underper- parts to manufacturers in the upper tiers. form.25 A fundamental question is the make- or-buy dilemma, i.e. whether a product should be manufactured in-house or pur- 23 Lutes, Charles D., Peter L. Hays et al., eds. Towards a Theory of Spacepower: Selected Essays. Washington D.C.: National Defense University Press, 2011: p. 215; see 24 “Study on the Internationalisation and Fragmentation of also, Blamont, Jacques. “Space Governance and Global- Value Chains and Security of Supply | Case Study on isation.” Yearbook on Space Policy 2014: The Governance Space.” 17 Feb. 2012. Danish Technological Institute 18 of Space. Eds. Cenan Al-Ekabi, Blandina Baranes, Peter Sept. 2014: 38. Hulsroj, and Arne Lahcen. Vienna: SpringerWienNewYork, 25 Satellites to be Built & Launched By 2022.” 2013. Euro- 2016. 167-85. consult. 51.
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chased from an external supplier. Satellite commercial telecommunication satellites and integrators may also decide to combine Earth observation satellites are in different forces in order to increase their competitive stages of consolidation (i.e. satellite commu- position in the market. nications is a much more mature sector than Earth observation). As in other manufacturing industries in the aerospace and automotive sectors, a satellite Consolidation in the satellite industry is not a manufacturing supply chain will often be con- worldwide phenomenon. In the 1990s, it took centrated in regional clusters near a first tier place mainly in the United States and Europe, system integrator.26 This can reduce the time while countries such as Japan and China have needed for the delivery of components to the not yet seen a significant change in the com- satellite integrator, in addition to expediting position of their respective space industries.31 the development of technologies. Although Bucking that trend, in 2013, the Russian gov- the preference in government procurement is ernment began consolidating its space indus- for satellite integrators to procure subsys- try into one single state-controlled corpora- tems, equipment and components domesti- tion.32 cally, commercial contracts usually have the In Europe, companies went through a con- added flexibility of being able to procure in- solidative transformation through mergers ternationally. and acquisitions in the 1990s, which led to Approximately 30 companies (including two space company groups at the prime con- Europe’s Airbus Defence & Space, Thales tractor level, Airbus Defence & Space and Alenia Space, OHB, and SSTL) in the global Thales Alenia Space.33 When considered to- satellite manufacturing industry have the gether, these two conglomerates employed capability to assemble, integrate, and test 52.7% of all employees in the European complete satellite systems (excluding univer- space industry in 2014 (this also comprises sities and their spinoffs, research laboratories employment in launcher manufacturing).34 and institutes that develop very small satel- However, these two groups are comple- lites for LEO). The 30 companies do not all mented by OHB as another burgeoning sys- compete directly since satellites have differ- tem integrator; OHB being the result of ent capabilities, e.g. LEO vs. GEO satellites, strong internal growth and investment in and some companies may focus solely on space, particularly in the past two decades. government contracts while others on com- The challenge of consolidation is obviously mercial contracts. Around 14 manufacturers that it may lead to ineffective competition as have the capability to produce GEO satellites, barely enough players are left to compete for of which 9 compete internationally.27 There new contracts.35 Figure 1.11 provides the are more than 50 subsystem suppliers, while timeline of major consolidations within equipment and component suppliers number Europe’s space industry. above 300 internationally.28
1.6.1 European Consolidation of the Spacecraft Manufacturing Industry An industry in a new market tends to be fragmented during initial formation, but will normally consolidate as the market ma- tures.29 This phenomenon can be seen also in the space industry, with consolidation having taken place in recent decades in both the upstream and the downstream segments.30 This notwithstanding, the value chains for 31 Ozgur Gurtana. Fundamentals of Space Business and Economics. SpringerBriefs in Space Development. 2013. p. 49. 26 See generally Satellites to be Built & Launched By 32 “Russian Space Industry to Be Consolidated Within Year 2022.” 2013. Euroconsult. 53, 59-64. – Rogozin.” 4 Sept. 2013. RIANOVOSTI 4 Nov. 2014 27 Ibid. 52.
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Figure 1.11. Consolidation in the European space industry36
The space industry designs and manufactures 1.7 The Satellite Manufactur- satellite systems and launch vehicle systems for three main types of customers39: domes- ing Industry tic government agencies (civilian and mili- tary) in the home country of the industry; The satellite manufacturing industry had a global or regional commercial satellite opera- turn-over of $15.9 billion in 2014 or 7.8% of tors (mainly GEO communication satellite total satellite industry revenue. systems); and government agencies in newly Euroconsult estimates that 74.3% of satellite emerging space countries that lack indige- manufacturing revenue originates from gov- nous satellite manufacturing or launch capa- ernment contracts.37 This notwithstanding, bilities and thus have to procure them from some segments have matured enough to abroad. stand on their own. Further, Euroconsult es- A relevant statistic for gauging the number of timates satellite manufacturing revenue to spacecraft manufactured is to analyse the grow by more than 25% in the next decade, details of satellites launched per year. Ac- while the share of institutional satellites is cording to The Annual Compendium of Com- likely to remain roughly equivalent to previ- mercial Space Transportation: 2016 (FAA ous years, at 75.7%. In 2012, more than half Compendium), 86 launches took place in of government contract revenue for the year 2015, which delivered 116 satellites to or- was concentrated in the U.S., with the re- bit.40 Of those satellites ranging from small to maining share divided between China (20%), heavy in size, 49 satellites had a commercial 38 Russia (14%) and Europe (13%). U.S. sat- payload, denoting a commercial function or ellite manufacturers have access to a large operation by a commercial entity.41 The re- domestic market protected by Buy American maining 67 satellites were used for non- regulations. European manufacturers are commercial civil, military, or non-profit pur- hard pressed to compete for satellites for use poses. by non-European governmental, military or civil uses and have to take into account na- tional preferences when competing for com- mercial non-European communication satel- lites. 39 Ibid. 47. 40 This value does not include the 149 micro-satellites built 36 Updated diagram showing the evolution of Airbus De- mainly by governments, universities, non-profits, and fence and Space and Thales Alenia Space adapted from commercial companies such as ‘Planet Labs’ that were the diagram found in Peeters, Walter. “Overview of the also released into orbit in 2015. Space Sector.” Presentation. Space Economy in the Multi- 41 “The Annual Compendium of Commercial Space Trans- polar World. Vilnius, Lithuania. 7 Oct. 2010. portation: 2016.” Feb. 2016. Federal Aviation Administra- 37 “Satellites to be Built & Launched by 2022.” 2013. Euro- tion 1 May 2016 consult: p. 54.
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Figure 1.12. Percentage of Commercial Satellites Launched (Source: FAA)
From Figure 1.12 above, in the past decade purposes, and 18 of those GEOCOM satellites an average of 22.8% of all satellites launched had commercial payloads. The 188 GEOCOM had a commercial purpose. This is in line with satellites with a commercial payload that Euroconsult estimates that in 2012, 76.5% of were launched in the past decade were de- satellite manufacturing revenue originated signed and produced by 13 manufacturers, from government contracts. with 82% made by the six traditional prime contractors. Of these, four are U.S.-based, The market for geostationary communica- i.e. Space Systems/Loral, Orbital Sciences, tions (GEOCOM) satellites is highly competi- Lockheed Martin and Boeing. Their market tive, especially in the case of GEOCOM satel- share was 51% of all commercial GEOCOM lites that have a commercial payload. Over satellites launched in the past decade. This the past 15 years, an average of 21 GEOCOM shows the scale of U.S. capabilities in the satellites with a commercial payload have global satellite manufacturing industry. The been ordered each year. Although these two European manufacturers, Airbus Defence spacecraft command very substantial prices, & Space and Thales Alenia Space were their profit margins for manufacturers are low be- main competitors and managed to acquire a cause of the high level of competition. market share of 31% of all GEOCOM satellites In 2015, 32 of the 39 geostationary satellites with a commercial payload. that were launched were for communication
Figure 1.13. Commercial geostationary commercial satellites for the period 2006-2015 (Source: FAA)
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In the past decade manufacturers from six sions of EADS (Astrium, Cassidian, and other countries have competed for contracts Airbus Military), is a subsidiary of the with the American and European prime con- Airbus Group and is headquartered in tractors. These include Russia (with ISS Re- Toulouse, France. Its ownership is shared shetnev and Khrunichev) as well as Japan between France (12%), Germany (11%), (with Mitsubishi Electric Corp. (MELCO)). and Spain (4%) as state holdings, with China is a relatively new player in the mar- the remaining 73% of shares floated on ket, with its first successful GEOCOM satellite the market.42 While the main operations launched in orbit in 2007 (Sinosat 3, now are conducted in France and Germany, leased to Eutelsat). Also India is relatively divisions are located in 9 countries, with new to the market, with its first GEOCOM 16 of its 18 sites and offices in Europe.43 launched in 2002. More recently, Israel and Airbus D&S generates revenue of ap- Argentina have also made a noticeable pres- proximately €14 billion per year, and has ence, with their respective Amos and Arsat some 40,000 employees.44 Prior to the communication satellites. reorganization of divisions, EADS Astrium generated a revenue of €5.8 billion in It is important to note here that the FAA 2012, while having 18,000 employees, Compendium identifies satellites with a com- with 87% residing in France, Germany, mercial payload as spacecraft that serve a or the UK.45 Airbus D&S conducts AIT ac- commercial function or are operated by a tivities for its communications satellites commercial entity. This does not mean they at its Toulouse site, with most compo- have been commercially procured. Although nent parts arriving from sites in the UK, the communications satellite Insat 4G/GSAT- France, Germany and Spain.46 Intespace, 8 has a commercial payload and its services also headquartered in Toulouse, per- might be sold through its Antrix commercial forms environmental testing of satellites, arm, it is manufactured and operated by the under shared ownership with Airbus D&S Indian Space Research Organisation (ISRO) (87%) and Thales Alenia Space (13%).47 and is therefore not commercially procured. • Thales Alenia Space There are therefore 9 manufacturers that compete internationally for commercial GEO Thales Alenia Space is a French-Italian comsats, these being Boeing, Lockheed Mar- aerospace company headquartered in tin, Orbital ATK, SS/L, Airbus Defence & Cannes, France. A joint subsidiary of the Space, Thales Alenia Space, MELCO, China Thales Group (67%) and Finmeccanica Great Wall Industry Corporation (CGWIC), (33%), the company operates in the and ISS Reshetnev. space industry in a space alliance with Telespazio, also parented by the Thales Group (33%) and Finmeccanica (67%).48 1.7.1 The Six Prime Contractors Generating revenues of €2.0 billion in The six largest commercial prime contractors 2014, the company employs around in the commercial satellite manufacturing industry are Space/Systems Loral, Boeing, 42 Lockheed Martin, Airbus Defence & Space, EADS (Airbus Group) Annual Review 2013. 26 Feb. Thales Alenia Space, and Orbital ATK. Airbus 2014. Airbus Group 6 Nov. 2014: 27
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7,500 employees within 14 industrial di- Lockheed Martin’s Space Systems (Lock- visions located in France, Italy, Spain, heed Martin) has the headquarters of its Germany, Belgium, the United Kingdom, Commercial Space division in Denver, and the United States.49 Colorado.55 The division has four related space system units with about 11 busi- U.S. Prime Contractors ness locations spread across 9 states in the U.S., and has around 16,000 em- • Space/Systems Loral ployees.56 Lockheed Martin Space Sys- Space/Systems Loral, wholly owned by tems generated sales of $9.1 billion in Canadian MacDonald, Dettwiler and As- 2015, which represents 19.7% of the sociates Ltd. (MDA) through a holding parent company’s total consolidated net 57 company, is a U.S. company headquar- sales ($46.132 billion) for that year. tered in Palo Alto, California. Prior to its • Orbital ATK acquisition in 2 November 2012, Space Systems/Loral reported $1.1 billion in The Space Systems division of Orbital revenue for 2011, and employed about ATK (formerly Orbital Sciences Corp.) is 3,200 employees.50 At the time of its ac- headquartered in Dulles, Virginia. One of quisition, it had 11 business locations in three segments within Orbital ATK, the or near California, with 5 additional sites Satellites and Space Systems division spread over parts of Europe, Japan, and has four facilities, of which two are satel- Canada.51 lite manufacturing facilities capable of performing AIT production processes.58 • Boeing The largest facility is located in Gilbert, Boeing Space & Intelligence Systems, a Arizona, developing commercial Earth division of Boeing Defense, Space & Se- imaging, space science, and military 59 curity, manufactures government and technology demonstration satellites. A commercial satellite systems, with head- smaller AIT facility, developing commer- quarters in El Segundo, California.52 Its cial GEO communications satellites and parent, Boeing Defense, Space & Secu- other types of satellites, is located near rity, earned $31 billion in 2014, and has Orbital ATK headquarters in Dulles, Vir- 60 around 50,000 employees. Boeing Space ginia. Orbital ATK has over 12,000 em- & Intelligence Systems (Boeing) gener- ployees, of which 2,700 work in its Space ates 82% of its revenue from govern- Systems Group in business locations 61 ment customers53, and is staffed by spread across 8 states of the U.S. Ap- about 5,400 employees mostly based at proximately 25% of Orbital ATK’s reve- its headquarters, but with several hun- nue of $3.2 billion in 2015 came from dred staff in other offices throughout 22 commercial and foreign customers, business locations spread across 12 states of the United States.54 55 SpaceNews Staff. “Satellite Telecom | Lockheed Opens • Lockheed Martin Commercial Satellite HQ in Denver.” 1 Nov. 2014. SpaceNews 7 Nov. 2014
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whereas the remaining 75% came from U.S. government customers.62 1.7.4 European Prime Contractors’ Relative Posi- tion in the Global Industry 1.7.2 The Smaller Commercial Prime Contractors European prime contractors are in a water- shed period, faced with increasing competi- Other smaller commercial prime contractors tion from the traditional U.S. competitors, compete within the industry, albeit on a di- while simultaneously being pressured by low minished production scale compared to the cost manufacturers catering to emerging six largest prime contractors. These compa- regions that seek less sophisticated technol- nies include OHB (based in Germany), Mitsu- ogy at a discounted price. Moreover, com- bishi Electric Corporation (Japan), MDA (Can- petitors in the U.S. have the luxury of cater- ada), Turkish Aerospace Industries (Turkey), ing to a giant well of domestic institutional and others. OHB is a smaller European com- investment when commercial demand dries mercial prime contractor that develops fully up; and new commercial competitors in integrated satellites from its two locations in China, India, and Russia are state-financed Bremen and Munich, Germany. The remain- and thus to some extent cushioned from ing prime contractors are each capable of commercial pressures. European manufactur- developing fully integrated commercial satel- ers must rely much more on commercial lites, however doing so in smaller quantities revenue, especially from the export market. over the last decade. Considering the scarcity of new contracts, the level of competition, and the marginal profits 1.7.3 Asian National Prime Contractors in the to be earned, maintaining a significant role in Commercial Market this domain may require new and forward- looking approaches. Investigating these is the Three notable national prime contractors, purpose of the following chapters. CASC through its CGWIC commercial arm of China, ISRO of India through its Antrix com- mercial arm, and ISS Reshetnev & Khrunichev State Research and Production Space Center of Russia, have begun entering the commercial market, carving out a niche market in low cost commercial satellites. Combined, these national prime contractors had captured a 16.4% share of the commer- cial satellite market by the end of 2015. In the coming years (further elaborated on in Chapter Four below) their share is expected to grow to 28% of the commercial satellite market. These state-owned companies bene- fit from factor endowments such as the low cost of labour, and favourable exchange rates. Moreover, their low-cost satellites with in-orbit delivery arrangements are attractive to emerging countries, which have fewer capability requirements.
62 “Orbital ATK, Inc. Fiscal Year 2015 Annual Report.” 30 June 2015. Orbital ATK 10 May 2016
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2. The Changing Landscape
European satellite integrators in the commer- cial satellite manufacturing industry, Porter’s Five Forces Model will be adopted to serve as 2.1 Maintaining a Competi- an underlying framework.63 The model pro- tive Advantage vides a qualitative evaluation tool to assess an industry’s external environment and de- The global market for commercial geostation- scribes how profitability is determined by five ary satellites is changing through the shifting forces that impact the level of competitive- dynamics of incumbent rivals, increasing ness. The five forces include three “vertical” competition from rising commercial space- competitive forces that originate from estab- craft manufacturing nations and the availabil- lished rivals, new entrants (i.e. growing ity of substitute products, including small commercial rivals), and substitute products; satellites and non-satellite alternatives. This and two “horizontal” competitive forces that directly affects the competitive landscape of stem from the bargaining power of suppliers European satellite integrators and poses a and the bargaining power of buyers (see Fig- risk to their competitive position. In order to ure 2.1). assess the changing external environment for
Figure 2.1. Diagram of Porter’s Five Forces Model
developed since. See further Porter, Michael E. 1979. How 63 The Five Forces Model was developed by Michael E. competitive forces shape strategy. Harvard Business Porter at the Harvard Business School in 1979 and further Review. March-April 1979, pp. 137-145.
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Figure 2.2. Diagram of the adapted Five Forces model66
Porter’s Five Forces Model however needs to institutional actors where one would be op- be slightly adapted in order to be in line with erationally deficient without the activities of the characteristics of the space industry. In the other.65 When applied to the space indus- the Model, the impact of government in- try, the foundation of the model, which is volvement is treated as a “factor” rather than solely the profitability of an industry, does a force.64 While this might be the case for a not provide a complete picture. The govern- number of industries, strict adherence to ment actor is therefore included in the Model governments as a mere factor would under- as a sixth overarching force that impacts state their determining role in the global each of the five forces unidirectionally and space sector. Historically, governments have will be addressed transversely as represented been the driving actors in space activities and in Figure 2.2. space has been considered as a highly stra- Secondly, Porter mainly focuses on the rela- tegic and political asset for reasons of na- tive strengths of the respective forces that tional security, national prestige, and auton- affect the level of competition and profitabil- omy as well as for scientific interests and ity of an industry, with each force having an socio-economic development. It is only since impact on the economic and technical topog- the 1980s that a commercial space industry beyond the United States began to emerge, 65 first in the satellite telecommunications mar- Fuller, Joseph Jr., Foust, Jeffrey, Frappier, Chad, Kai- ket and later in other market segments such ser, Dustin, and David Vaccaro. “Chapter 6: The Commer- cial Space Industry: A Critical Spacepower Consideration.” as Earth observation. But government poli- Towards a Theory of Spacepower Selected Essays. Eds. cies still influence the landscape of the com- Charles D. Lutes and Peter L. Hays. Washington D.C.: mercial space industry by shaping domestic Institute for National Strategic Studies National Defence industry to contribute to national and societal University. 2011. 66 needs, resulting in an interdependence be- Diagram adapted from: Li, Zhe, and Lu Sun. “The Impact of the Government Policy on the Chinese Electric Vehicle tween the commercial space industry and Industry and Business Strategy Management: Case of FAW.” Student Thesis at the Linköpings University 30 May 2011
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raphy of the industry. The Model is therefore reduce overhead costs, capital expenditure, applied herein from the perspective of Euro- facility space, and labour, and to reap R&D pean satellite integrators to provide a portrait and production cost advantages as well as of the global competitive environment, i.e. faster cycle times. Nevertheless, rivalry is the intensity of rivalry among established further intensified by the uncertain demand competitors, the threat of new commercial for satellites, which can affect production rivals, the bargaining power of suppliers, the capacity, notwithstanding production back- bargaining power of buyers, and the threat of logs among prime contractors. For instance, substitution. Following the identification of following EADS’s December 2013 reorganiza- the relative strength of the different forces, tion to become the Airbus Group, Airbus D&S Chapter 3 will consider the risks and oppor- required its Astrium division to cut 2,470 tunities associated with the strategies the positions from its pool of 18,000 employees European satellite integrators might choose as part of Astrium's streamlining effort70; to put forward to either maintain or improve that number was reduced by 600 positions their competitive position. following the success of new product lines for EO and telecommunications satellites on the export market in 2014, however.71 Moreover, even prior to the November 2012 acquisition 2.2 Intensity of Rivalry of Space Systems/Loral by Canada’s Mac- amongst Existing Competi- Donald, Dettwiler and Associates Ltd. (MDA), Space Systems/Loral sought to streamline tors activities through standardization whenever possible, in addition to improving efficiency in As in most industries, the intensity of rivalry its engineering and manufacturing pro- in the commercial space manufacturing sec- grammes. And in ongoing government con- tor stems from a number of interacting struc- tracts, both Boeing and Lockheed Martin of- tural factors, i.e. not only the number and fered to trim manufacturing costs by decreas- scale of competitors, and the industry’s rate ing government oversight, reducing reporting of growth (as described in Chapter 1) – but requirements, and conducting less testing on also fixed costs, product differentiation and later edition satellites.72 associated switching costs, production capac- ity, competitor diversity, the strategic stakes The diversity among prime contractors, the involved, the scale of exit barriers, and mar- high strategic stakes involved, and the high ket politics.67 Until recently, major rivalry exit barriers (i.e. the loss of technological within the commercial satellite manufacturing capability) are also factors that sustain in- industry centred mostly on the six main tense rivalry among prime contractors. commercial prime contractors in Europe and Whereas prime contractors in the U.S. have the United States, each competing for market the added support of an established domestic share. But, as noted above, an additional market for satellites, with government and number of smaller commercial prime contrac- military actors that prefer domestic manufac- tors also compete with these prime contrac- turers, Europe’s market for military systems tors, albeit on a diminished scale, providing is relatively underdeveloped. In Europe, 24% smaller customised satellites.68 of European space industry sales is generated from exports to commercial telecommunica- While a limited number of commercial tion satellite operators, including a small GEOCOM contracts are available to be won on share generated from operators purchasing the global market, an estimated five to ten Earth observation satellites - combined, these satellite contracts (commercial or not) are customers accounted for 81% of total export needed per year (depending on the size, revenue in 2014.73 Moreover, sales generated power, pricing and complexity of the satellite) to cover the fixed costs associated with each prime contractor’s AIT processes and highly 70 De Selding, Peter. “EADS Restructuring To Eliminate skilled labour69. As a result, operations tend Nearly 2,500 Astrium Jobs.” 10 Dec. 2013. SpaceNews 19 to be of a job-order nature, rather than an May 2014 assembly line process. However, some prime
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by the commercial export of European tele- Following Boeing’s contract for the production communication satellites and Earth observa- of four “all-electric” 702SP satellites in 2012, tion satellites far exceed the value of the remaining main manufacturers (i.e. Airbus Europe’s domestic sales of similar systems.74 D&S, et. al.) in addition to OHB, stated a cur- And this does not take currency inflation into rent or upcoming capability to offer electric account, considering the relatively flat yearly propulsion technology to their customers.78 revenue generated since 1996 compared with the diminishing value of the U.S. dollar.75 So High Throughput Satellites it is clear that commercial satellite contracts, especially geostationary satellites, are essen- Whereas traditional geostationary communica- tial for the business of European satellite tion satellites transmit data through a single integrators. beam to cover a broad regional footprint with a fixed signal capacity, high throughput satel- Prime contractors historically have insulated lites (HTS) are a type of communications sat- their competitive positions by differentiating ellite that uses multiple focussed spot beams, their products and by increasing switching leveraged by frequency reuse, to increase costs in the form of ground equipment up- both the available coverage and signal capac- grades for their customers. That differentia- ity.79 With increased signal capacity, a satellite tion, developed with a focus on cost reduction operator is able to be more competitive by and increased capabilities for customers, is offering customers either better throughput, in robust among mature prime contractors terms of bandwidth and efficiency at the price whose customers (i.e. major commercial sat- currently charged, or current level throughput ellite operators) also compete for market at a lower cost per bit.80 As the global demand share, expanding coverage into emerging re- for satellite bandwidth continues to increase, gions, while also mindful of the bottom-line. HTS satellites enable operators to provide The latest differentiated satellites marketed by services to emerging and remote regions, the main competitors include cutting-edge including maritime commercial routes. While technologies such as electric propulsion, high- the leading prime contractors delivered an throughput, and low-latency, among others, aggregate total of 31 HTS between 2004 and with each technology having the potential to 2013, Euroconsult predicts that an additional change the game within the commercial space 33 HTS satellites will be manufactured and sector. launched between 2014 and 2016.81 Electric Propulsion Low Latency Technology Electric propulsion is not a new capability; While HTS satellites increase the amount of dating as far back as the 1960s, experimental signal capacity available, providing higher satellites launched by both the U.S. and Soviet throughput at a lower cost-per bit compared Union demonstrated the concept of ion propul- to traditional FSS satellites using the same 76 sion as a form of in-orbit station keeping. amount of allocated frequency, signals that This concept has now been expanded to allow are transmitted from GEO orbit take longer to orbit insertion by electric propulsion. The main reach Earth than signals from satellites orbit- benefit from the use of electric propulsion is ing at lower altitudes. This latency time is the reduction in consumption of propellant, most noticeable when comparing the +500 substantially lowering the total amount of milliseconds needed to transmit a signal round propellant needed for the lifetime of the satel- trip from Earth to GEO orbit compared to sub- lite, translating into either a lower launch cost stantially below 100 milliseconds for terrestrial of a satellite that has less mass, or increased internet connectivity via DSL, cable or optical capabilities derived from additional payload capacity. However, in contrast to chemical
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fibre. For example, the HTS satellite ViaSat 1 mercial satellite manufacturing industry. Once was reported to have a measured latency of strong during the infancy of the commercial 638 milliseconds, approximately 20 times industry, these barriers have eroded in recent more than the terrestrial average in the U.S.82 decades, increasingly shaped by globalization To overcome this signal delay, constellations and international competition. The most rele- of communications satellites in Medium Earth vant of these entry barriers specific to satellite Orbit (MEO), a distance ranging between manufacturing are economic and policy-based. 2,000 km to 35,786 km, are being developed to provide satellite broadband service with Economic Barriers Inherent to the Satellite latency time much closer to terrestrial provid- Manufacturing Industry ers. The O3b satellite constellation built by Thales Alenia Space, and operated by O3b In previous decades, economic barriers such Networks, claims a round-trip data transmis- as high capital requirements, the need for sion time of less than 150 milliseconds83, or scale economies, and the research and devel- just 4 times longer than the terrestrial average opment involved, kept new actors from enter- in the U.S. – resulting in a more fibre-like ing the satellite manufacturing industry. experience for its customers. Space is inherently a capital-intensive industry due mainly to its harsh operating environ- Other Advanced Technologies ment. Each component undergoes rigorous In addition to the differentiated technologies testing to ensure proper functioning of the listed above, several other technologies are satellite and its subsystems, including redun- currently being developed with the potential to dant systems in the case of a malfunction. disrupt current technologies within the com- Presently, a space infrastructure capable of mercial satellite manufacturing industry in the building and servicing satellites while in orbit near-to-mid future. These technologies in- does not yet exist. This therefore necessitates clude: Earth observation satellites with full- not only a high level of knowledge capital (i.e. motion satellite imaging capability (e.g. Terra know-how, technical expertise) but also capital Bella satellites (formerly Skybox Imaging) investment in high-tech production facilities to manufactured by Space Systems/Loral); the manufacture a spacecraft that meets the re- use of hosted payloads on commercial satel- quirements defined by the customer and the lites to allow governments to test space-based space environment. technologies while lowering overall purchase In the 1980s, during the Cold War, only a cost of a satellite for an operator (e.g. the small number of countries were capable of commercially hosted infrared payload (CHIRP) building and launching a satellite. For in- on the SES-2 satellite); and the development stance, according to statistics available on the of less costly nanosatellite and microsatellite OECD Database, between 1976 and 2014 the constellations for use in lower orbits (e.g. vast majority of space-related patents (desig- Planet Labs and Terra Bella microsatellite con- nated as B64G) filed under the European Pat- stellations). Another potentially disruptive ent Office (EPO), Patent Co-operation Treaty technology being developed is the capability to (PCT), and the United States Patent and refuel satellites while in orbit through the use Trademark Office (USPTO) came from the of orbiting life extension vehicles (e.g. ESA’s U.S., France, Germany, the UK, and Japan.85 conceptual ConeXpress orbital life extension It was in this cold war period, when different 84 vehicle). parts of the world remained in isolation, that major scientific and technological advance- 2.2.1 Barriers to Entry ments were made, backed by military inter- ests and the need for industrial secrecy to Even with the relatively intense rivalry be- preserve technological advantage. Following tween prime contractors in Europe and the the end of the cold war, globalisation provided United States, high entry barriers that have a window for researchers to increase the col- hindered new actors have sheltered the com- laboration and dissemination of scientific ad- vances, knowledge flows and dual-use techno- logical transfers to other parts of the world.86 82 “2013 Measuring Broadband America - February Report | A Report on Consumer Wireline Broadband Performance in the U.S.” Feb. 2013. FCC 2 Dec. 2014: 11
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Figure 2.3. Breakdown of Space-related Patents (B64G) at EPO, PCT, and USPTO from 1976-2014, by Country of Applicant (Source: OECD Database87).
Figure 2.4. Breakdown of Space-related Patents filed under the PCT from 2001-03 and 2009-11 (Source: OECD 2014).
87 “OECD.Stat.” OECD 1 May 2016
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Today, the technological advantage in space processing times, and a detailed disclosure of related technologies, as reflected in the OECD the nature of the transaction, while also pro- 2014 edition of Space Economy at a Glance, hibiting the export or re-export of commodi- shows a different picture. Taking a sample ties to countries under U.S. embargo. By from filings submitted under the PCT, coun- contrast, the export of commodities under tries such as China and Russia have made the EAR is far less burdensome, needing the significant strides in increasing their shares of approval of the U.S. Commerce Department, space-related patents filed in 2009-2011 which has fewer requirements and greater compared to 2001-2003.88 flexibility in its application process.89 Finding an increased competitive environ- Policy-based Barriers Inherent to the Satellite ment stemming from the growth of indige- Manufacturing Industry nous capabilities in Europe and in Asia by- Policy-based barriers are government policy, passing ITAR requirements, the U.S. gov- and laws and regulations that are restrictive ernment called for an assessment of the risks for new actors to enter the satellite manufac- associated with removing satellites and re- turing industry, of which export control regu- lated components from the USML under Sec- 90 lations are the most significant obstacle. tion 1248 of the NDAA of 2010. The Aero- space Industries Association (AIA) estimated Export restrictions are a highly relevant mat- that between 1999 and 2009, $21 billion in ter in the satellite manufacturing industry, commercial manufacturing revenue was lost particularly since satellite components for U.S. industry, which cost about 9,000 sourced from the United States have the po- direct jobs annually.91 In April 2012, the U.S. tential to keep a European prime contractor Department of Defense (DoD) and State De- from selling satellite technology to export- partment released their joint report to Con- restricted countries such as China, or to limit gress concluding that communication satel- the available options for procuring cheaper lites and remote sensing satellites, including launch services from other low-cost regions. their subsystems, parts, and components Export restrictions prevent the export of were more appropriately designated as dual- technological goods and services that would use items on the CCL, to be controlled under make a significant contribution to the military the EAR.92 So long as these satellites did not potential of other states, thereby potentially contain classified components, and had per- harming the exporting state’s national secu- formance parameters below thresholds speci- rity. The U.S. International Traffic in Arms fied for items remaining on the USML, they Regulations (ITAR), first introduced in the were not critical to U.S. national security. In mid-1970s, are currently the most notable 2013, under Section 1261 of the NDAA of unilateral restrictions. 201393, dual-use satellite technology was The U.S. ITAR export regulations, which grew transferred back to the CCL, with final classi- fication rules by the State Department taking more restrictive in regard to the transfer of 94 satellite technology during the 1990s, had a effect on 10 November 2014. However, tide shifting effect on technology transfer and the development of indigenous capabilities 89 Panahy, Dara, and Bijan Ganji. “ITAR Reform: A Work in throughout the globe. The most notable of Progress.” The Air & Space Lawyer 26.3 (2013) 14 Nov. the ITAR regulations is the Arms Export Con- 2014 trol Act (AECA) of 1976, which authorises the
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certain restrictions remained on satellite ex- commercial contracts, although so far only ports to China, North Korea, and states that with governments of emerging space nations the U.S. considers to be sponsors of terror- searching for low-cost alternatives. Yet, it ism.95 For further consideration of multilat- seems that it is only a matter of time before eral and European export control require- China has the means to gain even more mar- ments, see ‘ANNEX 1: CoCom, Wassenaar, ket share from the top satellite integrators. and European Export Control’. The quality of Chinese satellites, i.e. capacity, reliability, and lifetime, has significantly in- creased, while remaining low-cost due to the lower wages of skilled technicians and opera- 2.3 Threat of New Rivals tors in the country and strong government support. As seen in the next section, with In Porter’s Model, new entrants constitute a China having won several contracts from threat to established rivals because they have developing countries with its DFH-4 commer- the potential to gain market share with new cial GEOCOM satellite, it has become the capacity and substantial resources. But in main emerging competitor in the commercial every industry there are barriers that impede satellite marketplace, with India as a poten- the ascendance of new entrants. The height tial competitor in the short to medium term. of these barriers determines the profitability In addition to China and India, other emerg- of the established firms - the higher the bar- ing space nations are developing spacecraft riers, the higher the profitability of estab- manufacturing capabilities, including Turkey, lished firms above the market level in the 96 Argentina and Brazil. These emerging manu- long-term. In the commercial spacecraft facturers pose both threats and opportunities manufacturing industry, barriers are high and to European spacecraft integrators. the entry of new actors is difficult because spacecraft manufacturing is a highly techno- In addition to the high cost of entering the logical industry that requires heavy financial industry, government policy, even among investment. Although well protected by entry long established space actors, can result in a barriers, profitability is low, because the barrier to entering the commercial market. competition between incumbents is fierce. During the Cold War, export restrictions such as COCOM operated as a uniform export re- This notwithstanding, in recent decades sev- gime among Western countries.97 In that eral emerging space nations have acquired period, uniformity of approach worked to the capacity to manufacture geostationary keep Western technology from reaching the satellites domestically and thus have success- Soviet Union. Stunted but not swayed, satel- fully transcended these barriers with the goal lite manufacturers in the Soviet Union relied of establishing national space industries that instead on their indigenous space industry to are competitive in the global satellite manu- meet the needs of their domestic institutional facturing market. Most notably, China and market. Following the Soviet collapse in India have shown incremental space ad- 1991, and COCOM’s expiry in 1994, Russia vancements and technological breakthroughs rapidly began to commercialize with a focus that have allowed them to emulate the tech- on launchers, and subsequently on commer- nological level of Western spacecraft manu- cial satellites.98 Hence Russia, in the context facturers. While the focus of India’s satellite of commercial satellite manufacturing, can be manufacturing is still mainly the generation seen as a ‘quasi’ new commercial rival bring- of domestic socio-economic benefits to ad- ing new capacity and substantial resources to dress its enormous societal needs, China has the industry with the intention of gaining started to explore the international satellite market share. manufacturing market by competing for
Category XV.” 13 May 2014. US Federal Register 24 Nov. 2.3.1 China 2014 The China Aerospace Science and Technology
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ordinate entities, at various tiers, which are the fully “ITAR-free” DFH-4 (Dong Fang Hong primarily engaged in the research, design, (“The East is Red”)) satellite platform. DFH-4 manufacturing and launch of space systems, was envisaged as doubling the capacity of its including satellites, launch vehicles and predecessor DFH-3 and equalling the capacity manned spaceships as well as strategic and of Western small and medium size geosta- tactical missiles.99 The other main contractor tionary satellite platforms (with a satellite of the Chinese space programme is the China mass up to 5.2 metric tonnes and a payload Aerospace Science & Industry Corporation power of 8 kW). (CASIC) that focuses more on defence issues. Introduced in 2006, the platform was devel- Within CASC, its subordinate company China oped by the DongFangHong Satellite Com- Academy of Space Technology (CAST) deals pany Ltd. (DFH Satellite Co), a subsidiary of with space technology and products, engag- CAST, and was marketed domestically and ing in such fields as the development and internationally to private and governmental manufacturing of satellites, satellite applica- satellite operators as a low-cost alternative to tions and external exchange and cooperation the satellites offered by the United States, in space technology.100 In addition to a num- Europe, Russia and Japan.104 CGWIC has ber of other smaller satellite programs, CAST made a business case of selling all-inclusive has manufactured the spacecraft for the es- ‘In Orbit Delivery Contracts’ which include tablished satellite series Yoagan (reconnais- satellite manufacturing, insurance, and sance satellites for presumably military pur- launch, typically on-board the Chinese Long poses), Beidou (global dual-use satellite March 3B rocket.105 It also often includes the navigation satellite constellation), Shi Jian construction of ground segment facilities, the (scientific and technology demonstration training of satellite operators, and financing minisatellites series) and Feng Yun (weather in the form of a generous loan.106 CGWIC has satellites). It has also manufactured commu- been successful in selling these inclusive sat- nications satellites for commercial use for ellite packages to fast-growing developing Hong Kong based operators Asiasat, Apstar, countries in Asia, Africa and South America, ABS, and for semi-commercial use for state- which see satellite technology as the next owned satellite operator Chinastar.101 Build- step in their country’s socio-economic devel- ing on this rapidly growing expertise in satel- opment and as a status symbol. Nigcomsat-1 lite manufacturing, CAST has also started to was the first commercial in-orbit delivery export fully integrated satellites through the contract won by CGWIC in 2004 in an inter- China Great Wall Industry Corporation national tender with 22 companies, including (CGWIC), a specialized company of CASC, Western satellite integrators.107 Since then, which is the sole commercial organization CGWIC has exported several DFH-4 GEOCOM authorized by the Chinese government to sell satellites to the governments of emerging Chinese satellite technology abroad.102 space nations, including Venezuela, Pakistan As a result of increased export restrictions in and Bolivia, and signed export contracts with the U.S. ITAR in 1999 (following the unau- the governments of Laos, Belarus, the De- thorised release of technical information to mocratic Republic of the Congo, Nicaragua, the Chinese government about two commer- and Sri Lanka.108 cial satellites that were destroyed during Chinese launch failures103), and the ongoing embargo following the Tiananmen Square 104 Although China mainly focuses on selling geostationary tragedy of 1992, satellite components from communication satellites in the global market, it has also the U.S. cannot be used in Chinese satellites, started to export smaller Earth observation satellites, such which has compelled China to develop all as VRSS-1, the first Venezuelan remote sensing satellite, which was launched in 2012. satellite technologies indigenously leading to 105 Harvey, Brian. China in Space. The Great Leap For- ward, Springer, New York, 2013. 106 “Dongfanghong-4 (DFH-4) Satellite Platform.” 10 Jan. 99 “Company Profile.” 10 Jan. 2014. China Aerospace 2014. SatLaunch 27 Jan. 2014 Science and Technology Corporation 6 Feb. 2014
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Even though Chinese satellites have become low-cost launch alternatives, such as a low-cost alternative to Western satellites, SpaceX.111 price and other contractual advantages are In sum, China is on the verge of becoming a not the only factor that needs to be taken stronger competitor to European satellite into consideration. Quality is a significant integrators, which signals a threat but also discriminator. Reliability, capacity, lifetime, several opportunities. For instance, Europe’s and on-time delivery of the satellite are im- Thales Group has seen China as a key growth portant features for any satellite project. In area in the aerospace sector for several dec- the past decade, Chinese-made satellites ades; it has gained a solid foothold in China’s have faced several in-orbit failures. The sat- air transport market, and its subsidiary ellite Sinosat 2 for China Satcom, the first Thales Alenia Space is also the only foreign DFH-4, was designed to operate for 15 years supplier of satellites to China.112 The implica- but had a total failure after 15 hours due to tions of the risks and opportunities emerging the non-deployment of its solar arrays and from China’s commercial space sector will be antennas, while the solar arrays of Nigcom- explained in Chapter 3. sat-1 failed in 2008, the second year of its 15 year expected lifetime; in 2010 Sinosat 6 was hampered by a leak in its helium- 2.3.2 India pressurization system that resulted in a five year reduction of its 15 year expected opera- The Indian Space Research Organisation tional life.109 By the end of 2013, three DFH- (ISRO), founded in 1969, is the main con- 4 satellites had been delivered to orbit for tractor for India’s space programme, set up Chinese domestic customers, whereas CAST by the Indian Space Commission and admin- 113 had contracted for the development of DFH-4 istered by the Department of Space (DOS). satellites for the governments of Nigeria, ISRO has established two major space sys- Venezuela, Pakistan, Laos, and Bolivia.110 tems, the INSAT and IRS satellite series. The China launched the replacement satellite Indian National Satellite System (INSAT) Nigcomsat-1R for Nigeria on 20 December series has enabled India to focus on its na- 2011. tional economic and social development. It is considered as one of the largest domestic To correct this quality deficiency, CAST is communication systems in the world, cur- developing a next-generation geostationary rently consisting of 11 multi-purpose geosta- satellite platform. The DFH-5 platform will tionary satellites that provide operational offer increased performance and reliability services in many areas ranging from tele- compared, making the platform more com- communication, television broadcasting, and petitive on the international satellite manu- meteorology, to societal applications, such as facturing market, which might enable Chinese telemedicine, tele-education, tele-advisories satellites to break into the high-end market and similar such services.114 The second ma- dominated by Western manufacturers. In jor Indian space system is the Indian Remote order to broaden its product offer, CAST is Sensing (IRS) satellite system which is the also developing several variants of its current largest civilian remote sensing satellite con- DFH-4 satellite platform, i.e. DFH-4S (Small stellation in the world providing remote sens- and Smart Bus), a lighter design to be ing services with applications for agriculture, launched on the smaller, less-expensive Long water resources, urban development, mineral March 3C, and the DFH-4E (Enhanced Bus) prospecting, environment, forestry, drought which offers more capacity, in addition to and flood forecasting, ocean resources and offering stand-alone satellites without insur- disaster management.115 The constellation ance and launch on board a Chinese rocket, which might be a good strategy since Chinese launchers are losing some of their competi- 111 “China Plans 2013 Release for 2 New Telecom Satellite tive advantage due the emergence of other Options.” 5 Oct. 2012. SpaceNews 6 Feb. 2014
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currently has 11 satellites in sun-synchronous the world.123 This agreement has enabled orbits.116 Airbus to have a presence in the small geo- stationary satellite market without having to ISRO has mainly focussed its resources on invest in a light version of its larger Eurostar developing satellite technology to cater to satellite platform. While it is estimated that India’s domestic needs but it has been seek- two or three satellites would be manufactured ing to become more active in the interna- each year, only two spacecraft were ordered, tional satellite market and thereby expand its however – for the European satellite opera- communications satellite production capabili- tors Eutelsat (W2M) and Avanti (Hylas-1).124 ties to capture a share of the commercial The industrial partnership encompassing market.117 Antrix Corporation, established by overarching cooperation on launchers and ISRO as its commercial arm, has been mar- satellites was renewed in 2010 for five years, keting Indian space products and services in and by December 2015, that relationship the global market.118 Antrix has access to appeared poised to continue for an additional ISRO’s satellite design, manufacturing and five years.125 Another key long-term agree- launch facilities and offers products ranging ment between Airbus and Antrix was signed from complete satellite programs to function- in 2008 on the use of the Indian PSLV specific components, as well AIT services and launcher that enabled Airbus to offer attrac- launch services.119 In 2001 Antrix initiated tive launch solutions in the international mar- talks with Boeing to cooperate in the manu- ket for the in-orbit delivery of its Earth ob- facture of small geostationary communication servation satellites.126 This had led to the satellites. Due to management changes at successful launch of two Earth observation Boeing and ITAR export controls, an alliance satellites, Spot 6 in 2012 and Spot 7 in 2014. proved impossible. Antrix then turned to The decade-long alliance between the part- European satellite integrator Airbus D&S.120 ners has allowed Airbus to establish itself as As a result, in 2005, Airbus became the prin- the premier foreign industrial partner of ISRO cipal foreign partner of ISRO and Antrix in and the Indian space industry.127 the market for smaller geostationary commu- nication satellites (with a satellite mass of between two and three tons and a payload 2.3.3 Smaller Emerging Geostationary Satellite power of 4 kW).121 In the Memorandum of Manufacturers Understanding it was stipulated that Airbus would provide the communication payload Global access to space technology has dra- that would then be integrated by Antrix on an matically increased over the years and has Indian satellite bus (an I-2K satellite plat- enabled several emerging space industries to form).122 Antrix would lead the bids as prime very quickly catch up technologically, rather contractor for customers originating from than develop indigenous technologies organi- 128 most of South Asia while Airbus would be the cally. This has enabled several small space leading actor for satellites sold in the rest of nations, besides the large emerging space
123 De Selding, Peter B. “Strong Market for Smaller Satel- lites Spurs New Competition.” 6 Feb. 2006. SpaceNews 21 116 The satellites part of the IRS constellation are: IRS P6, Nov. 2013
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powers China and India, to develop geosta- Argentina tionary satellite manufacturing capabilities. These nations have seen rapid economic With the launch in 2014 of the geostationary growth in recent decades and have started to communications satellite ARSAT-1, Argentina address their socio-economic needs by using became the first Latin American country to satellite technology for the benefit of their operate an indigenously integrated geosta- populations, various industry sectors, educa- tionary satellite. Even though most of the tion and research. Some of them have shown satellite subsystem and components were interest in becoming commercially active in supplied by foreign manufacturers, the full the global satellite market and are therefore design, integration, and testing was done by a potential threat in the long term, but the Argentinian satellite manufacturer INVAP. equally an opportunity for European satellite A Thales Alenia Space payload and several integrators. Nevertheless, these countries are Airbus D&S satellite components were inte- only beginning to enhance their technological grated on an indigenously developed ARSAT capability, with a very long timescale for de- 3K satellite bus. ARSAT-1 is the first of three velopment, and do not present the same satellites of the ambitious ARSAT program level of threat as China, India, or Russia. which has the objective of not only achieving 100% satellite coverage of the Argentine Brazil territory but also of developing an indigenous industrial and technological capability for the In 2013 a contract was signed between manufacturing of GEOCOM satellites. Thales Thales Alenia Space and the Brazilian gov- Alenia Space also supplied the payload, and ernment for the delivery of a dual-use geo- Airbus D&S supplied several components for stationary satellite named the Geostationary the Arsat-2, proving their role as leading Defence and Strategic Communications Satel- equipment suppliers in the ARSAT program. lite (SGDC). The agreement included a large Initially the program envisaged procuring technology-transfer package in line with the several communication satellites and launch Brazilian government’s objective to establish services from the Chinese government. A a national satellite prime contractor that is cooperation agreement was signed but noth- competitive in the commercial satellite manu- ing more came of it after the United States facturing market.129 The outcome of the bid- lobbied against the partnership. It was there- ding competition – Thales Alenia Space was fore decided to develop indigenous GEO sat- selected from seven bids – was in part de- ellite manufacturing capabilities, resulting in cided by how much technology a bidder was the cooperation with European satellite willing and able to transfer to Brazil’s space manufacturers, indicating that the political programme.130 Although U.S. industry offi- neutrality of Europe as a cooperating partner cials claimed that U.S. export regulations no promotes European manufacturers for cur- longer posed limitations on U.S. participation rent and emerging space nations.131 in international competition and related tech- nology transfer, they most likely played a factor in the decision process. This again Turkey demonstrates the liberal setting European In 2009, Thales Alenia Space and the Turkish manufacturers have over their U.S. counter- Defence Ministry signed the Göktürk contract, parts in selling satellites to emerging space an industrial agreement for the manufactur- nations that expect a sizable technology ing of Göktürk-1, a high-resolution optical transfer. Notwithstanding the recent change Earth imaging satellite system to be launched in ITAR regulations, European satellite inte- in 2016. In addition to the satellite, the con- grators have gained considerably more ex- tract included a substantial technology trans- perience in technology transfers than their fer program, i.e. the construction of the Gök- U.S. counterparts, making them more attrac- türk ground infrastructure and a satellite tive partners. Nevertheless, whether such Assembly, Integration and Test Centre (AIT) fluidity in transferring technology can be said near Ankara.132 The AIT centre was com- to be a European competitive advantage still pleted in 2014 and is Turkey’s first facility for remains to be seen, as it brings with it the the integration of low-Earth and geostation- risk of intensifying competition in the future. ary orbit satellites up to 5 metric tons for
129 “Brazilian Competition Proving Irresistible to Satellite 131 Belluscio, Alejandro G. “ArSat-1: Argentina to Commu- Builders.” 12 Apr. 2013. SpaceNews 15 Jan. 2015 nicate Its Heightened Space Ambitions.” NASA Spaceflight
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military and civil purposes. It serves as a (e.g. TsSKB-Progress’ Soyuz launcher com- critical infrastructure for the development of mercialised by Starsem and now also Turkey’s national space program and pro- launched from Kourou, Kruchinev’s Proton vides Turkey with the capability to become a launcher commercialised by ILS, NPO Ener- satellite designer and integrator for small gomash’s RD-180 engine on Altas 5, and GEO communication satellites.133 Final as- KBkhM Isaev’s KDVD1 engine on the Indian sembly of the Göktürk-1 will be in the facility, GSLV137). However, in the more recent past followed by Türksat 5A, a communication Russia’s space sector has jeopardised its satellite based on a DS-2000 satellite bus market situation because of lack of productiv- provided by the Japanese company Mitsubishi ity and lack of oversight, resulting in a string Electric (MELCO). Türksat 5A is slated for of launch and spacecraft failures amounting launch in 2017 and will be the first geosta- to billions of roubles in losses.138 tionary communications satellite to be as- By 2005, the Russian Federation had already sembled and integrated in Turkey, with 25% begun taking measures to resuscitate its of the satellite technology manufactured do- industry by signing Resolution No. 635, ap- mestically.134 By 2020, Turkish Aerospace proving the Federal Space Program for 2006- Industries (TAI) aims to produce Türksat 6A, 2015, worth 305 billion roubles (~$10.6 bil- which is labelled as Turkey’s first domesti- lion in 2005 prices).139 The resolution’s main cally manufactured satellite but will likely goal was ‘to satisfy the increasing needs of include substantial foreign components, with the state governmental institutes, regions Airbus’s subsidiary Surrey Satellite Technol- and the citizens of the country, by providing ogy Ltd. (SSTL) expected to provide a Ku- them space technologies and services’. In a band payload. After the qualification based on two stage process, to be completed by 2010 the processing of Göktürk-1, TAI hopes to and 2015 respectively, it set ambitious objec- commercially use the facility to assemble, tives to be achieved in all space-related integrate and test satellites for other na- fields: i.e. telecommunications, Earth obser- tions.135 vation, launchers and space ports, fundamen- The long-term objective of the Turkish gov- tal space research and technology, and space ernment is to develop an indigenous capabil- applications; and was expected to result in a ity to manufacture a complete satellite, shift- total economic impact of about 500 billion ing Turkey from a satellite purchaser to a roubles by the end of the period.140 Much of satellite manufacturer. In order to reach this the resolution was dedicated to communica- ambitious goal, Turkey will need to continue tions satellite manufacturing, where in addi- to cooperate with foreign suppliers to support tion to developing, augmenting and maintain- the development of its spacecraft manufac- ing satellite constellations, the government turing infrastructure in the near-to-medium sought to maintain the expected operational term.136 lifetime at 15 years and reduce its depend- ence on imported subsystems and component parts to as little as 10%; therefore requiring 2.3.4 Russia Russian-built components capable of compet- 141 The space program of the former Soviet Un- ing globally. In that pursuit, the resolution ion was the first to put a man-made object in also set objectives for the evolution of Rus- an orbit around Earth in 1957 and evolved sia’s satellite manufacturing capacity, which into one of the biggest space programs in the would result in ‘an increase in the volume of world. Russian space commerce is mostly external trade turnover and improve the identified with its launchers with which it has quality of Russian involvement in the interna- had many successes in the export market tional trading processes’ by utilizing the com-
133 “Turkey’s Satellite Test Center Ready for Launch.” 28 137 Bènilan, Ivan. Supporting Russian Satellite Equipment Nov. 2014. YeniSafak 14 Jan. 2015 Suppliers to Export. Strasbourg: ISU, 2010.
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petitive advantages its industry has in the (URSC).148 In a change of course, on 21 export of knowledge-intensive products.142 January 2015, President Putin then approved However, Russia’s space industry continued the merging of Roscosmos’s duties with the to lose its capability to produce many satellite URSC, providing a single entity ‘Roscosmos components and thus by the end of 2013 up State Corporation’ (RSC) at the helm of Rus- to 80% of the equipment on new Russian sia’s space industry.149 satellites was imported from Thales Alenia By consolidating the industry, in addition to Space and MDA.143 eliminating excess manufacturing capacity In 2010, the inferior quality of electronic (prior to the declaration, manufacturers op- components sourced by the Russian space erated at 40% of their capacity), RSC should industry was addressed at the collegiate streamline the procurement of foreign elec- council of the Russian space agency. Contin- tronic components with increased purchasing ued reliance on those components increased power to negotiate volume-based dis- the number of failures both at the AIT stage counts.150 In addition to industry reform, and in the operational use of satellites and Russia plans to spend an estimated 2.1 tril- other space technology. The problem seemed lion roubles (around $63 billion) including to be a lack of ground testing and too much extrabudgetary sources, for the development reliance on calculations instead of full-scale of its national space activities in 2013- testing. Another more systemic cause 2020.151 seemed associated with the increased obso- Russia is also looking to increase cooperation lescence of the entire infrastructure of the with emerging entrants. A series of consulta- Russian space agency, Roscosmos.144 tions is expected to take place between the This problem was acknowledged in a report Indian and Russian space agencies to engage by the Russian Audit Chamber, which de- Indian partners in the plans and projects to clared Russia’s Federal Space Program as be undertaken by RSC.152 “ineffective”, caused by poor management of space activities and the budget funds allo- cated for space projects.145 This resulted in Russian President Vladimir Putin signing a 2.4 Bargaining Power of December 2013 decree that started a funda- Suppliers mental reform of the country’s space indus- try, with the objective of streamlining pro- When prime contractors procure subsystems, duction and the operation of spacecraft and equipment and component parts from lower- 146 cutting down on the misuse of funds. The tier suppliers for final integration into a satel- reform first split the Federal Space Agency lite, the bargaining power of those suppliers Roscosmos into two, a demand and supply can affect the overall profitability of the prime side, where Roscosmos was intended to act contractor. Using the Porter model as a basis, as a customer, responsible for space policy, the strength of this segment in the manufac- research and ground infrastructure (e.g. the turing sector depends on its own interacting 147 Baikonur Cosmodrome) , while the supply structural factors, such as the number of side consisted of a holding company consoli- suppliers, availability of substitutes, the im- dating most of the sector’s companies that portance of the prime contractors as the cus- developed and manufactured spacecraft into tomer of the suppliers, the switching costs the United Rocket and Space Corporation involved in resorting to other suppliers, the
142 Ibid. 148 “Overhaul pending in Russian space sector.” 3 Dec. 143 “Russia Bets on Sweeping Reform to Revive Ailing 2014. ITAR-TASS News Agency 4 Mar. 2014 Space Industry.” 26 Dec. 2013. Reuters 4 Mar. 2014
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importance of the supplier’s subsystems to manufacturing industry in previous decades, the prime contractor’s business, differenti- that influence can be described as having ated products, and whether suppliers pose a been eclipsed. Among North American and credible threat of forward integration. European suppliers, this is in part attributable to the effect of U.S. export restrictions that As reflected in Chapter 1, the concentration apply to strategic or dual use subsystems, of suppliers appears to increase almost expo- equipment and component parts, which have nentially as the sophistication of components limited their respective abilities to compete and parts decrease. One estimate lists the globally. Key lower tiered suppliers are also number of large prime contractors to be at risk of being targeted for acquisition by around 10, whereas sub-system suppliers higher tiered competitors; as consolidation is number between 40-50, equipment suppliers’ another recurrent activity among competitors number over 300, and so on.153 As the num- in higher tiers.155 Similarly, in state-owned ber of suppliers increases per tier, the tech- industries such as in China and Russia, sup- nology they provide becomes increasingly pliers are controlled as subordinate entities widely offered. Moreover, through globaliza- within the vertical supply chain. Moreover, tion, the technological capabilities that previ- the size of the industry is another factor lim- ously had been difficult to source in the iting the bargaining power of suppliers, as global market have become widely available there is an abundance of suppliers further from manufacturers throughout the world. down the tiers in the supply chain, i.e. lower However, large integrators have also reduced tiered less-strategic equipment and compo- the potential for forward integration by sub- nent suppliers number over 300 globally, and system suppliers by absorbing them as sub- must compete with subsidiaries of higher sidiaries, and competing alongside other tiered manufacturers.156 Through globaliza- lower tier competitors in the industrial pyra- tion, the technological capabilities that previ- mid. The consolidation with key subsystem ously had been difficult to source by prime suppliers has allowed prime contractors to contractors in the global market are now exert greater control over parts of the supply ubiquitously available from manufacturers chain that are strategic for their core busi- throughout the world. ness and has removed the risk of acquisition by competitors.154 Government policy has also resulted in a shift in the strength of the bargaining power of 2.5 Bargaining Power of higher tier subsystem and component buyers Buyers geographically. The prime example of this is ITAR, which hinders export of some compo- The buyers of satellites, be they institutional nents. or commercial, have a strong impact on prime contractor competitiveness, with the Government action can also support suppliers potential to influence the price, quality, and in an industry, as shown by the EU and ESA’s competitive environment for prime contrac- push for Electrical, Electronic, and Electrome- tors. The strength of buyer bargaining power chanical (EEE) components to be sourced less depends on its own set of market characteris- from U.S. components suppliers through its tics, (as for suppliers). Here, customer power ‘European Components Initiative’. Whereas in depends on factors such as the number of 2006 a European satellite had an average buyers, the volume purchased, product U.S. electronic content of 75%, by 2013 this knowledge, product differentiation and asso- had reduced to 60%, edging closer to the ciated switching costs, the threat of backward 2020 goal of having European satellites com- integration (i.e. the ability of a customer to posed of 50% European electronics build its own satellites157), and the impor- While suppliers in the lower tiers can have an tance of the prime contractor’s satellites to impact on the competitive environment in the quality of the buyers’ business. Addition- commercial satellite manufacturing, their ally, government policy can also play a role in influence depends largely on the technology influencing the bargaining power of buyers. they offer, and the environment in which they operate. When compared to the remaining 155 “Satellite Industry Consolidation: Why, When and competitive forces in the global satellite Where?” 23 June 2003. Futron 25 Sept. 2014: 3
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Table 2.1. Comparing select satellite capabilities between top commercial prime contractors and national integrators.
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From a historical perspective, the limited instead enter a contract for the supply of number of both institutional customers (i.e. services, typically in a hands-off mode.160 Russia, U.S., China, Japan, India, ESA and its Export restrictions such as the U.S. ITAR in largest members), and commercial operators the last decade restricted the use of cheap (i.e. Intelsat, SES, Eutelsat, etc.), has helped launch services to reduce costs. In the mid- increase their bargaining leverage due to the 2000s, European prime contractor Thales dependence of prime contractors on their Alenia Space developed an ITAR-free version business. Obviously, the number of satellites of its Spacebus 4000 product line to over- purchased also has an impact on that power. come the export burdens of satellites built The reliability of a satellite is another deter- with export-controlled U.S. subsystems or mining factor of bargaining power, as buyers components. Between 2005 and 2012, a total might be less price sensitive on satellites with of seven ITAR-free Spacebus 4000 GEO tele- flight heritage, rather than risk the conse- communications satellites were ordered by quences of an operational failure on a previ- Chinese companies Chinasat and APT Satel- ously untested satellite. lite Company, and launched on Chinese Long While the exact cost and content details of March launchers.161 Eutelsat was the only satellite contracts are not widely disclosed, western operator to order the ITAR-free bargaining power can be assessed with the Spacebus 4000 satellites, W3B and W3C, and help of the experience and knowledge of the while both satellites were intended for launch numerous consultancy groups in the U.S. and on Chinese launchers, W3B was switched to in Europe. Table 2.1 provides a sample com- an Ariane 5 launcher due to a temporary parison of the commercial satellites offered shortage of non-ITAR controlled components. by top commercial prime contractors, in addi- However, following a successful launch sepa- tion to lower low-cost satellites offered by ration from the Ariane 5 on 28 October 2010, (quasi-)new commercial rivals (i.e. China, the W3B failed due to a propellant tank India, and Russia). While in no way a com- leak.162 The W3C was successfully launched plete representation of the differentiated on a Chinese Long March launcher on 7 Octo- satellites offered by each market participant, ber 2011; the first launch of a Western satel- it lists some of the technical capabilities of lite on a Chinese launcher in over a decade commercial satellites, in addition to listing following the 1999 changes to ITAR.163 How- some of the factors buyers might consider in ever, the ITAR-free version of the Spacebus selecting a satellite. 4000 platform was discontinued in August 2013, following a U.S. State Department Customer bargaining power can shift accord- investigation that determined that improper ing to both the nature of the buyer (private labelling by a U.S. component supplier al- or institutional) and the contract (satellite lowed export-controlled defence articles to be purchase contract or a supply of service con- integrated into the series164; thus reducing tract). For instance, commercial contracts available launcher options available to West- with private satellite operators will likely call ern buyers. On the other hand, the emerging for the cost-effective procurement of materi- commercial operator Apstar Inc. was able to als supplied domestically or internationally, reduce its manufacturing and launch costs by whereas institutional contracts may require bypassing U.S. export restrictions, having that prime contractors procure certain less purchased ITAR free satellites developed by cost-effective subsystems, equipment and China. components domestically. Another term might specify that the satellite be delivered to an unaffiliated launch service provider; or it might require an “in-orbit” delivery that 160 Ibid. 161 would include the successful launch and in- Federal Aviation Administration. Semi-Annual Launch orbit testing of the satellite by the prime con- Report: October 2010. Washington DC: FAA, Oct. 2010: 158 15 tractor. In a commercial satellite purchase
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2.6 The Availability of Sub- Terrestrial fibre optics and cellular networks also require significant capital investment but stitutes can often be offered at lower cost, making them a direct competitor to satellite commu- A company in a certain industry is restrained nications - for example, satellite fleet opera- in pricing because consumers might turn to a tors are facing increased competition from competitor that offers an identical or nearly terrestrial communication systems in Africa similar product. This was a topic of discussion as undersea cables have reached the conti- in the first two vertical forces of the Five nent. However, terrestrial systems also have Forces Model - established rivals and new disadvantages; they require manual con- entrants. But the lowest price of a good or struction of physical terrestrial infrastructures service within an industry cannot exceed the which not only makes them vulnerable to price of suitable substitute goods.165 Substi- instability on the ground, such as theft, loot- tutes for geostationary satellites can be cate- ing, war, and natural disasters, but they are gorized into non-satellite and small satellite also economically unattractive and impracti- substitutes that pose a threat to the profit- cal in rural and remote areas with a low ability and revenue of European satellite inte- population density, and time-consuming to grators. lay down. The customer of communication services takes both alternatives into consid- eration and makes an informed decision as to 2.6.1 Non-Satellite Substitutes which option serves its needs the best based Many communications satellites reside in GEO on price, quality and availability. The upshot orbit above the Earth’s equator and are able is that terrestrial communication services are to broadcast signals over a large geographical a direct competitor of satellite communica- area.166 Where terrestrial communication tions, especially in urban areas, resulting in a systems are deficient or lacking, satellites can smaller demand for communication satellites provide a more economical alternative to and therefore indirectly impacting the reve- providing access for remote regions because nue and profitability of European satellite the cost and speed of deployment of satellite integrators. However, it also appears rela- communications is independent of distance. tively clear that the global communication Satellite communications also offer flexibility needs in the future will require a combination in terms of user mobility (e.g. aviation, mari- of terrestrial and space based communication time, land mobile) and in situations when as neither system on its own will be able to more bandwidth is required for emergency fill demand. This is a considerable safeguard connectivity or network redundancy.167 But for satellite manufacturers. satellites also bring a number of disadvan- A factor that influences the choice of the cus- tages. The high-altitude orbit of geostation- tomer is government policy, often in the form ary satellites causes path loss and propaga- of subsidies. The Digital Agenda for Europe, tion delay, which is problematic for services one of the seven flagship initiatives under that are sensitive to latency such as voice Europe 2020, aims to boost Europe’s econ- communication. Moreover, geostationary omy through digital technologies. One of the satellites are much more complex to develop objectives is to make fast broadband of more and currently significantly more expensive to than 30 Mbps available for every European deploy than other competing non-satellite citizen by 2020. The European Commission technologies, resulting in a higher cost per has stated that this is not feasible without the 168 bit. In addition, to receive the satellite use of satellites for those who live in remote signal the user requires a specialised terminal and rural areas. Europe 2020 stimulates the that is often quite costly and can be used use of satellite systems in the European Un- with only one operator. ion by subsidizing the satellite dish and mo- dem that are required for satellite broad- band.169 Government policy therefore also influences the number of satellites ordered. 165 Porter also states that consumers are price sensitive if Besides the traditional terrestrial communica- a close substitute is existent and price insensitive if a close tion systems, disruptive technologies are substitute is absent. See further Porter, Michael E. 1979. How competitive forces shape strategy. Harvard Business emerging that rely on high-altitude balloons Review. March-April 1979, pp. 137-145. and Unmanned Aerial Vehicles (UAV, also 166 See further Chapter 1 Section 1.2 Satellites in Opera- called drones) to deliver communication ser- tion. vices to the user. These systems are cur- 167 See further Chapter 2 Section 2.1. rently under development, mainly by Internet 168 “Satellite Communications Basics Tutorial.” Radio- Electronics 20 Jan. 2015
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giants Facebook and Google, which aim to effective alternative in medium density areas. provide Internet connectivity to the two- Drones, unlike satellites, do not burn up in thirds of the world population that does not the atmosphere and can be returned to Earth have Internet access today. Facebook, under for refurbishment and easily redeployed af- its Internet.org partnership with other com- terwards. They cause almost no propagation panies, non-profits, and governments, plans delay, which makes them a very good alter- to offer worldwide Internet access, especially native for broadband communications such as to rural and remote areas that are separated voice and Internet. Even though Google and from major population centres by long dis- Facebook are predominantly targeting a new tances or rugged terrain, by using a combina- market of consumers in demand of low cost tion of terrestrial networks, drones, and LEO Internet access, they might also take away and/or GEO communication satellites based business from the large satellite operators on the different population densities served. that also offer broadband services, thus mak- Dense urban areas would be served through ing balloons and drones an indirect threat to terrestrial networks, medium density areas the European satellite manufacturers. Never- through drones and low-density areas theless, geostationary satellites will remain through communication satellites.170 Simi- essential in operating and coordinating the larly, Google’s Project Loon aims to create an drones, making drones more of a comple- aerial wireless network using solar-powered mentary product than a substitute for geosta- high-altitude balloons, with a long-term plan tionary satellites - the more drones are de- to replace the balloons with drones for high- ployed, the more demand there will be for capacity services in smaller areas.171 In addi- control through GEOCOM satellites. Moreover, tion to balloons and drones, Project Loon will a large number of small satellites are needed rely on low-Earth orbit satellites to comple- in the Facebook and Google projects to pro- ment the drones by offering broader cover- vide Internet access to low density areas age in sparsely populated areas.172 These where it is uneconomical and impractical to initiatives can potentially bring an end to the deploy drones or balloons. digital divide the world is facing today and, less altruistically, bring new customers and revenue to both companies. It seems that 2.6.2 Small Satellites both Google and Facebook have turned these The past decade has seen a significant projects into a key priority and the reciprocal growth of small satellites for a range of appli- competition could result in a race to be the cations, including communications, Earth first to offer low-cost global Internet connec- observation and remote sensing, science, tivity, strengthening and accelerating de- exploration, technology demonstration, etc. ployment. Also satellite manufacturer Thales Since European satellite integrators are Alenia Space has recognized the potential of mainly commercially active in the market of airborne systems. It is developing an geostationary communication satellites, it is autonomous long-endurance airship, a com- appropriate to assess the threat from the bination of a drone and a satellite called the emergence of small satellites that provide StratoBus project, which could be deployed communication services. Small satellites, as for a wide range of applications, including an alternative to much larger traditional GEO observation, communications and naviga- satellite systems, might therefore also chal- 173 tion. lenge GEOCOM revenue. Yet, small satellites Balloons and drones could become a competi- also offer opportunities for the European sat- tive substitute for geostationary communica- ellite integrators to improve their competi- tion satellites as a more efficient and cost tiveness. This will be discussed in the follow- ing sections.
170 “Connecting the World from the Sky.” 28 Mar. 2014. Small Satellites for Communication Applications Internet.org 29 Jan. 2015
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on standardized low-cost designs that use Medium 1,201 – 2,500 ABS 3A (GEO) off-the-shelf components, require less com- plex manufacturing infrastructure for their Intermediate 2,501 – 4,200 Intelsat 34 (GEO) production, have shorter production cycles, Large 4,201 – 5,400 Türksat 4B (GEO) and are less expensive to operate. Moreover, because of their shorter intended lifetimes, Heavy 5,400 – 7,000 Inmarsat-5 F3 (GEO) they necessitate less redundancy and testing, furthering their low-cost character. Since Extra Heavy >= 7,001 they are lighter and smaller, they can be Table 2.2. Satellite Mass Class Categorization (Source: launched in multiples or as a secondary pay- 176 load (piggyback), using excess launch capac- FAA Compendium) ity on a rocket at a significantly lower cost.174 Smallsats not only offer significant cost re- As small satellites can be very cost effective, ductions, they also bring technical advan- this has stimulated the emergence of small tages, such as shorter propagation delays satellite businesses for the provision of global and smaller chances of path loss since they communication services. The first generation are mostly launched in lower Earth orbits. of commercial small satellite ventures mate- However, a constellation of satellites is rialized in the 1990s with satellite operators needed to achieve global coverage, hence Iridium, Globalstar, ICO Global Communica- requiring a multitude of satellites. A constel- tions, Teledesic, and Orbcomm aiming to lation of small satellites can provide great provide worldwide communication services functionality while still remaining low-cost – (voice and low-bandwidth data with hand- importantly, a constellation is resilient to held satellite phones and other receivers) by failure of an individual satellite because a deploying a constellation of small satellites in replacement satellite (possibly from a stock low and medium-Earth orbit. Contracts for of spares) can be launched much faster, and the manufacture of these satellites were new technologies can be deployed and tested awarded to the traditional large satellite more swiftly. Another benefit of satellite con- manufacturers, i.e. Lockheed Martin (72 LEO stellations is scalability; if the market re- satellites for Iridium), Space Systems Loral sponds well to a business plan more satellites and Thales Alenia Space (52 LEO satellites for can be launched in order to enhance the ca- Globalstar), Boeing (12 MEO satellites for ICO pabilities of the constellation. Manufacturing Global Communications), and Orbital ATK (36 a large number of small satellites enhances LEO satellites for Orbcomm). However, all the potential of economies of scale through filed for bankruptcy because cheaper terres- mass production, lowering the price per unit trial alternatives such as cellular services had even more. already come into service by the time the constellations achieved full operational capa- Small satellites usually weigh less than 1,000 bility. But several companies re-emerged kg although their mass can vary significantly. after bankruptcy and were able to generate a Table 2.2 gives an overview of the common profit, resulting in contracts for second gen- categorization of the small and large satellite eration satellites for Iridium (Iridium NEXT) mass classes.175 and Globalstar-2, which were both awarded to Thales Alenia Space for 66 and 48 satel- Class Name Kilograms Example lites, respectively. Also Orbcomm ordered (kg) several next-generation satellites with OHB (6) and afterwards with Sierra Nevada Corp Pico <= 1 AMSAT Fox-1 (18). (LEO) The significant rise in demand for broadband Nano (Cube- 1.1 – 10 ExactView 9 (LEO) services all over the world has made the Sats) business outlook for global satellite commu- Micro 11 – 200 ORBCOMM-2 F2 nication networks a lot better than two dec- (LEO) ades ago. This has stimulated the emergence Mini 201 – 600 DMC-3 A, B, C of several private businesses using small (LEO) satellites to provide low-cost satellite broad- band services. O3b Network was founded Small 601 – 1,200 Galileo FOC-3 with the goal of providing broadband internet (MEO) to the “Other 3 billion” of the world popula-
174 Though they are limited to the orbit of the primary pay- 176 “The Annual Compendium of Commercial Space load. Transportation: 2016.” Feb. 2016. Federal Aviation Ad- 175 Petroni, Giorgio, and Stefano Santini. “Innovation and ministration 1 May 2016: 56 Change? The Evolution of Europe’s Small Satellite Manu-
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tion that do not have reliable high-speed OneWeb Ltd., previously operating under the Internet connectivity.177 Thales Alenia Space name WorldVu Satellites Ltd., announced was contracted to manufacture twelve first- plans to set up a constellation of around 700 generation satellites for placement in me- satellites to provide high speed Internet and dium-Earth orbit. At an average per-satellite telephony all over the world. Both the Virgin cost of $22 million, the whole O3b satellite Group and Qualcomm have made undisclosed constellation costs about as much as a large investments in the company.182 By using geostationary satellite and is able to provide small low-Earth satellites, the SpaceX and nearly global Internet connectivity (full cov- OneWeb systems will be able to offer an even erage within 45 degrees of latitude north and lower latency delay than the O3b medium- south of the equator) at a lower cost per bit, Earth satellite constellation. The trade-off is lower latency and a higher throughput that these systems require a multitude of (equals fibre quality), which demonstrates satellites to be able to provide global cover- that small satellites are a competitive substi- age. It therefore remains to be seen whether tute for geostationary communication satel- they are economically feasible, but the inter- lites.178 More recently, SpaceX revealed plans est shown by SpaceX, Google, Virgin Group, to deploy an extremely large satellite constel- Qualcomm et al. clearly testifies to the busi- lation of 4000 satellites with the objective of ness potential of deploying a huge constella- setting up a global Internet connection net- tion of small satellites to deliver worldwide work.179 It intends to build the satellites in a Internet services. new satellite production facility, which, more- However, satellite broadband services consti- over, is part of its objective of revolutionising tuted only 1.5% or $1.8 billion of total satel- the satellite manufacturing industry as it is lite services revenue in 2014. Even though attempting with the commercial launch indus- this is likely to increase with Google, Face- try.180 Google has invested $900 million in book, OneWeb, SpaceX, O3b et al. opening the SpaceX satellite system.181 Similarly new markets and reaching a large number of potential customers, 80.7% of total satellite 177 The major shareholder of O3b is now one of the world’s services revenue originates from satellite largest satellite fleet operators SES. broadcasting, i.e. satellite television and to a ESPI Report 58 44 May 2016 The Future of European Commercial Spacecraft Manufacturing tionary satellites will remain central in provid- facturing capabilities are also emerging viz. ing broadcasting services, which is still the Brazil, Argentina, and Turkey. Not only do largest market for satellite operators, and these smaller space powers create a new smallsats currently do not appear to pose a revenue stream for European satellite inte- fundamental direct threat to the demand for grators through satellite contracts and tech- large geostationary communication satellites nology transfer programmes, they also offer and the core business of European satellite the potential of future mutually advantageous integrators. relationships. Both the bargaining power of suppliers and the bargaining power of buyers are likely to 2.7 Sounding the Competi- change in the future, enabled by reduced export restrictions and further globalization tive Environment within the industry. In addition to the classic space pursuits of national prestige and na- By now it should be apparent that there is a tional security, emerging space nations have growing risk for European satellite integrators shown increased interest in space applica- in the commercial satellite manufacturing tions and the socio-economic benefits stem- market due to increased competition from ming from Earth observation, satellite com- outside Europe, i.e. the traditional competi- munications, science, and other space tech- tors, mainly in the U.S., and new market nologies. The development of a space infra- players, especially China, due to their lower structure including dedicated cost manufacturing base and strong govern- organisations/agencies that execute national ment support. Should European satellite inte- space programmes, can also be an enabler grators stovepipe and remain status quo, for the start of a domestic space industry, these developments will most likely result in which is often part of a wider national strat- the blunting of Europe’s competitive edge and egy for science and technology aimed at in a decline of market share in the global high-tech industries, innovation and science commercial satellite manufacturing industry. worldwide. Again, this provides both oppor- To remain successful within the global com- tunity and risk. mercial satellite manufacturing industry, The largest share of commercial revenue in Europe’s prime contractors need to position communication is, as mentioned, generated themselves according to where they possess by geostationary communication satellites. competitive advantage. In this pursuit, it While small satellites have recently emerged should be noted that two basic types of com- as a substitute product for conventional large petitive advantage exist: differentiation and 186 satellites, they are not a direct threat to lower cost. Differentiation is the ability to European satellite integrators since geosta- provide unique and superior value to the tionary satellites will remain central in provid- buyer in terms of product quality, special ing broadcasting services, the lion’s share of features, or after-sales service. In commer- total satellite services revenue. This is in cial satellite manufacturing, this differentia- contrast with the market for Earth observa- tion among the top prime contractors has led tion and remote sensing satellite applications to a wide array of satellite capability meant where small satellites seem to be a more to meet the different needs of customers (see potent substitute product. cutting-edge satellites above). Lower cost is defined as the ability of a firm to design, pro- duce, and market a comparable product more efficiently or with a lower factor cost than its competitors.187 The emergence of China and India, and the re-emergence of Russia on the commercial market, gives pause. While they are increas- ingly becoming a threat to European satellite integrators they also provide opportunities for them to improve their competitive position by taking advantage of the low-cost labour and low-cost technology available in these coun- tries. But smaller nations with satellite manu- oconsult-smallsat-report-sees-steady-increase-across-the- market/>. 186 Porter, Michael E. The Competitive Advantage of Na- tions. New York: The Free Press, 1990: 37. 187 Ibid. ESPI Report 58 45 May 2016 3. Risks and Opportunities for European Manufacturers maining active in the commercial satellite market as prime contractors is necessary for 3.1 Introduction Europe’s overall space industry; and whether the European institutional framework is suffi- Based on the five forces competitive envi- ciently supporting the competitive environ- ronment identified in Chapter 2 above, sev- ment. Such fundamental queries help to iden- eral strategies can be suggested for European tify the beneficial interests of European prime prime contractors to maintain and enhance contractors, and the European space industry their level of competitiveness. The mooted overall. strategies can be divided into two categories, the strategies that influence the internal dy- namics of the European space sector, i.e. 3.2.1 The Necessity of Commercial Business for intra-European strategies, and those that rely the European Space Sector on actors outside Europe, i.e. extra-European The first question is whether it is a precondi- strategies. tion for Europe’s space ambition that compa- nies remain active in the commercial satellite market as prime contractors. The companies 3.2 What Is the Strategic Airbus D&S, Thales Alenia Space, and more recently OHB, cater also to European institu- Value of Having a Euro- tional demand for space infrastructure, i.e. science and exploration satellite systems for pean Commercial Satellite ESA, Earth observation and navigation satel- Manufacturing Sector? lites for the EU, meteorological satellites for Eumetsat, and a number of civil and military With shifting dynamics increasingly challeng- satellites for the national space programmes ing the commercial revenue of the European of European nations. Hence it could be ar- spacecraft manufacturers, some existential gued that without involvement in commercial questions can be raised prior to assessing the spacecraft manufacturing, these companies risks and opportunities available to European will not be effective in institutional markets. competitors, along the lines of whether re- Figure 3.1. Satellite Manufacturing Industry Revenue (U.S./RoW (mostly European-generated), $ Billions) ESPI Report 58 46 May 2016 The Future of European Commercial Spacecraft Manufacturing This seems likely since abandoning commer- answer is the one just given, namely that cial activities would negatively affect prices prime contractors for commercial spacecraft and the level of innovation required for insti- manufacturing are necessary in order to re- tutional uses of space. Commercial actors tain prime contractor capabilities outside search for the best price/quality product, commercial space. But another is that Euro- which stimulates European satellite integra- pean prime contractors are enablers of tors into taking more risks in order to offer manufacturing of lower tier products. In mar- cost-efficient and cutting edge satellite solu- kets that are not yet fully globalised and tions and be more competitive in the global where conglomerates tend to favour their satellite market. The absence of commercial own products, champions in the form of contracts would reduce the beneficial effect of prime contractors are needed to build and economies of scale as the high fixed costs retain market share for subsystems and could no longer be spread over a larger num- components. ber of satellites manufactured, triggering increases in cost. Moreover, because com- mercial revenue makes up more than half of 3.2.2 The European Institutional Framework European satellite integrators’ business, Supporting the Competitive Environment European institutional demand might not be Improving competitiveness in global markets sufficient to retain the current critical mass of is clearly a key priority for European satellite the European space industry. The existence manufacturers but to a large extent it is de- of three prime satellite contractors in Europe pendent on the institutional framework in might no longer be sustainable for the num- place, which is difficult for them to shape to ber and value of available institutional con- their benefit. Although space is considered a tracts, either leading to a bankruptcy of one highly strategic sector, the development of a of the satellite contractors or a further con- national space industry is in some countries solidation of Europe’s industrial base. supported by substantial institutional spend- A decrease of competition within the Euro- ing and favourable policies, which directly pean space industry would consequently im- affect the level of competition in the global pair the cost effective and innovative capa- market. Other countries support less. bilities of European integrators. Abandoning The European institutional budget for civil commercial activities would also affect the and military space activities – in terms of European level of autonomy in space technol- R&D financing programmes and the institu- ogy. This could in the long term jeopardize tional purchase of space products and ser- the capability of the European space industry vices – is only a fraction of the U.S. govern- to be an enabler of economic and social ment budget.189 European space industry as benefits for the whole of European industry and a driver for growth and innovation that supports many industries outside the space 189 Civil government spending in Europe originates from 188 industry. Relinquishing commercial activi- four distinct sources: activities by ESA that are funded by ties would therefore have far-reaching impli- the ESA member states; activities of Eumetsat; activities cations for Europe’s space ambitions; similar directed by the EU and executed by the EC; and activities to the large share of U.S. civil and military carried out by European countries independent of the EU, Eumetsat, and ESA, mainly in France, Germany, Italy, satellite contracts that sustain the U.S. satel- Spain and the United Kingdom. ESA has since its founda- lite manufacturing base, it is essential for tion been the facilitator of technology development in Europe’s space ambitions that European sat- Europe with one of the key objectives to make the Euro- ellite manufacturers maintain their activities pean space industry competitive on a global scale by on the commercial market in order to remain stimulating innovation through R&D funding. ESA has also assumed the role of procurement and development agency cost-efficient and cutting edge technology for the Eumetsat and EU orbital infrastructure. The latter providers of space systems to fulfil institu- has become the single biggest customer and contributor to tional space infrastructure demand, as well as ESA’s budget, primarily for its two flagship satellite pro- to preserve a healthy, competitive space grammes focused on navigation and Earth observation, i.e. industry that can cross-fertilize the whole Galileo and EGNOS, and Copernicus respectively. The EU to a lesser extent also supports R&D and innovation pro- European manufacturing base. grammes for the European space sector through its 7-year It may well be argued that the more profit- framework programme Horizon 2020, of which the non- dependence for critical components is one of the key able part of the value chain is the provision of topics. In addition to the civil governmental activities in subsystems and components. Hence, why space, there is also a relatively small share of military bother with prime contractor activities? One government spending in several national military satellite programmes – mostly in France, Germany, Italy, Spain and the United Kingdom – as well as the military space 188 The space industry is a driver for growth and innovation activities of the European Defence Agency (EDA). See through spin-offs of cutting edge technologies and the further “Europe's Space Industry – Competing Globally in a sustainment of a knowledge economy by nurturing the Complex Sector.” 28 Feb. 2013. European Commission 17 growth of local talent in the highly innovative fields of Feb. 2015 ESPI Report 58 47 May 2016 a consequence relies more on commercial 3.3 Improving the Competi- sales, a more volatile and hence less secure market than the large U.S. institutional mar- tive Position of the Euro- ket. Also the synergies between civil and defence sectors in Europe are far less devel- pean Satellite Integrators oped compared to some of the international in the Global Satellite counterparts.190 This directly affects the com- petitive position of European satellite integra- Market tors on the global market and can therefore be considered as a clear competitive disad- It has been established that European satel- vantage. lite integrators need to remain active and competitive in the commercial market for European industry in general is supported by large satellites at the satellite integrator level the geographical return principle of ESA, in order to assure Europe’s future in space. however. And this is also true for satellite But due to the changing forces in the external prime contractors as. At first glance one may environment that challenge the commercial argue that geographical return (the principle revenue of European satellite integrators in according to which the value of contracts the global satellite manufacturing market, awarded to a given country should be com- they cannot remain idle and proactivity is mensurate with the amount the country has needed to preserve and improve their com- paid into ESA) diminishes competition and petitive position. therefore encourages complacency. And al- though there is an element of truth in this, the reality is that funding for space would 3.3.1 Internal European Cooperation and Meas- decrease very significantly if the geographical ures in Place to Collectively Improve the return principle did not apply. A main motiva- Competitive Position tion for Member States of ESA to assign funds to ESA programmes is that there will A fundamental factor in determining the be geographical return. Hence geographical competitiveness and effectiveness of a com- return is a method for collecting funds in the pany or industry is technological competence. multilateral framework of ESA, and all par- The European space industry is one of the ticipants in the space endeavour benefit from most innovative, cutting edge space indus- the effectiveness of this funding mechanism. tries in the world and European satellite inte- Yet, notwithstanding the geographical return grators and their subsystem and component principle, ESA’s procurement system is based suppliers offer highly reliable and state-of- extensively on open competition. the-art satellite technologies, such as electric propulsion, high-throughput satellites, small The EU follows a different approach when it geostationary platforms, software-defined funds space activities. When community payloads, etc. This world-class capability to funds are involved, straight best-value-for- develop core satellite technologies has al- money competition takes place also for space lowed European manufacturers, in addition to investments. With EU funding becoming a catering to the needs of the European institu- significant factor in space, Europe thus has a tional actors, to gain a fairly large market co-existence of procurement principles: the share in the global commercial satellite mar- industrial policy of ESA seeks to attract fund- ket. Although these highly innovative tech- ing from Member States by ensuring that nologies have contributed to the competitive- there is strong technological capability in ness of European satellite integrators, they Europe. And by this, it is creating a broad cannot be considered as disruptive technolo- industrial base. The EU procurement system gies since they are also marketed by their is based on traditional procurement principles U.S. counterparts on satellites with similar and therefore will not necessarily advance the levels of reliability, and also the new market distribution of capabilities, but will serve the entrants, mainly China and India, are closing sharpness and competitiveness of the actors the technological gap. These cutting edge involved. Although these objectives may ap- technologies are not a unique capability that pear contradictory, the interplay of ESA and allows European system integrators to signifi- EU policies tends to reinforce the European cantly differentiate themselves from their space sector and ensure not only the creation competitors, but it is nevertheless essential of a broad industrial base in Europe, but also that European satellite integrators uphold the keenness and competitiveness of Euro- their level and rate of innovation in order to pean industry and its prime contractors. preserve competitive position. Due to the emergence of low-cost manufac- 190 “Europe's Space Industry – Competing Globally in a turers, the principal challenge to European Complex Sector.” 28 Feb. 2013. European Commission 17 satellite integrators is, firstly, to drive down Feb. 2015 ESPI Report 58 48 May 2016 The Future of European Commercial Spacecraft Manufacturing keeping the rate of technological progress the global satellite market. One example of and satellite reliability constant. Therefore, such successful cooperation has been vis-a- innovative production technologies to reduce vis Arabsat – with the partners repeatedly costs and production time are being con- winning the bidding for the latest eight geo- stantly researched, designed and imple- stationary communication satellites, with mented by European manufacturers, such as Airbus D&S as prime contractor while Thales standardization of components, additive Alenia Space supplies the communication manufacturing (i.e. 3D-printing), modular payloads.193 They have also jointly competed satellite platforms, etc. Also company re- for Earth observation satellites, such as two structuring and broad cost reduction efforts Falcon Eye satellites for the United Arab have been realized. In 2014, Airbus D&S was Emirates (UAE) Armed Forces, with Airbus created from three previous standalone Air- D&S again as the prime contractor and bus divisions, Cassidian, Astrium and Airbus Thales Alenia Space supplying several sub- Military. The military and space business lines systems and components. In fact, this spe- were consolidated into one single entity to cific contract was politically influenced since benefit from synergies and thereby cut costs, the French Defence Minister persuaded Airbus increase competitiveness and improve profit- D&S and Thales Alenia Space to pitch a coop- ability.191 Also Thales Alenia Space rolled out erative offer so there was just one European a 10-year competitiveness improvement offer, thereby increasing the chance of win- plan, called Ambition 10, with the goal of ning.194 This form of collaboration between reducing costs across all its business lines Europe’s two largest prime contractors is and improving competitiveness. One of the rather unique in the global satellite market objectives is to cut the costs of its telecom- and is partially the outcome of their close munications satellites by 30% and, as a con- collaboration for institutional contracts, such sequence, win more satellite contracts in the as for the manufacturing of the first two sat- global market. Two years into the programme ellites for the EU Copernicus programme.195 this has already resulted in a sharp increase Yet, for a number of satellite bids they still in the number of geostationary communica- compete independently. More frequent coop- tion satellites orders - from 3 orders between eration in bidding for satellite contracts might 2011 and 2013 to 5 in 2014.192 Although conceivably improve their competitive posi- production process innovations and corporate tion. restructurings have a direct bottom line effect that lead to more competitive offers on the commercial market, costs reductions and shorter development cycles are a key priority 3.4 External International of every internationally competing satellite Cooperation to Improve integrator and will not per se create a com- petitive edge. the Competitive Position One of the strengths of European satellite of European Satellite Inte- integrators is cooperation, which they have grators used to their benefit. Even though they are direct competitors, they have repeatedly With closer cooperation between the two sought closer cooperation amongst them- main European prime contractors not always selves to form one united front against the being feasible, are broader alliances with rising competition from outside Europe. Thus traditional competitors another alternative? Airbus D&S and Thales Alenia Space have Perhaps the collective competitive advantage occasionally collaborated in order to increase of international participants can be increased their chances of winning satellite contracts in if they display complementary strengths and goals. In this case, in addition to potentially increasing economies of scale and sharing 191 This was EADS’ reaction to the steep reduction in European defence spending and the non-profitability of its risk, a broader alliance might assist technol- space hardware and services division Astrium, mainly its launcher segment but also the satellite manufacturing segment. See further “EADS Restructuring To Eliminate Nearly 2,500 Astrium.” 10 Dec. 2013. SpaceNews 17 Feb. 193 I.e. Arabsat-4A (Badr-1), Arabsat-4B (Badr-4), Arabsat- 2015 ESPI Report 58 49 May 2016 Figure 3.2. Percentage of tertiary-educated adults in 2000 and 2012 (25-64 year-olds) (Source: Education at a Glance 2014 – © OECD 2014). ESPI Report 58 50 May 2016 The Future of European Commercial Spacecraft Manufacturing Figure 3.3. 10-Year Average Annual Total Location-Sensitive Costs for Aerospace and Precision Manufacturing Industries (Source: KPMG Competitive Alternatives 2012). ogy transfer, cost reduction, and access to for the satellite manufacturing sector, as markets. there is a shared typology of workforce. By way of background, the following figures show the demographics of labour skill levels 3.4.1 Broader Alliances/Cooperation with the and business costs for the mature and high Traditional Competitors growth markets. Figure 3.2 lists the percent- age of tertiary-educated adults in 2000 and There are several incentive criteria that could 2012, from the OECD’s Education at a Glance be used in selecting an alliance partner, such 2014.196 Figure 3.3 displays the cost factors as the possession of a desired source of com- in aerospace and precision manufacturing for petitive advantage, e.g. scale, technology, mature and high growth markets from cost, or market access. There is also a need KPMG’s Competitive Alternatives 2012 Edi- for complementarity, calling for a balanced tion197, which might be representative also contribution from the firms, as a dispropor- tionate power balance in an alliance may result in instability, and undue enrichment by 196 OECD. Education at a Glance 2014: OECD Indicators. a partner. Also, partners might seek partners OECD Publishing, 2014: 30 ESPI Report 58 51 May 2016 with complementary international strategies. a significant part of operations in the U.S., And there is a greater incentive to maintain a and share work with U.S. contractors. long term alliance with a partner when con- European contractors have been able to tap tinued benefit from investment and aligned the U.S. government market in the past. For goals and strategy can be had. An alliance instance, the Airbus Group has a growing can also have pre-emptive value if it can presence in the U.S. providing hardware, keep the partner from becoming a competitor software, services and support to customers itself, or providing a major source of competi- in the commercial, homeland security, aero- tive advantage to another rival. Lastly, the space and defence markets, and, its subsidi- organizational style and norms of a partner ary Airbus D&S has been selected in key might be similar enough to allow ongoing competitions for military aircraft and sys- collaboration.198 tems, starting in 2002.202 Moreover, Thales An initial step for European prime contractors Group has a U.S. subsidiary known as Thales could be to look at alliances with competitors USA, Inc., which focuses on naval, land from mature commercial space industries, forces, commercial aviation, military aviation, including current rivals in the U.S., and the security, transportation, and space domains, smaller scale system integrators of Japan. and earned $2.1 billion in U.S. generated revenue in 2015.203 Potential Alliances with Top Prime Contractors Furthermore, Thales Alenia Space has had a in the U.S. joint venture with U.S. defence contractor The potential for future alliances with current Raytheon Co since 2001; however, the op- competitors in the U.S. has become interest- eration of this joint venture is focused on ing with the possibility of the EU-U.S. Trans- sales outside the U.S. and EU. About 10% of atlantic Trade and Investment Partnership Thales Alenia Space’s overall annual revenues (TTIP) being put in place.199 The TTIP might come from the U.S., with the Pentagon and cover issues of dual-use technology, which other government customers accounting for could benefit Europe’s commercial space in- nearly $1.3 billion in sales. While Thales dustry with fewer tariff barriers between the Alenia Space has won many contracts from two regions.200 However, the TTIP will likely the Pentagon for specialized communications require the EU and U.S. to align their dual- and military equipment, until recently it has use technology export control policy, which rarely been the leader in Pentagon related could affect the EU’s ability to act in other projects. Yet, in June 2010, Thales Alenia markets where its companies are currently Space won a satellite-production contract for active. nine satellites for the Iridium low-Earth communication network, requiring at least An alliance between EU and U.S. competitors 40% of the work to be done in the U.S., with could increase Europe’s access to the large Boeing being one of the subcontractors. Al- U.S. institutional market, as governmental though Iridium is a commercial operator, the actors have a preference for domestic manu- Pentagon is a major customer for Iridium facturers, currently enshrined in the U.S. in voice and data services, and thus this satel- the Buy American Act. An illustration of this is lite award gave a significant boost to Thales MDA’s 2012 acquisition of prime contractor Alenia Space in terms of expanding both its Space Systems/Loral. The Canadian parent U.S. commercial and defence businesses.204 company can now bid as a prime contractor On 6 January 2015, in a collaboration be- on U.S. government contracts through its tween CNES and NASA, Thales Alenia Space 201 SS/L subsidiary. Similarly, if European was also awarded the first contract to de- competitors wish to access the U.S. govern- velop and integrate the Surface Water and ment market, they might be required to base Ocean Topography (SWOT) platform which will provide enhanced capacity and coverage 198 Porter, Michael E., and Mark B. Fuller. “Coalitions and over the current series of Jason ocean- Global Strategy.” Competition in Global Industries. Ed. altimetry satellites, with NASA financing Michael E. Porter. Boston: Harvard Business School about two thirds of SWOT’s overall budget, Press, 1986. 315-343. and CNES contributing the remaining share; 199 See further “The Transatlantic Trade Investment Part- nership: Making trade work for you.” 10 Feb. 2015. Euro- pean Commission 11 Feb. 2015 202 “Airbus Group in the United States.” 2016. AirbusGroup ESPI Report 58 52 May 2016 The Future of European Commercial Spacecraft Manufacturing the two governments will invest some $1.1 though in recent years Melco has been win- billion and expect a launch in 2020.205 ning a number of satellite contract awards. Since the 1970s, NEC has mainly been a sat- While an alliance between competitors in the ellite prime contractor strictly for the Japa- EU and U.S. could result in increased knowl- nese government210, though it is an active edge transfer and access to a pool of highly component supplier on the international mar- skilled employees, it is unlikely to reduce ket. In 2014, NEC entered the commercial labour expenses. Nevertheless, with an alli- market as a prime contractor with the sale of ance similar to MDA’s acquisition of SS/L, two low cost small EO satellites to Viet- European manufacturers could benefit sub- nam.211 NEC intends to market its low cost stantially from the access to the very large platforms to emerging countries, with pack- U.S. domestic institutional market. age deals including communications, ground support, and geospatial products or services. Potential Alliances with Japanese Competitors The first Advanced Satellite with New System The smaller but mature space industry of Architecture for Observation (ASNARO-1) was Japan is another prospect where alliances launched aboard a Russian Dnepr rocket on 6 might be sought. However, Japan’s industry November 2014. has been effectively ‘captured’ by U.S. indus- At a time when the Japanese government has try, with Boeing having particular dominance, decided to increase investment in space, both having managed to create a relationship with Melco and NEC appear to be eager to expand Japanese firms where moving up the value their share in the commercial space market. 206 chain is difficult. Nevertheless, there is a Yet with Japan’s highly skilled workforce, renewed emphasis on developing Japan’s ranked third in terms of the percentage of aerospace sector. adults with a tertiary degree212, and its com- Japan’s top satellite prime contractors are paratively high labour costs, the outcome of Mitsubishi Electric Company (Melco), and an alliance with competitors in this industry Nippon Electric Company (NEC), along with seems likely to have the same outcome as industrial suppliers Toshiba and Kawasaki with competitors in the U.S. – that is, in- Heavy Industries Ltd. that also have substan- creased technology exchange, and access to tial in-house R&D experience in satellite a pool of highly skilled employees, but rela- manufacturing.207 Melco began as a satellite tively little change in labour costs. However, prime contractor in 1983, when it was se- even if European competitors can access lected to construct Japan’s CS-3 communica- Japan’s domestic institutional market, access tions satellite208; it entered the commercial to that market is less beneficial than access market in 2000 with a winning bid for the to the substantially larger U.S. domestic insti- Optus C1 satellite contract in collaboration tutional market, even if a footprint in Asia in with Space Systems Loral.209 While Melco is general might become easier. Japan’s main commercial satellite prime con- Japanese companies tend to be more focus- tractor, its commercial production scale is sed on regional alliances, with sights on In- dwarfed by the six largest prime contractors; dia. To respond to the growth of China, Japan has increased economic ties with India, strengthening the relationship with the estab- 205 De Selding, Peter B. “Thales Alenia Space Nabs $94 lishment of the "Global Partnership between Million Contract for U.S.-French Ocean Topography Satel- Japan and India" in 2000. The two countries lite.” 6 Jan. 2015. SpaceNews 26 Mar. 2015 ESPI Report 58 53 May 2016 between the leaders of the two countries has tin are beginning to equip satellites with further cemented the relationship. metal parts made from 3-D printers, with the latter aiming to print an entire satellite bus Assessing the Merits of Seeking Technological by 2019.217 Automating the assembly-line Leadership Advantage through Cooperation process and placing reliance on 3-D printed parts may initially contravene the interests of Allying with a mature industry is more likely Europe’s space industry labour force, as some to reinforce the technological competitive staff would be supplanted by machines; but it advantage collectively held by top rivals in will also work to plug the loss of market the industry over new entrants, than to offset share that low cost countries have managed factor cost disadvantages in doing business. to capitalize on with their own labour cost However, such alliances could impede the advantage. Hence limited job losses of today global strategy of European prime contractors might avert much larger job losses in the overall, as independent partners might have future. conflicting interests and objectives that could impact collaboration from the outset. For 3.4.2 Broader Alliances/Cooperation with Emerg- example, the U.S. ITAR restricts the sale of ing Low-Cost Satellite Manufacturers dual-use technologies to China, whereas Ja- pan is in the midst of negotiating economic The trade-offs associated with alliance build- partnerships with China and other countries ing change when focussing on emerging low- in the region.214 However, if European com- cost commercial satellite manufacturers, such petitors wish to access emerging countries as China, India, Russia, and to a lesser ex- with costs comparable to the state-run indus- tent Brazil, Argentina, and Turkey et al. Yet, tries in low cost countries, and increase over- such alliances must also be contemplated. all competitive advantage with the industry, focus must be placed on developing an inter- Potential Alliances with Chinese Competitors nal capability to lower costs, similar to how SpaceX has lowered costs in the U.S. domes- As described in Chapter 2 above, China’s tic launch industry. space industry has shown remarkable com- mercial growth in recent decades. The state- Next, the higher costs of Western commercial owned industry has made considerable satellites will continue to result in a seepage strides in marketing low-cost satellites to of market share to low cost countries whose institutional emerging markets in the past technology competencies are converging to decade through CGWIC and CAST. Targeting the global standard. Moreover, access to ei- emerging countries in Asia, Africa and South ther the U.S. or Japanese domestic institu- America, China's commercial space segment tional market does not guarantee that institu- has made inroads by providing an ‘all- tional customers will veer away from prefer- inclusive’ low-cost package including satellite ring domestic contractors. Hence, if low cost design and construction; launch services, in labour is unavailable to reduce factor costs, addition to building ground segment facilities; perhaps automated assembly-line manufac- training local personnel; and financing pro- turing – i.e. using robots instead of human gramme costs in the form of loans.218 labour, or the use of additive manufacturing (3-D printing) are other ways to drive costs CASC through its 130 subsidiary organiza- down.215 Assembly-line manufacturing has tions employs around 170,000 technicians 219 already begun to emerge among U.S. manu- and operators in total ; of which 59% of facturers such as Ball Aerospace, SpaceX, employees in leadership positions in the sub- and Planet Labs in the production of small to sidiary organizations hold advanced tertiary 220 large constellations of low Earth orbit (LEO) degrees. Of the countries listed in Figure small-to-micro sized satellites.216 Addition- 3.2, while China ranks lowest in terms of ally, Space Systems/Loral and Lockheed Mar- 217 Werner, Debra. “Reimagining satellite construction.” 1 Mar. 2015. Aerospace America 16 Dec. 2015 214 Tiezzi, Shannon. “China-Japan-South Korea Hold FTA ESPI Report 58 54 May 2016 The Future of European Commercial Spacecraft Manufacturing population percentage of adults with tertiary discontinued in August 2013.225 As a conse- degrees; it aims to increase that percentage quence, Turkmentsat-1, a third satellite built to 20% (i.e. 195 million people) by 2020.221 by Thales that was originally scheduled for launch on a Chinese rocket, was transferred As can be seen from Figure 3.3 China’s la- to a SpaceX launcher. But the existence of bour cost is only undercut by India, and the U.S. ITAR regulations still provide Euro- China’s total location-sensitive costs (includ- pean satellite integrators with a comparative ing labour costs, facility costs, utility costs, advantage because U.S. manufacturers are costs related to capital, and taxes) remain prohibited from exchanging technologies with the lowest. Yet, it should be noted that Chinese manufacturers, such as the collabo- China’s low-cost competitive advantage is ration between Thales Alenia Space and diminishing, as wages have increased annu- CAST. This will remain so in the near future ally by 14.3% and 18.3% in the public and since there is still strong resistance in the private sector, respectively, since 2004.222 U.S. to bilateral cooperation between the U.S. Thus, China’s wage level is expected to have and China.226 The European satellite integra- converged substantially with developed tors can be uncontested in potentially bene- economies by 2030, and is in the process of fitting from China’s low-cost labour, and in being surpassed as a low-cost production hub utilising low-cost Chinese satellite compo- by India and by other Southeast Asian coun- nents and subsystems, which could result in tries.223 a lower price for European satellites. In the near term, an alliance with China's However in the long term, the benefit of an state-run industry could be ideal in pursuing alliance with China's low cost industry is likely a cost leadership competitive advantage, to decline, as labour costs are expected to where European manufacturers trade market converge with Western levels faster than access for low-cost labour. Whilst intellectual India and other Southeast Asian countries. In property protection is a considerable issue, that time, depending on the level of technol- an alliance might enable European competi- ogy exchanged, China might also gain a dis- tors to further access China’s domestic insti- proportionate benefit from the know-how tutional market. Moreover, European com- provided by European competitors, allowing petitors may be able to cherry-pick higher the state subsidised industry to enhance its skilled employees by offering comparatively own market position at Europe's expense. For more attractive wages. instance, in developing its DFH-4 platform, Thales Alenia Space has been cooperating CAST selectively brought in external exper- with CAST for several decades, providing key tise in order to match the highest worldwide satellite components - such as the power standards. Of the four companies that sub- supply of the “Simon Bolivar” satellite that mitted proposals, Thales Alenia Space was was launched in 2008 - for the improvement chosen because of its previous cooperation of the quality of Chinese satellites.224 Thales with China.227 This cooperation allowed CAST Alenia Space has benefited as well from the to reduce the need for further outside exper- close relationship with CAST in other re- tise and after the launch of the first DFH-4 spects, such as the launch of the Thales-built satellite – Sinosat 2 – it was ready to sell geostationary communication satellites fully indigenously built satellites on the global Palapa-D and Eutelsat-W3C on the cheaper market.228 Moreover, in transferring satellite Chinese Long March rocket, which increased technology, European prime contractors the competitiveness of the Thales Alenia might want to consider whether the U.S. Space offer on the international market. This might respond to that action and enforce its was possible because the satellites were free embargo on China extraterritorially through of strategic U.S. components and thus did not coercively punishing European manufacturers fall under the U.S. ITAR regulations. How- that transfer technology with China by pro- ever, as previously mentioned, the “ITAR- hibiting them from serving as contractors for free” platform of Thales Alenia Space was 225 Svitak, Amy. “U.S. Electronics Firm Fined $8 Million For 221 “Education Indicators in Focus.” May 2012. OECD 19 Export Violations.” 16 Sept. 2013. Aviation Week 17 Nov. Feb. 2015: 3 ESPI Report 58 55 May 2016 U.S. institutional contracts229, i.e. putting at dustrial policy goals rather than conserva- risk Thales Alenia Space’s ongoing activities tion.234 with the Pentagon and other U.S. govern- ment customers, which account for nearly Potential Alliances with Indian Competitors $1.3 billion in annual sales.230 In the above mentioned investigation of the “ITAR-free” India shares many of the qualities exhibited platform of Thales Alenia Space, the U.S. by China, including its rapidly developing State Department warned Thales Alenia space capability, its low cost access to space, Space that its U.S. suppliers might be denied and its wealth of low cost skilled labour. In- export licenses absent greater cooperation in dia’s ISRO, itself a subdivision of the gov- that investigation.231 ernment’s Department of Space (DOS), pro- vides commercial products and services The reasoning for such a response arises through its commercial arm, Antrix Corpora- from section 1233 of the U.S. Duncan Hunter tion. With access to ISRO’s satellite design, National Defense Authorization Act of testing and manufacturing facilities, Antrix 232 2009. Section 1233 mandated a Review of offers products ranging from complete satel- Security Risks of Participation by Defense lite programs to function-specific compo- Contractors in Certain Space Activities of the nents, as well AIT services.235 People’s Republic of China, where satellite prime contractors of the DoD (including their The DOS has a total of 18,561 employees of subcontractors at any tier) that are in any whom 12,850 work in scientific and technical way associated with China’s space industry capacities, while another 5,711 jobs are more 236 would be identified as a security risk by the administrative in nature. India’s percent- DoD in a report provided to Congress, which age of tertiary educated adults is estimated could affect their ability to bid on future con- to be lower than that of China; for instance, tracts as prime contractors or suppliers to the India had an estimated 9.1 million adults DoD. While this amendment was partly tai- between 25-34 with a tertiary degree while lored to focus on Thales Alenia Space’s mid- China had around 15.5 million in the year 2000 commercial activities with China, with 2000 – in 2010, India’s tertiary educated respect to the development or manufacture youth grew to around 14.2 million, while 237 of satellites by Western manufacturers for China’s reached around 23.2 million. In- launch from China, this mechanism could dia’s labour cost is lower than that of China, theoretically be extended to other U.S. insti- but the cost saving is offset by India’s sub- tutional contracts.233 However, the likelihood stantial taxation. Yet, even with high taxa- of this is presumably very low as this route tion, India is undercut only by China in terms could risk severe retaliatory trade measures, of total location-sensitive costs. Moreover, and might run counter to WTO rules. In the unlike the anticipated growth of China’s wage converse configuration, a discriminatory ac- levels, India labour wage levels are expected tion in 2014 by China in charging U.S. manu- to remain low until at least 2030, thus main- facturers three times the amount it charges taining its appeal for low cost manufacturing its own domestic industry for rare Earth min- (as long as the right institutional environ- erals was already seen as a violation of WTO ment, transportation, and energy infrastruc- rules, as they were designed to achieve in- ture is maintained). Similar to developing an alliance with China’s state-run industry, an alliance with India’s industry is another possibility in pursuing cost leadership. Importantly, an alliance with In- 229 Mineiro, Michael C. “An inconvenient regulatory truth: dia’s industry will not be hindered by the Divergence in the US and EU satellite export control poli- same level of export control as with China. cies on China.” Space Policy 27 (2011): 213-221, 219. For now, Airbus is the principal foreign part- 230 Pasztor, Andy and Daniel Michaels. “Thales Team ner of ISRO and Antrix,, with Airbus and An- Beats Lockheed for Satellite Job.” 1 June 2010. The Wall trix collaborating under a formal cooperation Street Journal 26 March 2015 ESPI Report 58 56 May 2016 The Future of European Commercial Spacecraft Manufacturing agreement to address the commercial market over time India’s space industry might also for smaller communications satellites, as gain a considerable benefit from the know- explained above.238 how provided by European competitors, al- lowing the state subsidised industry to en- The decade-long alliance between both part- hance its own market position at Europe's ners has allowed Airbus to establish itself as expense. However, this is an issue that is the premier foreign industrial partner of ISRO relevant for all international cooperation sce- and the Indian space industry.239 The indus- narios to a varying degree. trial partnership is advantageous for Airbus because it increases its level of competition in the global commercial market by pooling Potential Alliances with Russian Competitors skilled low-cost labour from India, resulting in Russia’s space industry has a vast amount of lower-cost satellites. This is a competitive experience in space, having been a leader in advantage that Airbus has over its American the first years of space exploration and ex- counterparts who, at the moment, do not ploitation and continuing to be a major have comparable cooperation agreements space-faring nation. Thus, Russia remains a with India. strong force in the spheres of human space- ITAR does not restrict U.S. competitors from flight and satellite navigation systems, inter building alliances with India’s space industry. alia. Prior to the recent reorganization of Here, the competitive edge the European Russia’s space sector into one state-owned satellite integrators have over their U.S. entity, it included over 100 companies that employed a workforce of about 250,000 counterparts might be challenged due to the 241 gradual increase in cooperation between In- highly skilled personnel. Yet, with Russia dia and the United States as a result of the cooperation it is not so much a question of loosening of U.S. government regulations on innovation dynamics, but more that there collaboration with that country. In 2008, the could be a significant cost advantage, al- U.S. government eased sanctions on indus- though this advantage is to a large extent trial cooperation by U.S. companies with In- offset by a current lack of capabilities to cre- dia in the field of space and missile technol- ate high quality products. ogy, sanctions that were originally put into Russia ranks the highest in terms of popula- force after Indian underground nuclear tion percentage of adults with tertiary de- 240 tests. ITAR regulations formed a second grees, ahead of the U.S. and Japan, while barrier that made it impossible for U.S. labour wages are much lower than Western manufacturers to export U.S. satellite com- counterparts. Yet in its application to the ponents and fully manufactured satellites to space sector, Russia needs to make a sub- India, which impeded them from entering stantial investment in its industry to revive into industrial cooperation with ISRO/Antrix an obsolete industrial base and renew its similar to the Airbus cooperation. Because of aging workforce (of which 46 years is the the 2014 changes in the ITAR regulations this median age).242 In this respect low wages are barrier has been lifted. The access advantage a disincentive to attracting young highly European satellite integrators had is therefore skilled engineers and scientists into the space reduced but no U.S. satellite integrator has industry, as a single Russian space industry so far established any form of cooperation employee generates an average 1.6 million agreement with ISRO or Antrix. roubles ($32,000) in revenue for an em- ployer, while the employee receives an aver- Although India is seen as less threatening 243 than China in intellectual property terms, and age salary of 534,000 roubles (~$10,000). attracting exceptionally skilled employees By way of illustration, the average salary of with better wages might also be feasible, an employee in the U.S. aerospace industry is over $117,000, and the average age of an employee working at SpaceX is between 26 238 “EADS Astrium-ISRO alliance sealed. First contract with and 30 years. To revive its industry, Russia Eutelsat for W2M satellite.” 20 Feb. 2006. Indian Space aims to recruit over 100,000 young engineers Research Organisation 21 Nov. 2013 by doubling wages and implementing incen- ESPI Report 58 57 May 2016 tive systems to increase the sector’s effi- lites will be developed, enabling it to more ciency by 2025.244 completely address the future requirements of both Russian and international markets.249 Even if labour costs are higher than in China The joint venture had its initial success with and India, Russia’s total location-sensitive the 14 September 2015 launch of the Express costs tend to be only slightly higher than AM8 satellite, for which Thales Alenia Space India’s. Hence competitive advantage on cost had supplied a payload, while ISS Reshetnev could still be pursued, with access to a pool provided the bus, and assembled, integrated, of highly skilled employees, while European and tested the satellite in its facility.250 competitors might also benefit from a two- way technology transfer resulting from Both Thales Alenia Space and Airbus D&S Europe’s and Russia’s experience in space, have other joint ventures with Russian com- and their complementary scientific and indus- petitors. Thus, Thales Alenia Space and ISS trial actors. Cooperation between Europe and Reshetnev are developing the joint Russian- Russia in the aerospace sector has been on- European satellite platform, Express 4000.251 going for more than two decades in the avia- And, Airbus D&S and RSC Energia have a tion, helicopter, and space sectors245; and joint venture, Energia SAT, meant to build on with Roscosmos and ESA also agreeing to the success of the Yamal and Eurostar E3000 launch the Russian Soyuz-ST from the Euro- platforms to construct the Express-AM4R and pean Kourou space center in French Guiana. Express-AM7 communications satellites.252 Russia’s cooperation with both prime contrac- Moreover, following the collapse of the Soviet tors extends to other aerospace sectors as Union in 1991, and the ‘privatization’ of the well; yet, Russia has also had joint ventures Russian space industry, numerous joint ven- with Japanese and U.S. competitors.253 tures and partnerships emerged with Western companies in the fields of launchers, rocket With the change in the political climate (in- engines, and satellite and module manufac- cluding mounting EU and U.S. sanctions on turing.246 For example, in the past two dec- the Russian government) following Russia’s ades, ISS Reshetnev (Russia’s leading com- annexation of Crimea in Ukraine in early munications, navigation and geodesy satellite 2014, a European prime contractor might be manufacturer) and Thales Alenia Space have restricted in exporting technology to Russia in cooperation built about 20 telecommunica- for either ITAR or domestic reasons. For in- tions satellites together, both for the Russian stance, in mid-April 2014, Germany deferred market and, to a lesser extent, for export a decision on granting Russian export li- customers. That cooperation increased fur- censes to Airbus D&S, indefinitely putting on ther in August 2013, following the creation of hold the sale of satellite technology worth up ‘Universum Space Technologies’, a joint ven- to €700 million ($973 million).254 As political ture between ISS-Reshetnev (60%247) and tension between Europe and Russia’s gov- Thales Alenia Space (the remaining 40%), to ernments continues, more restrictions in strengthen their ability mainly to win both building commercial alliances might emerge. Russian and international telecommunications This is true also for Russia-Japanese alli- satellite contracts.248 Initially, the company ances, and, a fortiori, for Russia-U.S. coop- will focus on developing equipment on par eration. However, from a strategy viewpoint with the most demanding international stan- the question is whether Russia will be perma- dards for use on Russian telecommunications satellites. Thereafter, new products for satel- 249 “Thales Alenia Space and ISS Reshetnev Create Joint Venture in Russia.” 28 Feb. 2013. Thales Group 18 Feb. 2014 ESPI Report 58 58 May 2016 The Future of European Commercial Spacecraft Manufacturing nently estranged and hence unattractive as a Argentina and Turkey are still in the process cooperation partner in space, or whether the of gaining their own footholds in the industry tide will change and benefits will be reaped while also dealing with issues of scale. It by those who are well placed to step up in- should be noted, however, that both coun- volvement. tries are determined and that particularly Turkey has favourable demographics and Potential Alliances with Brazil, Argentina, Turkey many well-educated youth. Turkey’s prox- et al imity to Europe and its strategic importance are also important factors in assessing the As described in Chapter 2 above, there are suitability of its nascent space industry as a smaller space nations including Brazil, Argen- partner. tina and Turkey, which may grow to be new rivals in the longer term, and are hence The long-term objective of the Turkish gov- worth mentioning. Since data for the two ernment is to develop an indigenous capabil- latter countries is not completely available, ity to domestically manufacture a complete their industries can be only partially con- satellite, shifting Turkey from a satellite pur- trasted in terms of skilled labour and wage chaser to a satellite manufacturer. In order to levels. However, looking at Brazil, its space reach this ambitious goal, Turkey will need to industry has an aging labour force of 3000 continue to cooperate with foreign suppliers people and the percentage of the population to support the development of its spacecraft with tertiary education is relatively low. This manufacturing infrastructure in the near-to- 257 notwithstanding, Brazil plans to triple its medium term. This creates an opportunity space budget in the coming years, in addition for European space industry to extend its to streamlining management, and educating involvement in the Turkish space program. more aerospace workers, and hence its la- European manufacturers possess valuable bour force is likely to expand.255 In addition skills and know-how that would allow Turkish to the small size of its industry, another fac- industry to further develop the infrastructure tor that places Brazil at a disadvantage is its required to indigenously manufacture a com- location sensitive costs, which are greater plete geostationary satellite, in addition to than the above-described low cost countries, supplying satellite components and subsys- and nearly on par with the levels currently tems for the Türksat 6A and other satellite prevailing in Europe. While Brazil has devel- projects. This kind of technology transfer oped technological competencies in liquid would provide a supplementary revenue propellants, and is seeking access to space stream for European satellite integrators. with its indigenous VLS-1 launch vehicle, the Moreover, they could benefit from the low- many drawbacks make Brazil a challenging cost Turkish satellite components and sub- cooperation partner. systems, manufactured with lower-cost la- bour than European wage standards. Contin- In 2013, Thales Alenia Space won a contract ued cooperation would therefore positively to deliver a dual-use geostationary satellite, influence the competitive position of Euro- named the Geostationary Defence and Stra- pean satellite integrators and potentially open tegic Communications Satellite (SGDC), to new markets. the Brazilian government. The outcome of the tender was in part decided by how much In 2014, Argentina became the first country technology a bidder was willing and able to to operate an indigenously integrated geosta- transfer to Brazil’s space programme.256 tionary satellite, ARSAT-1, containing a Thales Alenia Space was likely seen as the Thales Alenia Space payload and several Air- prime contractor in a better position than bus D&S satellite components on Argentina’s U.S. competitors to transfer technology with ARSAT 3K satellite bus. The two European fewer export restrictions. The SGDC contract prime contractors reprised those roles as has created several opportunities for Euro- leading equipment suppliers in the ARSAT pean satellite integrators because it has es- program with the follow-on Arsat-2. This is tablished an entry point into Brazil’s ambi- again a great opportunity for both system tious national space program that could integrators to deepen their strategic relations evolve into broader mutually beneficial coop- and industrial cooperation with the Argentine 258 eration. satellite manufacturer INVAP. 255 Messier, Douglas. “Will a new space power rise along the Atlantic?” 15 Aug. 2011. The Space Review 27 Feb. 257 Stein, Aaron. “Turkey’s Space Policy.” May 2014. Cen- 2015 ESPI Report 58 59 May 2016 Assessing the Merits of Seeking Cost Leadership capabilities that could chip away at Europe’s Advantage through Cooperation own industrial base that cannot compete at the same margins. As technological prowess If a European competitor were to pursue cost seeps to the low cost manufacturer, perhaps leadership by allying with a low cost manu- the best way to maintain a benefit in the facturing company abroad, the resulting la- arrangement is through continuous innova- bour cost benefits might have limited shelf- tion on the European side. Should coopera- life if production remains in a single region. tion extend to the long-term, these low-cost By 2020, China and India will make up 40% countries could become repositories of previ- of the 200 million 25-34 year olds with higher ous innovation, allowing Europe’s industrial education degrees across OECD and G20 base to put greater focus on critical new countries, whereas the U.S. and Europe are technologies that are central to the demands expected to account for just over 25% of the of Europe’s space industry. total.259 As the percentage of the population with tertiary education in traditional low cost When considering market access, the U.S. countries increases, in principle the cost of institutional market can be seen as the prize such labour will go down unless demand ex- in the near term. Yet, as the U.S. govern- ceeds the increase in skilled work force sup- ment adopts a disaggregation approach to ply, or the general wealth of a country means defence spending - which will distribute func- that labour rates generally go up. The latter tionalities and risks onto several small satel- is typically the case. For instance, China’s lites working collaboratively rather than on average manufacturing sector wages now costlier large satellites - in addition to the use exceed comparable levels in South and of hosted payloads on commercial satellites, Southeast Asia by as much as six times.260 the U.S. institutional market might be seen By comparison, the average factory worker in as less of a bonanza in the long term. China earns $27.50 per day, while the wage In contrast, institutional markets are ex- is $8.60 per day in Indonesia, and $6.70 per pected to boom in countries such as China day in Vietnam followed by even lower wages 261 and India. With such projected change in the in the Philippines. Relatedly, those South- economic landscape, the question becomes east Asian countries (along with Malaysia and whether the technology and market access Thailand) have also made important invest- European companies can provide will out- ments in space technologies and space sci- weigh protectionist instincts in partner coun- ences for decades to forecast and manage tries. natural disasters and severe weather phe- nomena, with most investments in the region in the area of space based communication facilities, highlighting the potential for future 3.5 What About Outsourcing alliances in the long term.262 or Offshoring the Low-End While the labour cost benefit from low cost countries is likely to diminish over time, the Technology to Low-Cost capabilities transferred by European competi- Countries? tors cannot be taken back. It is more likely that those low cost manufacturers - now with In some instances, outsourcing or offshoring higher educated talent pools - will increase beyond the European area can provide sub- productivity and adopt enhanced technical stantial cost benefit, in addition to lowering production time and increasing economies of scale. The European space sector has long ESPI Report 58 60 May 2016 The Future of European Commercial Spacecraft Manufacturing 3.5.1 Outsource or Offshore Subsystems and recently formed a joint venture with India’s Equipment Mahindra Defence company to set up assem- bly lines and establish supply chain and re- Instead of entirely developing commercial lated infrastructure for military transport satellites in-house, top prime contractors planes and helicopters in India.266 Offshoring often outsource the production of subsystems production is also regularly done in the and equipment to lower-tiered suppliers to automotive industry, where it is common to reduce costs, and focus on core activities. see vehicles entirely assembled in a foreign Depending on the criticality of a specific country; for instance, besides manufacturing technology, they may, however, also acquire cars in Europe, both Mercedes-Benz and BMW a supplier to ensure that their supply chain is manufacture or assemble vehicles in the protected. Americas and Asia. Emerging space faring nations are not as Unlike in the aerospace and automotive sec- tethered to the U.S. for critical subsystems tors, the limited production number of satel- and equipment as is Europe; in fact, in the lite subsystems and equipment makes off- case of China and Russia, procuring strategic shoring production to low-cost countries U.S. technology is not an option. Instead, trickier, and this may be wedded to intellec- they either source critical technologies from tual property concerns (more pronouncedly in other regions or develop these technologies outsourcing than in pure offshoring). Yet, within their own industrial bases, at a lower there may be no alternative, if European in- cost possibly, but then without a track re- dustry is to remain competitive in commercial cord. As a subsystem is only as good as its markets. This may be a lesson from the component parts, European prime contractors automotive industry, as will be explained may find that the quality of their satellites below. may drop in line with the cost of the satellite in extensive outsourcing cases, although it has to be said that many Asian countries 3.5.2 Components have outstanding records in manufacturing, While the European space industrial base is particularly in the field of electronics. adept at developing most parts of its supply An alternative to procuring subsystems and chain, it is dependent on non-European sup- equipment from low-cost countries is to off- pliers at the lower levels of production, such shore European production to low cost coun- as with Electrical, Electronic and Electrome- tries to benefit from low-cost labour. Both the chanical (EEE) components and with ad- Thales Group and the Airbus Group have vanced materials. While most high-tech com- many joint ventures (one type of offshoring) ponents are imported from the U.S., microe- with state-owned partners within the aero- lectronics and semi-conductors are imported space sector of low-cost countries. For in- from Japan and other parts of Asia; and most stance, the Thales Group has created several of the world’s rare earths are supplied by joint ventures with partners in China in a China.267 Currently, an average European wide range of domains including air traffic manufactured satellite has about 60% U.S.- management, IFE, avionics, transportation made electronic components and 5% Japa- and space263; Thales Group also has a strong nese-made components. As European space industrial footprint in India’s aerospace de- industry already procures most of its low-end fence sector through partnerships with local components and non-critical technology from industry.264 Similarly, Airbus Group has joint outside Europe, sourcing low-end compo- ventures with partners in China’s aerospace nents from low-cost countries should have sector, which cover training and support, the least harmful immediate impact on engineering, final assembly and composite Europe’s supplier base. The question remains manufacturing of aircraft, in addition to a whether the reliability of low-cost compo- number of cooperation projects265; and it nents can be ensured, although the Asian record on electronics is outstanding, as men- 263 “Thales celebrates 50 years of diplomatic relations tioned. between China and France.” 30 Jan. 2014. Thales 19 Oct. 2015 Should European prime contractors begin to ESPI Report 58 61 May 2016 consider is whether Europe will remain in a 3.5.3 Outsourcing and Offshoring Lower-Tier vulnerable position, as it will still have some Technology to Central and Eastern Euro- level of dependence on foreign suppliers, pean Countries? thereby making the industry susceptible to political changes including additional export Rather than outsourcing or offshoring the controls or natural disasters.268 To limit this production of subsystems or components vulnerability to foreign produced low-end outside of Europe, an alternative low cost components, a European non-dependence option exists within the Central and Eastern strategy began to crystalize in the last dec- European (CEE) region. Here, CEE countries ade through the initiatives of ESA, the EU, can offer a labour cost incentive similar to and the EDA. To reduce the European space that of China, India, and Russia, without pre- sector’s dependence on non-European EEE- senting as great a risk to Europe’s current components from single source suppliers or space industrial base. Some underlying suppliers that might be subject to export knowhow already exists in CEE countries that restrictions, ESA developed the European were previously involved in Soviet-era space Components Initiative (ECI). Under the ECI, programmes. Moreover most CEE countries the goal of several European governments is wish to join ESA as full members, and are to reduce the share of U.S. supplied elec- working with ESA to raise their space related- tronic components to 45% by 2020, with industrial and scientific capabilities to ESA 50% of electronic components built in standards, and could therefore be strongly Europe, and the remaining 5% in Japan, and motivated. to avoid single source dependencies when Several CEE countries are already full ESA components are sourced from outside 269 members, including the Czech Republic (hav- Europe. The question is whether higher ing acceded to the ESA Convention in Nov. reliance can be placed on low cost manufac- 2008), Romania (Dec. 2011), Poland (Nov. turers both by sourcing more from these and 2012), Estonia (Feb. 2015), and Hungary by offshoring some of the nominally Euro- (Feb. 2015), entitling them to geographic pean supply to low cost countries. return on their investment in ESA. Other CEE Another concern that has recently begun to countries such as Bulgaria, Latvia, Lithuania, emerge is in terms of technology integrity Malta, Slovakia, and Slovenia are in different (i.e. concerns over cyber security). Two par- stages of transition towards becoming full allel classified studies conducted by ESA, in ESA members. collaboration with GMV of Spain and the ESA enlargement could enable European Thales Group, have determined that space- prime contractors to benefit from both lower craft hardware, firmware and software can be production costs, and the availability of maliciously modified in a manner that can go skilled and highly motivated engineers within undetected. Here, regardless of whether sub- the CEE. As can be seen from Figure 3.4, the systems, equipment, or components are labour cost of most CEE countries is roughly sourced from North America or from low cost around 33% of the labour cost in larger ESA countries, they carry the risk of being em- member states. And when looking at Figure bedded with spyware or logic bombs that can 3.2, there is a relatively higher percentage of be triggered at a later time by other cooper- tertiary educated adults within all CEE coun- ating components or by environmental fac- tries than in China and India. tors.270 As the globalization of manufacturing capabilities and increased reliance on com- As the industry and scientific communities modity software and hardware expands the within these CEE countries converge with ESA opportunities for malicious modification in a requirements, their increased capabilities manner that could compromise critical func- could provide favourable conditions for spe- tionality, European competitors may want to cialisation as lower-cost subsystems and place increased emphasis on procuring sensi- components suppliers for European prime tive technologies directly in Europe. contractors. Moreover, their experience in the automotive and aerospace manufacturing sectors might also be transferable to the space industry. The Research and Innovation performance in the EU – 2014 report, pro- duced by the European Commission’s Re- 268 Ibid. 269 search and Innovation DG, provides some De Selding, Peter B. “European Satellite Makers Shed- insight on how European states have at the ding U.S.-made Content.” 5 Feb. 2013. SpaceNews 23 Feb. 2015 ESPI Report 58 62 May 2016 The Future of European Commercial Spacecraft Manufacturing Figure 3.4. Hourly labour costs for the whole [European] economy in €, 2014 (not including agriculture and public administra- tion). (Source: Eurostat news release: Labour costs in the EU). For instance, the Czech Republic stands out the right environment to host production for its scientific and technological specializa- facilities.275 tion in aeronautics and space, which seems Clearly, CEE countries can then be attractive to rely on a narrow but high-impact science as outsourcing or offshoring hubs, but how base that could benefit from greater prioriti- this plays out depends not only on the prime zation.271 It is worth noting that the country contractors or on the receiving industry, but also stands out for its automobile sector that crucially on the plans of governments for performs well in medium-high/high-tech integration within ESA and on ESA’s plans in goods exports, thanks to several Asian and this respect. ESA’s industrial policy dictates a European owned production facilities located spreading of work across all member states, in the region; yet scientific production is both so it would seem sensible to leverage the relatively low in quality and scientific im- cost advantages of new member states in pact.272 By comparison, Slovakia’s aeronau- domains where this would bring relatively tics and space sector has a lesser impact at quick benefits. Lower-tier manufacturing the world level, but is better known for being might be a good solution in this respect, and the highest per-capita car producer in Europe even if cost advantages slowly disappear as a and Slovakia’s medium-high/high-tech goods result of general economic progress, the sys- exports are above the EU average.273 Hun- temic advantage, and the advantage for the gary is also notable for its high level of scien- prime contractors, will be that the system of tific excellence in aeronautics, while also be- geographical return will underpin the out- ing a host country for car manufacturers who, sourcing or offshoring even when cost bene- however, tend to do their research and pat- fits decrease. enting in the country of origin.274 This limited sampling does not exclude other lower cost Obviously, from the perspective of new ESA regions within the CEE that might also have Member States this cannot be the whole story, however. The ambition will naturally be to move up through the manufacturing tiers, and even if this does not extend to becoming system integrators, new member states 271 Research and Innovation performance in the EU: Inno- would not be happy to be involved in lower vation Union progress at country level 2014. 24 Nov. 2014. tier work only. However, the point is that European Commission 27 Feb. 2015: 75 ESPI Report 58 63 May 2016 lower tier manufacturing might be the best Europe has benefitted from a number of ma- starting point for upwards expansion. jor suppliers, including Bosch GmbH, Conti- nental AG, and ZF Friedrichshafen AG, which have a technical lead in certain component 3.5.4 Lessons from the Automotive Manufactur- areas, and can build complete subassemblies ing Industry in Outsourcing and components for assemblers. Moreover, The automotive industry first emerged in European suppliers tend to be clustered near France, England, Austria, and in North Amer- their home-country assemblers, both physi- ica in the dawn of the 20th century. Like a cally and in terms of long-term relationships, precursor to the satellite manufacturing in- which meant that assemblers could choose dustry, the early custom-made vehicles were from proven suppliers. However, a significant large and expensive, and their high price departure from the lean supply system in resulted in small markets and production Europe is the large number of lower-tiered volumes. Henry Ford’s Model T assembly line suppliers to each assembler – i.e. between 1,000 and 2,000, which complicates the sup- greatly increased the availability of vehicles, 278 allowing Ford to rapidly increase its market ply system. 276 share and reach new customers. Car In the following decades, carmakers began manufacturers in the U.S. and smaller Euro- outsourcing research and development to pean rivals then began to offshore entire their suppliers, which left them more de- production facilities throughout Europe, Latin pendent on the lower echelons of the supply America, Africa, and the rest of the globe to chain. As competitors pushed into new and avoid transportation cost and trade tariffs; emerging markets, they concomitantly dominating the market for nearly three quar- needed their suppliers to follow them. This ters of a century. Yet, by the mid-1970s, forced suppliers to develop the capability to Japanese manufacturers were able to pene- coordinate and deploy component manufac- trate the U.S. and European domestic mar- turing on a global scale, a task only within kets with low-cost vehicles that were highly reach of the largest and cash-richest compo- competitive in quality, durability, and fuel nent makers. It also resulted in suppliers’ efficiency. development of more modularised component Japanese manufacturers achieved competi- designs that catered to the needs of multiple tive advantages by adopting lean-production automakers. techniques that were pioneered by Toyota. A Today, while there are 16 major automakers progenitor of modern-day global outsourcing that sell more than 1 million vehicles per in subsystems and component parts – Toyota year, those vehicles are built from parts sup- made its vehicle production more efficient by plied by only 10 major component suppliers, developing a lean production model and spin- which have considerable bargaining power ning-off its in-house supply operations into due to their ability to control the supply and quasi-independent first-tier supplier compa- price of critical vehicle components. Collec- nies (while Toyota still retained some equity); tively, the top 10 first tier suppliers have the it then relied on a small number of suppliers ability to build 85% of the parts found in that had proven their ability to deliver on mainstream cars.279 Moreover, in contrast to time, maintain quality, control cost, and con- the commercial space sector, these compo- 277 tinue to innovate. nents are not restricted by export controls With globalisation picking up momentum in that could impact their marketability to the 1980s and onward, this outsourcing automakers. model was adopted by rival competitors and In the automotive market, the battle for other industries, including the aerospace technological competitive advantage is also sector. Europe’s automotive supply system is fought by the major suppliers within the in- somewhat closer to the Toyota lean supply dustry, which spend heavily on developing model than the U.S. mass supply industry, new technologies. For instance Bosch - the partly because European assemblers tend to world’s largest automotive supplier by reve- be smaller in scale and greater in number. nue - invested 10% of its 2013 revenue in research and development to maintain its 276 Sturgeon, Timothy and Richard Florida. “Globalization and Jobs in the Automotive Industry.” Mar. 2000. Industrial Performance Center – MIT 6 Mar. 2015: 22 278 “The Machine that Changed the World – Summary.” ESPI Report 58 64 May 2016 The Future of European Commercial Spacecraft Manufacturing position as an innovation leader. The invest- cial space business the degree of vertical ment is driven by the fact that rival suppliers integration may often have been driven by have the ability to build components that are the desire of integrators to hang on to the similar enough to be used interchangeably. most valuable parts of the supply chain, that is, the supply of subsystems and compo- And while most of the top automakers gener- nents, however, with the advent of stronger ate more revenue per year than their major competition from low-cost manufacturers it is suppliers, the operating margins of the 10 questionable whether this is a sustainable largest automakers are on average 4 per- situation. The institutional space market has centage points lower than the 10 largest sup- shown that buy-in approaches are perfectly pliers. Moreover, suppliers are better able to possible282, and although prime contractors respond quickly to the changing demands of have argued that this is not always cost ef- automakers by making small adjustments to fective, in the commercial field the conclusion components, whereas carmakers need to must be that spacecraft manufacturers must commit greater amounts in new designs to adopt this approach whenever it drives down meet customer demands and tastes.280 cost, as it will more frequently do with the The automotive sector seems to depart from increasing strength and capability of low-cost business theory, which expects profit margins manufacturers. Paradoxically, the role of to increase from initial supplier to final prod- European satellite manufacturers may only uct. Here, it appears to be more profitable to be safeguarded in the longer term by allow- be a large subsystem supplier than it is to be ing European subsystem and component a carmaker. A parallel can thus be drawn suppliers to be increasingly exposed to the with the European space industrial base, and ever-harsher climate of worldwide competi- the question can be asked whether it would tion. be more advantageous to be a subsystem supplier than a system integrator. However, a major divergence between the industries is 3.5.5 Lessons from the Aircraft Manufacturing the scale production of commercial automo- Industry in Outsourcing and Offshoring tive vehicles on the market (numbering sev- The satellite manufacturing and aircraft eral million cars sold every year), and the manufacturing industries share a similar his- scale effects of suppliers producing compo- tory, in that until the mid-1990s entry barri- nents that are in use in nearly all automotive ers and export controls protected the aircraft vehicles. In contrast, in the case of commer- manufacturing industry in the U.S. and in cial satellite manufacturing, the number of Europe. Indeed, in addition to being two of commercial satellite contracts available is the top commercial satellite prime contrac- around 25 per year, and the scale of produc- tors, Airbus and Boeing are the top prime tion of subsystems and components used to contractors in manufacturing aircraft. And construct a satellite is several magnitudes of whereas in previous decades most value order smaller than within the automotive chain activities were conducted in the home industry. However, ultimately the result may market283, these manufacturers began to be the same. Where only a few contracts can shift non-core capabilities to lower-cost coun- be won every year the commercial pressure tries seeking to maximize cost efficiencies, on the satellite manufacturer will be intense, share risk, and minimize supplier manage- whereas at the subsystem level the pressure ment challenges in the process.284 While sys- might be slightly less, depending on the niche tem integration usually takes place in home status obtained. Take for instance the recent countries, partly for cultural reasons, lower- dynamic changes needed in OHB’s structure tiered suppliers have begun to offshore pro- following its branching out as a prime con- duction of both minor components and major tractor, whereas subsystem supplier RUAG subassemblies to take advantage of low-cost has steadily grown its portfolio in recent labour and gain access to locally available 281 years. The slower product renewal cycles technology.285 Moreover, complete system in the satellite industry may also mean that niche status can be retained longer. 282 Because ESA insists on supplier competition at the The fundamental lesson that can be learned lower tiers through its ‘Best Practices’ procurement sys- from the outsourcing strategies of the auto- tem. 283 motive industry is, however, that it is possi- Michaels, Kevin. “Aerospace Globalization: The Next ble to outsource very significantly without Wave.” 17 Oct. 2013. ICF International 4 Mar. 2015 ESPI Report 58 65 May 2016 integration is beginning to take place in low into quasi-independent first-tier supplier cost countries as well, close to where they companies and relying on a small group of are being marketed, such as the final assem- suppliers, Toyota’s lean production model bly line for the Airbus A320 aircraft, and soon focussed on maintaining lower inventories, its A330 aircraft, in Tianjin, China.286 just-in-time parts deliveries, high perform- ance work organization, and continued im- In fact, to lower costs and accelerate produc- provement programmes for quality and pro- tion, over half the Airbus fleet in service ductivity.291 Moreover, problems of language worldwide has parts produced by Chinese and physical distance were overcome through companies.287 Airbus also has partners and face-to-face contractor and subcontractor suppliers in India and Russia, and its major communications. And rather than penalising tier 1 suppliers are encouraged to partner suppliers for delays, they were motivated by with organizations in those countries to ex- rewards for timely deliveries.292 When im- pand reach and capacity. Boeing is not much plemented properly, this model enables different, being responsible for the final as- manufacturers to outsource and offshore sembly, marketing, sales and overall design production regionally and internationally at of an aircraft, while outsourcing large ele- lower costs and with accelerated develop- ments of responsibility for the design and ment. production of subsystems, equipment, and components to a small number of risk- However, Boeing’s experience in outsourcing sharing partners.288 the development of its 787 aircraft in China provides an example of a project that was As in satellite manufacturing in low cost several billion dollars over budget and three countries, the main concern related to out- years behind schedule due to poor implemen- sourcing or offshoring in other aerospace tation. While the 787’s problem resulted from sectors stems from the risk of loss of intellec- outsourced lithium-ion batteries that over- tual property and technology to the national- heated, Boeing’s approach to producing that ized industries of China, India and Russia, aircraft had some systemic deficiencies in which could adopt that technology for their mitigating risks, i.e. in coordination, innova- domestic aerospace industries.289 Moreover, tion, communications, labour relations, man- aircraft manufacturers must balance the agement, and disengaged leadership.293 For benefits of lower labour costs, access to a instance, onsite expertise and support to broader pool of suppliers and resources, and suppliers was not provided, resulting in poor market access, against the detriments of coordination in ensuring that components export restrictions, the loss of intellectual would fit together during aircraft assembly. property, and the political backlash toward The lack of expertise also resulted in ineffi- globalization, outsourcing and offshoring.290 cient responses to unexpected problems that In light of the lower costs and accelerated arose from new technologies. And lacking development expected from outsourcing re- personnel onsite meant that the prime con- gionally and internationally, it should be tractor was unable to overcome cultural and noted that the poor implementation of an language differences and physical distances. outsourcing model might bring the opposite Moreover, the employees were not involved result. Here, it is beneficial to return to Toy- in the decision making process on outsourc- ota’s lean production and outsourcing exam- ing, which could have helped to maintain ple mentioned above, and expand on the labour relations and prevent potential costly methods that made it effective. In addition to strikes. In applying the outsourcing model, spinning-off its in-house supply operations an engaged leadership team with a proven record in supply chain management and risk 286 “Airbus in China.” Airbus 4 Mar. 2015 management was necessary, but not put in ESPI Report 58 66 May 2016 The Future of European Commercial Spacecraft Manufacturing As with the lessons from the automotive in- them to manufacture satellites cheaper and dustry, the aircraft manufacturing industry faster. For example, Sierra Nevada has also shows that outsourcing and offshoring is streamlined its production process by moving necessary, but that it entails risks that mean all testing and assembly in-house which has that proper and stringent risk mitigation allowed it to reduce the production cycle by a structures must be put in place. The greater factor of four, from two years to build a satel- the geographical and cultural distance, the lite to four to five months, at a fraction of the more the risk increases, as does the need for cost.295 risk mitigation measures. This has stimulated several European system integrators into acquiring a specialised small satellite manufacturer. European system in- 3.6 Potential New Paradigms tegrators thereby obtain the technological and production process innovations pioneered for Europe? by the small satellite manufacturers to streamline their production cycle, reducing 3.6.1 Small Satellites their manufacturing costs and increase their competitive position in the commercial mar- The above scenario assumes a static outlook ket for large satellites. In 2009 Airbus be- for the global space sector where the large came the principal shareholder of SSTL, a conventional satellites for telecommunica- spin-off company of the University of Surrey tions, Earth observation, science, exploration, that designs and manufactures subsystems technology demonstration and other applica- and small satellites for Earth observation and tions will remain central in a mainly govern- remote sensing, science, navigation, tele- ment funded space sector with only a small communications and technology demonstra- share of private space ventures. But only tion purposes.296 Also OHB, which developed recently a rise in small satellites businesses its small satellite technology in-house, pur- has taken place, triggered on the supply side chased several specialized companies, i.e. by massive improvements in technology and OHB CGS, KaiserTrede and Swedish Space the miniaturization of electronics and other Corporation, to improve its small and large satellite components, as well as a growth in satellite manufacturing capabilities. As inter- secondary payload opportunities, and on the est in small satellites grows, and launch costs demand side by a surge in governmental and continue to decrease, European manufactur- private demand for satellite data, e.g. geo- ers could bring their reliability paradigm to spatial satellite imagery, communications, small satellite production, which would make etc. them more competitive in this growing seg- ment. The large satellite integrators have recog- nized the increased demand for small satel- lites and have broadened their customer range by developing or sustaining an in- 3.7 Conclusion house small satellite product line next to their large satellite integration business - Thales The competitiveness of European integrators Alenia Space has recently sold small satellites for large satellites will remain essential to to Iridium, Globalstar, and O3b, while SSL sustain the critical mass of the European signed a contract for 13 small satellites with space industry as a precondition for Europe’s Terra Bella. And in June 2015, Airbus D&S space ambitions. Remaining competitive may was selected to design and build the first 10 require a change in industrial strategy, with a of OneWeb’s 648 small satellite constella- tion.294 295 “Sierra Nevada Cuts Costs With In-House Satellite The emergence of small satellite ventures has Assembly, Testing.” 6 Jan. 2014. The Denver Post 3 Dec. also stimulated the emergence of specialised 2014 ESPI Report 58 67 May 2016 focus on building stronger ties with Western parts of manufacturing to CEE countries, this manufacturers in addition to accessing their having the dual advantage of having highly industrial markets. Similarly, it could benefit skill labour at a lower cost and greater geo- from allying with rapidly emerging nations graphical proximity. This last approach has with low cost manufacturing capabilities or the added advantage of being more likely to outsourcing or offshoring to these countries. push forward Europe’s goal for technological A further option is to foster low cost internal non-dependence in components and parts. capability in Europe by seeking to relocate ESPI Report 58 68 May 2016 The Future of European Commercial Spacecraft Manufacturing 4. Findings and Recommendations As presented in Chapters 1, 2, and 3 of this China, India, and Russia are becoming more report, changes in the spacecraft manufactur- attractive, especially to emerging space mar- ing sector show that the intensity of competi- kets. Furthermore, the capabilities of the tion is increasing, with aggressive commercial different space actors are converging, policies from other space faring nations, both through both technology transfer and organic old and new. Moreover, the course of busi- growth, resulting in a more level playing field ness is also changing, as high-end technolo- and potentially a smaller share of the pie to gies continue to develop at a rapid pace, be won. The following three illustrations while low-cost options from countries such as demonstrate the evolving situation. Figure 4.1. Active Commercial Communications GEO Satellites by Manufacturer from 1993 Onward (Source: SatBeams). ESPI Report 58 69 May 2016 Figure 4.2. Planned Commercial Communications GEO Satellites by Manufacturer (Source: SatBeams). Figure 4.3. Comparison of All Prime Contractors (Source: Futron Manufacturing Report). ESPI Report 58 70 May 2016 The Future of European Commercial Spacecraft Manufacturing Clearly, the next steps to taken by Europe’s EU’s legal basis in space policy in Article 189 top competitors in maintaining their position of its Treaty on the Functioning of the Euro- in the industry will require careful delibera- pean Union (TFEU), a series of communica- tion by all stakeholders, as they are likely to tions between the European Commission, the have a lasting effect on Europe’s space capa- European Parliament, the Council, and vari- bility overall. In identifying the best course of ous other institutional bodies have outlined action to be taken by European prime con- the priorities that need to be followed in es- tractors, it is helpful to analyse the interests tablishing a European space strategy. of all space industry stakeholders, i.e. ESA, Against this background, the EU’s space in- the EU, and the European industrial base. dustrial policy has centred on five specific Such an approach enables the identification objectives: 1) establish a coherent and stable of common avenues where interests are regulatory framework; 2) further develop a aligned, and where they diverge. competitive, solid, efficient and balanced industrial base in Europe and support the participation of SME [small and medium-sized 4.1 ESA Interest in Space In- enterprises]; 3) support the global competi- tiveness of the EU space industry by encour- dustrial Policy aging the sector to become more cost- efficient along the value chain; 4) develop At first glance, ESA might appear to be in the markets for space applications and services; best position from the technological stand- and 5) ensure technological non-dependence point to address the new challenges, as the and an independent access to space.298 intergovernmental agency has shaped and Moreover, EU support for research and inno- developed initiatives in all space sectors, and vation in space comes from the Horizon 2020 has been Europe’s key player for space activi- budget, which has allocated €1.4 billion for ties. Indeed, it is a successful model in terms this over the course of 2014 to 2020. The of coordination of national space policies, objectives of Horizon 2020 are to: enable activities, and resources, and its core focus European competitiveness in space, with a has been toward fostering innovative new focus on ensuring non-dependence on critical technologies and space science. Yet, even technologies and fostering innovation; enable with space commercialisation programmes advances in space technologies; and stimu- such as BICs and ARTES, ESA is not a politi- late the full exploitation of space data and the cal actor and it lacks some of the tools to development of innovative applications. On improve the overall competitive environment the technological level, Horizon 2020 is thus and create a level playing field for the Euro- an important complement to the activities of pean space industry at the international level, ESA. even though ESA has been instrumental in strengthening Europe’s satellite manufactur- ing industry, in fostering innovation and in the consolidation of European industry over 4.3 Industrial Response to EU the last decades. Interest in Space Industrial Policy 4.2 EU Interest in Space In- ASD-Eurospace has also offered an industrial dustrial Policy perspective in response to the changes occur- ring in the EU’s initiatives in space industrial The emergence of new space powers, and the policy. The organization’s satellite telecom- increasingly competitive global environment, munications working group has provided po- has awakened in the EU to the need to pro- sition papers on the competitive challenges vide increased support to the maintenance of that affect Europe’s industrial space base, a healthy industrial base. Driven by societal, and has made its own recommendations for economic, and strategic imperatives to bene- fit citizens’ wellbeing, stimulate innovation, European Economic and Social Committee and the Com- and broaden the EU’s projection as a global mittee of the Regions. An Integrated Industrial Policy for actor, the EU is developing its own strategic the Globalisation Era Putting Competitiveness and Sus- space policy that will allow it to capitalize on tainability at Centre Stage. COM (2010) 614 final of 28 investments it has already made in the space Oct. 2010. Brussels: European Union: 24. 298 European Commission. Communication from the Com- sector and maximize space innovation poten- 297 mission to the European Parliament, the Council, the tial. Following the establishment of the European Economic and Social Committee and the Com- mittee of the Regions. EU Space Industrial Policy: Releas- ing the Potential for Economic Growth in the Space Sector. 297 European Commission. Communication from the Com- COM (2013) 108 final of 28 Oct. 2013. Brussels: European mission to the European Parliament, the Council, the Union: 5. ESPI Report 58 71 May 2016 consideration by European decision makers its prime contractors Airbus D&S, Thales with regard to the satellite communications Alenia Space and, to a lesser extent, OHB industry. Those recommendations support Space Systems, are market leaders in com- the initiatives of the European Commission, mercial satellite manufacturing. With many which comes as no surprise as both share an decades of experience, they tend to a captive interest in maintaining a strong industrial market for several space systems, building on base in Europe. For instance, with regard to their substantial space infrastructure. With satellite manufacturing, it calls for an in- their high technological capability, they mar- crease in public support for research and ket a wide assortment of reliable differenti- development activities, with a focus on en- ated space systems according to the com- hancing performance and attractiveness while mercial needs of their customers. And be- minimising price to align with market trends. cause of the impediment of U.S. ITAR con- Next, it recommends that the EU’s industrial trols on the sale of commercial satellites policy addresses the technology dependence containing U.S. dual-use and strategic com- issue and implements an efficient mechanism ponents, the commercial business of U.S. to promote and share the results of actions competitors was harmed, whilst European performed in this area. It also highlights the industry was strengthened, even if this ban need for an appropriate framework to enable meant that possibility of exporting complete the deployment of innovative satellite com- satellites to ITAR banned countries became munications infrastructures to serve the EU impossible also for European manufacturers, agenda through a new financial scheme in- since they rely on US components too. volving public support; market demand- Europe boasts a labour force of nearly 38,000 aggregation; pan-European harmonisation of employees distributed according to the re- satellite communication systems through spective industry clusters within the member standardisation and regulations; and the states, 88% of whom are highly-skilled, with creation of government markets. And lastly, qualifications ranging from high-vocational it goes further in its call for action to bring training (21%) to extended university back- the European satellite industry on a level grounds (67%), providing a strong setting for playing field with its non-EU competitors in European manufacturers.300 the field of competition, competitiveness, and the development of bilateral and multilateral A European prime contractor weakness, and agreements to support the export market.299 perhaps a weakness inherently experienced throughout the global industry, is the increas- ing commercial rivalry between top contrac- tors. In a Darwinian fashion, rivals must in- 4.4 Applying a SWOT Analy- novatively adapt their capabilities, and com- sis to Europe’s Prime Con- pete for the few available contracts, despite the low profitability of the industry, and the tractors costly price tag of Western technology – weakening the demand from states that are In considering the interests and initiatives of beginning to enter the space sector. Unlike European stakeholders, it is beneficial to distil the U.S., China, and India, whose institu- the relevant factors of Europe’s commercial tional market makes up a substantial propor- space industry in a Strength, Weakness, Op- tion of domestic business that sustains con- portunity and Threat (SWOT) analysis based tractors in times of low commercial demand, on the findings in earlier chapters. Europe lacks a comparable institutional safety Drawing on the material provided in earlier net; rather, it is dependent on the revenue chapters, a summary of the overall position generated from exports to the rest of the of Europe’s competitive sector can be de- world. In comparison to the domestic com- scribed in an interrelated fashion, wherein mercial industry, the commercial export of the distinction between a strength and a European telecommunication satellites and weakness, and an opportunity and threat, Earth observation satellites far exceeds the can be seen as mirroring one another. value of Europe’s domestic sales for similar systems.301 Moreover, currently, 60% of an Europe’s commercial space industry is en- average European-built satellite uses U.S. dowed with a number of competitive strengths. Having overcome the barriers of entry into the industry during the Cold War, 299 “Space Telecommunications | A key sector for Europe: achievements and perspectives.” 2013 ASD-EUROSPACE 23 Apr. 2015: 3 300 ASD-Eurospace. “Facts & figures – The European ESPI Report 58 72 May 2016 The Future of European Commercial Spacecraft Manufacturing Strengths Weaknesses • Market leaders in commercial satellite manufac- • Intense rivalry among top competitors turing • Few contracts available to go around • Captive market for some commercial space sys- • Low profitability tems • General high cost of large satellites • Substantial existing space infrastructure • Lack of institutional safety net for periods of • High-technological capability low commercial sales • Wide assortment of proven differentiated tech- • Large dependency on U.S. for strategic and nologies on the market dual-use components • Less restricted by ITAR export regulations than • Subject to foreign export control U.S. competitors • High labour wages • Highly skilled labour • Procurement inefficiencies / geo-return re- • Large industry labour force quirements potentially interfering with compe- tition Opportunities Threats • Growing international commercial markets • New commercial rivals China, India, and Russia • New potential customers in emerging countries • Low-cost satellites • Access to non-European institutional markets • Alliances among external rivals through alliance building • Unidirectional technology transfer • Enhance competitiveness by generating econo- • Increased dependency on non-European mies of scale sources • Increase high technological capability and differ- • Possible assembly-line production by current entiated technology rivals in the U.S. for large satellites • Enhance competitiveness by lowering labour costs • Unfair price competition through national sub- through outsourcing or offshoring sidies and price dumping • Circumvent/avoid potential export restrictions • Uncertain export controls • Small satellite constellations and the changing • Possible extraterritorial coercive measures on technological landscape European industry • Rival low-cost small satellite constellations Table 4.1 SWOT analysis of the European Prime Contractor Industry. electronic content – highlighting Europe’s the reader. In this study some interconnected continued dependence on U.S. industry for opportunities and threats can be established strategic and dual use components, and the based on the evolution of the industry. In the impact U.S. export control policy has on case of opportunities, the international com- Europe’s competitive industry. Next, low cost mercial market is expected to continue to countries such as China, India, and Russia grow with increased demand from commer- have the comparative advantage of low cost cial operators seeking to replace existing labour, and often attractive exchange rates, fleets with cutting-edge satellites. Moreover, enabling them to gain a substantial profit with the anticipated creation of new agencies from low cost commercial satellite contracts, in Africa, Latin America, Eastern Europe, Cen- whereas the labour costs in Europe are sig- tral Asia, and Southeast Asia, the corre- nificantly higher. Finally, ESA’s geo-return sponding number of customers in emerging requirements, whilst a strong fund raising countries is expected to increase.303 And with tool, leads to industrial fragmentation that is substantial funds available to U.S. competi- not always helpful for the commercial posi- tors through domestic institutional invest- tioning of European prime contractors; fol- ment, and the state-financed markets of lowing the latest Ministerial Council meeting China, India, and Russia, European prime of December 2014, the requirement of geo- contractors could try to increase their access graphic return for ESA institutional contracts to these non-European institutional markets was loosened only for Europe’s launcher sec- through alliance building. European prime tor.302 contractors could also try to enhance com- petitiveness by generating further economies Of course, the line between an opportunity of scale by concentrating activities within one and a threat is drawn by the perspective of 303 Lahcen, Arne. “The Globalisation of Space Activities: 302 Rumpf, Clemens. “Op-ed | Increased Competition Will The Implications for Europe and Possible Strategies to Challenge ESA’s Space Authority.” 16 Feb. 2015. Pursue.” Yearbook on Space Policy 2012/2013: Space in a SpaceNews 20 Apr. 2015 ESPI Report 58 73 May 2016 entity to serve both parties. European com- Finally, the rise of small satellite constella- petitors could try to enhance their competi- tions, with ever increasing capability, is a tiveness by focussing on developing high clear threat to the manufacturers of large technological capability and differentiated satellites, although this also constitutes an technology. Yet another way to enhance opportunity, because involvement in both competitiveness could be by lowering labour domains will enable potentially highly benefi- costs through outsourcing or offshoring; do- cial cross-fertilisation. ing so could also enable European prime con- tractors to circumvent or avoid potential ex- port restrictions that are normally attached to components procured from the United States. 4.5 Assessing Alternative Moreover, small satellite constellations and Roadmaps for European the changing technological landscape present a new opportunity for prime contractors to Competitors: Trade-off build and rapidly deploy an armada of satel- Considerations on Forming lites that do not require the quality/durability of typical satellite systems due to their low Alliances and on Outsourc- orbit and limited operating life, and these ing / Offshoring capabilities may cross-fertilise with the pro- duction of large satellites. In order to chart potential routes for Euro- The threats that face European prime con- pean Prime Contractors to remain competi- tractors in the medium-to-long term are po- tive, it is useful to assess the trade-offs in tentially existential. Whereas in previous forming an alliance to reap the best balance times, European prime contractors competed between the opportunities and threats in the in the market through product differentiation global market. The strategic benefits of alli- and cutting-edge technology, the emergence ances include economies of scale, technology of China, India, and Russia as new commer- transfer, risk reduction (through the spread- cial rivals opens another front-line by way of ing of risk among partners), and shaping the cost leadership. Here, the European commer- nature of competition in an industry,305 it cial space industry is not alone in seeking to being noted that the benefit of an alliance mitigate the changing competitive environ- exists so long as the strategic contributions of ment; rather, cooperative activities have both participants remain complementary or already begun among other traditional rivals, critical mass relevant. and, indeed, among some of the new en- However alliances can also come with costs trants. Moreover, outsourcing or offshoring that could increasingly accrue over the life- production to low cost countries would likely cycle of such partnerships. Identifying when result in technology transferred out of the cost of an alliance offsets its benefit can Europe; and it also serves to increase Euro- help to determine when an alliance becomes pean prime contractors’ dependency on non- a competitive disadvantage.306 Ongoing coor- European sources. Next, sustained by sub- dination is required between participants, stantial institutional investment by U.S. gov- which can be complicated by divergent inter- ernment actors, traditional rivals in the U.S. ests in configuring activity worldwide, in dif- have begun to adopt assembly line and 3-D fering forms of ownership and production. printing production methods in satellite con- The level of technology transferred could struction to become more cost efficient. This result in the dissipation of sources of Euro- makes it urgent that European satellite pean competitive advantage and create a manufacturers strongly follow suit. new competitor or make an existing competi- Unfair price competition through national tor even more formidable, thus undermining subsidies and price dumping can also have Europe’s own industry structure. Further- the effect of distorting competition across the more, in an alliance where benefits are di- whole industry, just as export controls and vided between participants, European prime market access controls in the US provide a contractors might find themselves in an ad- tool for potential extraterritorial coercive re- verse bargaining position if another partner is sponses, both by limiting the export of critical able to capture a disproportionate share of US technology as a competitive tool and by the value created by the alliance by making even further limiting the access of European competitors to the US institutional market.304 305 Porter, Michael E., and Mark B. Fuller. “Coalitions and Global Strategy.” Competition in Global Industries. Ed. 304 Mineiro, Michael C. “An inconvenient regulatory truth: Michael E. Porter. Boston: Harvard Business School Divergence in the US and EU satellite export control poli- Press, 1986. 315-343. cies on China.” Space Policy 27 (2011): 213-221, 219. 306 Ibid. ESPI Report 58 74 May 2016 The Future of European Commercial Spacecraft Manufacturing irreversible investments that make its contri- tential for the erosion of Europe’s overall bution integral to the venture.307 competitive position, and less chance of the creation of an adverse bargaining position as 4.5.1 Alliance Building among European Com- both participants would have direct access to petitors the same European industrial supplier base. Over time, technological capability within Benefits Burdens Europe’s industrial base would converge through standardisation. So to remain at the • Enhances bargaining • Nominal technol- forefront of the competitive arena, European power of European ogy transfer from industry should seek to acquire technology Prime Contractors in outside Europe from other leading competitors, and hire bidding for interna- (need to attract highly-skilled labour trained outside of tional contracts high-skilled labour, Europe to develop new synergies. Yet, in- • Enables economies of and technology creased cooperation among European com- scale between com- from abroad) petitors is unlikely to reduce labour costs, so petitors • Need to find other in manufacturing lower-cost satellites, manu- • Standardized manu- ways to lower cost facturers will need to lower costs in other facturing of compo- of doing business ways, i.e. through assembly line production nents and equipment without affecting and automation, in addition to further ration- for Telecom, EO and labour cost alisation of divisions (e.g. Airbus’ rationalisa- Navigation satellites • Possible job losses tion following its reorganization from EADS). • Less impacted by • Potential acquisi- Continued rationalisation could also evolve procurement ineffi- tion of a participant into a merger between the participants, or ciencies /and geo- by another com- the potential takeover of one of the partici- return requirements petitor pants, which brings into question the need to • Less dependence on • Need to avoid be- protect Europe’s competitive industry from U.S. built components coming anti- abuse of market position. • Coordination require- competitive within ments limited to the European Un- within Europe ion. 4.5.2 Alliance Building with Traditional Rivals Benefits Burdens Table 4.2 Trade-offs on Alliance Building among European Competitors. • Economies of • Aligned export control scale policy potentially further An alliance between European prime contrac- • Reciprocal tech- impeding European tors would enhance their collective bargaining nology transfer prime contractor global power in bidding for international contracts, • Access to poten- strategy e.g. as when Thales Alenia Space and Airbus tially large insti- • Unlikely to reduce cost of D&S cooperated to provide the payload and tutional markets labour – need to find components to Argentinian satellite manufac- • Maintain high other ways of lowering turer INVAP for its ARSAT 3K satellite bus. technological cost (efficiency) With each participant benefiting from com- capability and • Continued dependency plementary economies of scale, repeating differentiated on U.S. for strategic and such an arrangement would enable prime technology dual-use components contractors to specialize in key areas and • Access to highly • Less competitive among facilitate standardized manufacturing proc- skilled labour emerging countries esses encompassing components and equip- force ment for European telecommunications, Earth Table 4.3 Trade-offs on Alliance Building with Traditional observation, and navigation satellites. In Rivals. Europe, procurement inefficiencies due to geographic return requirements would de- In terms of alliance building with traditional crease, as participants could access a larger rivals, a notable distinction from an alliance share of institutional funding. Reliance on US with new rivals is the mutual transfer of components could be reduced when European technology and know-how, in addition to participants are better capable of designing reducing the risk for European competitors similar components to those restricted in the through access to other institutional markets, US. Moreover, the coordination of activities such as the U.S. institutional market. Next between European participants could be the technology involved would remain con- aligned easier according to European strate- centrated among traditional rivals, developed gic interests, while there would be less po- by a highly skilled labour force. 307 Ibid. ESPI Report 58 75 May 2016 However, coordination is likely to be the big- nologies, to place more focus on more critical gest issue in the case of an alliance with tra- European capabilities. ditional rivals, as export control interests will Yet, the erosion of Europe’s competitive posi- require alignment – which could impact tion is the central concern about an alliance Europe’s ability to sell a satellite to a country with new rivals, as European prime contrac- such as China; yet the trade-off may come tors may find a unidirectional technology from better access to the lucrative U.S. insti- transfer that could undermine Europe’s indus- tutional market. Moreover, as labour costs trial supply base. Moreover, as the cost of would be unlikely to diminish, other forms of labour in e.g. China converges with devel- cost reduction through standardization and oped countries, relocation to other low-cost assembly-line manufacturing will be needed countries will be needed for Europe to con- to lower the cost of a commercial satellite. It tinue benefiting from low cost labour. And is likely that Europe will continue to depend while European prime contractors could po- on components sourced from the U.S. based tentially tap the state-subsidised institutional on existing economies of scale; yet, to over- contracts of low cost countries, domestic come export restraints, Europe would need to industry is keen to adopt new technologies in further develop its own capability in strategic separate institutional contracts. Depending and dual-use components. Next, as the re- on the alliance that is formed, it might affect duction of any cost in an average satellite is commercial options with other competitive unlikely to completely offset the price advan- markets. tages of new rival low-cost countries, subsidi- sation methods similar to those of new rivals should be investigated and applied barring 4.5.4 Outsourcing / Offshoring Low-End Tech- potential conflict with WTO trade rules. nology to Low-Cost Countries 4.5.3 Alliance Building with New Rivals Benefits Burdens • Lower overall • European space industrial Benefits Burdens labour cost base may transition facili- • Lower overall • Unidirectional technol- • Many untapped ties to low cost countries labour cost ogy transfer (potential pools of low as part of continued ra- • More competitive erosion of European in- cost labour tionalisation of divisions. among emerging dustrial base) • Economies of • Risk of moving techno- countries • Benefits of low labour scale logical capabilities away • Less impeded by wages diminishing over • Avoidance of from Europe export restric- time additional ex- • Component reliability tions • Continued state subsi- port restrictions concerns (outsourced to • Outsourc- disation of state indus- • Low cost elec- manufacturers without a ing/offshoring po- try while adopting new tronics manu- track record) tential for non- technology (will need to facturing indus- • Additional concerns about critical technolo- subsidise European in- tries already Intellectual property and gies dustry to compete) established. technology integrity (cy- • Potential coercive ex- • More competi- ber security) traterritorial response tive among tra- • At risk of changes in the by U.S. ditional cus- political climate. tomers and • Continued dependence on Table 4.4 Trade-offs on Alliance Building with New Rivals. emerging coun- external suppliers as tries parts of supply chain The strategic benefit in allying with new rivals would remain outside mainly comes from the lower overall labour Europe cost, which could translate to greater econo- Table 4.5 Trade-offs on Outsourcing / Offshoring Low-End mies of scale and the reduced cost of satel- Technology to Low Cost Countries. lites. Lowering the price of a satellite will help European competitors to be more competitive among traditional rivals both in existing mar- Outsourcing and offshoring the development kets and when competing for customers in of subsystems, equipment, or components to developing and emerging countries. More- low cost countries is another option to cut the over, such an alliance could result in the re- cost of satellite development. Here, China placement of dual-use and strategic U.S. and India provide the greatest savings in satellite components, with components terms of labour costs, along with other loca- sourced from new rival competitors. And this tion-sensitive costs. However, as their labour activity provides an avenue for European cost benefit diminishes over time, nearby competitors to outsource non-essential tech- countries in South-East Asia are likely to pro- vide additional low cost labour alternatives. ESPI Report 58 76 May 2016 The Future of European Commercial Spacecraft Manufacturing Lowering the cost of production will enable Another opportunity comes from the un- greater economies of scale, while also reduc- tapped capability of CEE countries, which ing the impact of U.S. ITAR export restric- could also be useful for outsourc- tions. And as most electronics manufacturers ing/offshoring subsystems, equipment, or already outsource production to low cost component development. CEE countries pro- countries in Asia, an infrastructure already vide their own labour cost advantage com- exists to produce low cost components that pared to Western European wages, though European manufacturers could use to lower they are still higher than labour costs in the cost of their satellites in the near term. countries such as China and India. However, this approach facilitates economies of scale Yet, outsourcing or offshoring to low cost by becoming more competitive in the global countries comes with a number of disincen- market at the component/equipment level tives as well. It may affect Europe’s space while at the same time avoiding export re- industrial base by moving facilities to low cost strictions because the activity remains within countries as part of continued rationalisation the European region. The resulting lower cost of divisions, or it could result in the move- in production will enable European manufac- ment of technological capabilities away from turers to be more competitive among tradi- Europe. Moreover, the reliability of out- tional customers while also allowing them to sourced components is uncertain as they may better compete in emerging countries. be developed without a track record. There is also a risk that offshoring development of But outsourcing or offshoring the develop- components to low cost countries might re- ment of subsystems, equipment, or compo- sult in the adoption of that technology by nents to CEE countries brings its own con- domestic competitors. And slightly more con- cerns, as it is likely to affect the current cerning is the potential for outsourced com- European space industrial base by pulling in a ponents embedded with spyware, logic greater number facilities to cluster in CEE bombs, or other embedded malicious modifi- regions as part of the continued rationalisa- cations (however, this is also a concern that tion of divisions. Moreover, outsourcing or could extend to traditional suppliers in the offshoring any type of production to CEE U.S.). Lastly, as in the case of Russia, there countries is a long-term process, requiring is also a chance that the political climate ongoing financial commitment to see returns changes in the country where components on industrial space investment. are procured, which highlights the fact that Finally, it should be noted that outsourcing to European manufacturers would still be de- CEE countries that are members of ESA pendent on external suppliers as parts of the would allow some of the investment required supply chain would remain outside of Europe. to be covered by institutional funds as a re- sult of geographical return rules, since capac- 4.5.5 Outsourcing / Offshoring Low-End Tech- ity would tend to be shared between com- nology to CEE mercial spacecraft manufacturing and institu- tional spacecraft manufacturing. Benefits Burdens • Lower overall labour cost • Job losses in 4.5.6 Summary • Economies of scale existing In order to evaluate the various alliance op- • Preservation of technological manufactur- tions, they were matched according to incen- capabilities in Europe ing facilities tive criteria that could be used in selecting an • Avoidance of additional ex- • Requires port restrictions ongoing fi- alliance partner, as outlined in Chapter 3.4.1. The overall performance of each alliance op- • More competitive among nancial com- tion is presented in Table 4.7. A second as- traditional customers and mitment to emerging countries see returns sessment on the incentives for outsourcing or offshoring low-end technology was made to • Solves geographical return on industrial assess the trade-offs in outsourcing to CEE issue in ESA space in- vestment countries, or Asia, and is presented in Table 4.8. (timeline typically 10 years) Table 4.6 Trade-offs on Outsourcing / Offshoring Low-End Technology to CEE. ESPI Report 58 77 May 2016 Commercial Factors EU Rivals Traditional New Rivals Rivals Develop Economies of Scale 9 9 9 Reciprocal Technology Transfer 9 9 Lower Labour Costs 9 High Skilled Labour (Increased Productivity) 9 9 Access to New Markets 9 9 Fewer Export Restrictions 9 9 Increased Differentiated Technologies 9 9 Significantly Lower Cost Satellites 9 Complementarity between International Strategies 9 9 Enduring Benefit of Maintaining Alliance 9 9 Similar Organizational Styles 9 8 7 5 Table 4.7 Trade-off Assessment of Alliance Options Based on the number of criteria that are met collective bargaining power for international in Table 4.7, it appears that the development contracts. However, the other two alliance of an alliance among European rivals would options present key incentives that are not be the most feasible, which is not surprising present in the case of an alliance among as it essentially concentrates the already European competitors and are also relatively working formula, and could enhance their feasible. Outsourcing/Offshoring CEE Countries Asia Lower Cost Components 9 9 Component Reliability 9 Established Infrastructure 9 Lower Labour Costs 9 9 Fewer Export Restrictions 9 9 Intellectual Property Protection 9 Reinforce the Europe’s Industrial Base 9 Fewer Procurement and Geo-Return Requirements 9 Technology Integrity (Cyber Security) 9 Enhance Europe’s Non-Dependence Strategy 9 9 8 6 Table 4.8 Trade-off Assessment of Alternative Alliance Options In Table 4.8, CEE countries present the most ity and intellectual property issues might commercial and political incentives for out- offset that advantage to some extent. Alter- sourcing and offshoring production of low-end natively, outsourcing or offshoring production technology. Yet here too, there are key in- to CEE countries presents its own advan- centives for outsourcing to Asia that are not tages, as it could be a hybrid middle ground present in the CEE. Outsourcing or offshoring in the pursuit of technological leadership and to low cost countries in Asia would likely sub- low-cost labour. stantially reduce labour costs, though reliabil- ESPI Report 58 78 May 2016 The Future of European Commercial Spacecraft Manufacturing Bilateral Synergies Bilateral Synergies Multilateral Synergies Bilat- eral Syn- ergies Figure 4.4. Alliance Building Scenarios. where those prime contractors are able to Potential Scenarios achieve a proper return on their investment. The route to becoming more competitive can be envisioned in a number of scenarios (Fig- ure 4.4). Moreover, the choice of one route 4.6 Recommendations would not necessarily preclude a European competitor from forming relationships with Uncertainty is the hallmark of predicting the competitors in other spheres. A European future evolution of commercial spacecraft competitor could build an alliance with an- manufacturing, and in assessing how to re- other European competitor, while also form- main competitive in an increasingly globalised ing alliances with other traditional rivals or society. While the competitive environment new ones, in various tiers. For instance, one can be plotted from a historical context, and can visualize the benefit of an alliance with its current dynamics captured in the frame of China’s low cost industry to develop tech- Michael Porter’s Five Force model, the picture nologies that are ubiquitous enough to not is likely to change as time progresses. The create a dependency, and then use that risks and opportunities envisioned in this technology to develop a lower cost satellite report attempt to provide an initial sample of meant for the U.S. market through another the range of options that could be pursued by alliance with U.S. competitors. That ability to European prime contractors in response to be a bridge could enable European competi- changes in the competitive environment; tors to capitalise on an ability that is not however they are not exhaustive, are often available to U.S. rivals. Other configurations complementary, and do not give a definitive could allow European competitors to place a answer to what is in the best interest of greater focus on maintaining their own tech- Europe’s prime contractors, which also de- nological capability, by offshoring their pro- pends on the delicate compromise between duction only to traditional rivals, whilst intro- commercial and government actors. Answers ducing lower-technology satellites to go up for individual companies must necessarily be against new rivals in competing for business found with reference to the specifics of each in emerging countries. Moreover, these vari- company and as part of an overall commer- ous forms of alliances might enable a Euro- cial strategy. Answers must thus also con- pean competitor to negotiate lower prices sider the specific risk appetite and financial from current suppliers as a result of bulk. buffers of the company. So even if binary Likewise, an alliance with traditional rivals answers are not available, this report has could help to keep satellite prices at levels ESPI Report 58 79 May 2016 sought to be helpful by surveying the land- equipment and components) to low cost scape and describing many of the tools avail- Central and Eastern European (CEE) able for European satellite manufacturers. countries (which will help to maintain the Moreover, this report can hopefully be a use- European industrial base), or outsourc- ful tool for decision makers to help them be ing/offshoring those technologies to low better informed about the benefits and bur- cost non-European countries (which will dens before selecting the best strategies for provide more immediate factor cost ad- their companies. vantages). It should be noted, however, that both outsourcing and offshoring re- The analysis of this report leads to the identi- quire strong and engaged management fication of the following elements to be con- to be successful. sidered when formulating responses to the very substantial changes in the competitive • Outsourcing/offshoring production of environment of European satellite manufac- non-essential technologies will create turers: greater price bargaining power with lower-tiered suppliers, but it will not On Alliance Building eliminate Europe’s dependence on for- eign suppliers and locations, and this • European prime contractors should de- could be critical, unless multiple sourcing cide whether to form alliances with tradi- strategies are pursued. tional competitors and/or low-cost com- petitors to benefit from respective On the European Non-Dependence Strategy economies of scale, technology transfer, and Competition the spreading of risk among partners, and shaping the nature of competition in • To maintain European technological the industry. competitive advantage, and also reduce European prime contractors’ vulnerability • European prime contractors should also to U.S. ITAR restrictions, Europe’s space consider forming limited alliances with industry should continue to indigenously European competitors, which would pro- develop key Electrical, Electronic, and vide the added benefits of 1) collectively Electromechanical (EEE) components un- enhancing European bargaining power in der the European Components Initiative bidding for international contracts, 2) (ECI), along with technologies developed enabling specialization and standardized through ESA’s ARTES programme and manufacturing processes, and 3) reduc- the EU’s Horizon 2020 space research ing geo-return requirement interference and development programme. with competition, as participants would be able to gain access to a larger share • As the timeline between investment and of European institutional funding. return on investment typically extends over 10 years, investors should expect to • Throughout the life cycle of an alliance, sacrifice some short-term returns of to- prime contractors should monitor when day for larger payoffs in the future. the arrangement becomes competitively disadvantageous, i.e. when the costs in • To remain at the forefront of competi- terms of coordination, erosion of com- tiveness, European industry should seek petitive position, and creation of an ad- to acquire technology from other leading verse bargaining position disproportion- competitors, and hire highly skilled la- ately offset the benefits of the alliance. bour trained outside of Europe to develop new synergies. • Regardless of the type of alliance, to pre- empt the creation of an adverse bargain- • To stimulate the growth of the entire ing position, European prime contractors European space sector, more institutional should aim to maintain an entire vertical spending is needed to lower costs in the supply chain within Europe, to ensure long run through further economies of that external alliance investments can be scale, and bring Europe’s industry closer reversed. to being on an equal footing with U.S. and low-cost competitors. On Outsourcing/Offshoring Subsystems, Equip- • To remain competitive with low cost ment, and Components countries selling in-orbit delivery pack- • European competitors could seek to ages using export credit mechanisms, place focus on the more critical European Europe’s industry should seek to adopt a capabilities, by outsourcing/offshoring similar approach when marketing satel- non-essential technologies (e.g. low-end lites to emerging countries. ESPI Report 58 80 May 2016 The Future of European Commercial Spacecraft Manufacturing Annex In May 2012, Council Regulation (EC) No 428/2009 was amended by Council Regula- tion (EU) No 388/2012, which updated the EU A.1 COCOM, Wassenaar, and Dual-Use List of controlled items.313 Addition- European Export Control ally, Council Regulation 1231/2011 of De- cember 2011 amended Annex II of Council While the U.S. International Traffic in Arms Regulation (EC) No 428/2009, expanding the Regulations (ITAR) are the most notable uni- types of Community General Export Authori- lateral export restrictions, export control in sation (CGEA) licences that could be used to the EU is governed by international regimes export certain specified Dual-Use Items to 314 (e.g. the international Coordinating Commit- named non-EU destinations. tee on Multilateral Export Controls (COCOM), These legal acts provide for a common EU the Wassenaar Arrangement, etc.), EU law, export control regime, with a common EU and the national law of EU Member States. control list and harmonised policies for im- COCOM came into existence shortly after the plementation, to remove barriers to the free end of WWII (i.e. in 1949), and was one of movement of dual-use goods within the EU, the main multilateral arrangements govern- and improve international competitiveness in ing export controls of sensitive technology the global industry. While the export of dual- (including satellite technology) among West- use technologies under the EU control list still ern states. COCOM was succeeded by the 308 requires a licence from the state from where more liberal Wassenaar Arrangement es- it is being exported, its authorization is based tablished in 1996. on a set of guidelines with common criteria Unlike the time of COCOM, under the Was- for the authorising state to consider, and a senaar Arrangement European export control common list of destinations where simplified does not require coordination with the United formalities are applicable. Nevertheless, while States. In the mid-2000s, EU export control this approach provides greater flexibility in for dual-use items was governed by Regula- EU export policy through harmonisation, EU tion 1334/2000 of 22 June 2000309 which was Member States still reserve the right for based on Article 133 of the Treaty establish- themselves to make decisions on national ing the European Community (as amended by security at the national level. the Treaty of Amsterdam)310 relating to Title IX: Common Commercial Policy.311 In August 2009, Regulation 1334/2000 was reissued as Council Regulation (EC) No 428/2009, which sets out the scope, authorisations (including brokering), control measures, customs pro- cedures and other measures concerning the control of Dual-Use goods across the EU.312 lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2009:1 308 Wassenaar Arrangement on Export Controls for Con- 34:0001:0269:en:PDF>. ventional Arms and Dual-Use Goods and Technologies 313 Regulation (EU) No 388/2012 of the European Parlia- (the Wassenaar Arrangement) of 12 July 1996. ment and of the Council of 19 April 2012 on amending Wassenaar.org 12 Mar. 2015 Council Regulation (EC) No 428/2009 setting up a Com- ESPI Report 58 81 May 2016 List of Acronyms Acronym Explanation A ABS Asia Broadcast Satellite AECA Arms Export Control Act AIA Aerospace Industries Association Airbus D&S Airbus Defence and Space AIT Assembly, Integration and Testing ARTES Advanced Research in Telecommunications Systems ASNARO Advanced Satellite with New System Architecture for Observation B B64G Space-related Patents BIC Business Incubation Centres C CASC China Aerospace Science and Technology Corporation CASIC China Aerospace Science & Industry Corporation CAST China Academy of Space Technology CCL Commercial Control List CEE Central and Eastern European CEPA Japan-India Comprehensive Economic Partnership Agreement CGEA Community General Export Authorisation CGWIC China Great Wall Industry Corporation CHIRP Commercially Hosted Infrared Payload CNES Centre National d’Études Spatiales (French Space Agency) CNSA China National Space Administration COCOM Coordinating Committee on Multilateral Export Controls D DFH Dong Fang Hong DFH Satellite Co DongFangHong Satellite Company Ltd. DoD Department of Defense DOS Department of Space DTH Direct-to-Home ESPI Report 58 82 May 2016 The Future of European Commercial Spacecraft Manufacturing Acronym Explanation E EADS European Aeronautic Defence and Space Company NV EAR Export Administration Regulations ECI European Components Initiative EDA European Defence Agency EEE Electrical, Electronic, and Electromechanical EO Earth Observation EPO European Patent Office ESA European Space Agency ESOA European Satellite Operators’ Association EU European Union F FAA Federal Aviation Administration FAA Compendium The Annual Compendium of Commercial Space Transportation: 2016 FSS Fixed Satellite Services G GEO Geostationary Earth Orbit GEOCOM Geostationary Communications Satellites H HTS High Throughput Satellites I INSAT Indian National Satellite System IRS Indian Remote Sensing ISRO Indian Space Research Organisation ITAR International Traffic in Arms Regulations L LEO Low Earth Orbit LEOP Launch and Early Orbit Phase M Mbps Megabits per second MDA MacDonald, Dettwiler and Associates Ltd. MELCO Mitsubishi Electric Co. MEO Medium Earth Orbit ESPI Report 58 83 May 2016 Acronym Explanation MSS Mobile Satellite Service N NASA National Aeronautics and Space Administration NATO North Atlantic Treaty Organisation NDAA National Defense Authorization Act NEC Nippon Electric Company O OECD Organisation for Economic Co-operation and Development OHB Orbitale Hochtechnologie Bremen P PCT Patent Co-operation Treaty R R&D Research and Development RoW Rest of World RSC Roscosmos State Corporation S SGDC Geostationary Defence and Strategic Communications Satellite SIA Satellite Industry Association SpaceX Space Exploration Technologies SS/L Space Systems/Loral SSTL Surrey Satellite Technology Ltd. SWOT Surface Water and Ocean Topography SWOT analysis Strength, Weakness, Opportunity and Threat analysis T TAI Turkish Aerospace Industries TBD To be determined TFEU Treaty on the Functioning of the European Union TTIP EU-U.S. Transatlantic Trade and Investment Partnership U UAE United Arab Emirates UAV Unmanned Aerial Vehicles URSC United Rocket and Space Corporation ESPI Report 58 84 May 2016 The Future of European Commercial Spacecraft Manufacturing Acronym Explanation U.S. United States of America USML U.S. Munitions List USPTO United States Patent and Trademark Office W WTO World Trade Organisation WWII World War II ESPI Report 58 85 May 2016 Acknowledgements My sincerest appreciation goes to ESPI Direc- ing his time at ESPI, and to the ESPI Staff tor Peter Hulsroj for his enduring support, to whose input and comments helped to make Ewout Killemaes for the valuable inputs and the pages of this report come alive. background information he contributed dur- About the Author Cenan Al-Ekabi is a Resident Fellow at the versity in the Netherlands. He also holds a US European Space Policy Institute (ESPI) in JD with concentration in studies in interna- Vienna, Austria. He joined ESPI in 2011 after tional law from the Thomas M. Cooley law completing two advanced studies LL.M. de- school, and a bachelor’s degree in Political grees in Air & Space Law, and in European & Science from McMaster University in Canada. International Business Law from Leiden Uni- ESPI Report 58 86 May 2016 Mission Statement of ESPI The European Space Policy Institute (ESPI) provides decision-makers with an informed view on mid- to long-term issues relevant to Europe’s space activi- ties. In this context, ESPI acts as an independent platform for developing po- sitions and strategies. www.espi.or.at