The Structure and Dynamics of the European Space Industry Base

E S P I 55 PERSPECTIVES

The Structure and Dynamics of the European Space Industry Base

Keith HAY WARD , Head of Research, Royal Aeronautical Society, United Kingdom

The European space industry is a niche sector in the total European aerospace field, but it is a qualitatively important contributor to the European economy. Space is generally heavily dependent on public funding, but European companies have achieved an impressive share of accessible world markets for satellites and launcher services. Future competitiveness will depend on continuing support from national governments and European institutions. In this respect, it will be vital for the EU to formulate effective space industrial and technological policies that reflect the special characteristics of the space business and its market.

1. Introduction represented 90% of the total. The workforce is highly skilled with a higher than average level of The space industry comprises the “upstream” graduates (53%) and with 77% of space industry development and manufacturing sector and employees possessing technical qualifications. space operations, and the “downstream” element - a much wider and diffuse set of The space sector is research intensive. In the business activities. 1 While the value of the case of satellites and ground systems, the downstream segment considerably outweighs proportion of industry R&D funding is between that of the manufacturing element, there are 40% and 50%. Around 10% of industry revenue important technological and commercial links is R&D, including some 3.5% of self-funded between the two. Space equipment development R&D. This compares with 5% and 2.6% for the and manufacturing helps to diffuse awareness of US.3 opportunities and to stimulate novel applications; and market sensitivity helps to guide investment An Industry Defined by Its Market choices on the part of upstream actors. The evolution of the European Space 2. The European Space Industry Technological and Industrial Base (ESTIB) reflects wider structural trends in European The European space industry contributes about aerospace, characterised by several large ten percent of the European aerospace effort. In transnational companies. It is a dual technology 2009 the European space manufacturing sector sector, with strong links between military and earned € 5.47 billion and employed 32,851 civil activity. people. 2 The six largest ESA members,

(13,017), Germany (5,065), (5,100), UK The Role of Government and Public (3,186), Spain (1,971) and Belgium (1,123), Institutions The space business is deeply influenced by 1 “Downstream” space services include for example satellite governments and other political actors. While positioning and navigation and satellite delivered television. commercial space has grown rapidly over the 2 “Space Industry Facts and Figures 2009”. ASD-Eurospace last decade, over 80% of world space activity Aug. 2010. These figures may understate the actual size of the European space industry by a factor of two to three. For involves public institutions as investors, and example, a UK government-sponsored report at gives 2009 operators. Market access and space technology UK employment in space manufacturing as 7,301 compared to the ASD figure of 3,186. 3 http://www.bis.gov.uk/assets/bispartners/ukspaceagency/do (ESA). European Space Industry cs/10-1195-size-and-health-uk-space-industry-2010 Survey 2003-7. Doc. 21070/07/NL/HE July 2009.

ESPI Perspectives No. 55 December 2011 1 The Structure and Dynamics of the European Space Industry Base transfers are also directly affected by expensive and subject to risk of total failure. government controls. Margins for error are tiny. Consequently, space companies have high fixed costs, including The space business is deeply influenced investment in specialised test and fabrication by governments and other political actors. facilities. Reliability and reputation is a dominant consideration in the selection of suppliers, which is often best guaranteed by direct control. The sheer size of US government investment, as well as the growing power of other national Companies also have to cope with spasmodic investments in space, is a key element in orders and low volume production. In general, determining the long-term effectiveness of the these fundamental characteristics create high ESTIB. The US space budget is nearly 10 times 4 barriers to entry, reinforcing a natural tendency the size of European institutional spending. The towards vertically integrated space enterprises. size of the American market, largely closed to non-US suppliers, gives the US space industry a There are some important efficiency advantages massive advantage. Technology developed for generated by batch production of launchers and military programmes has often formed the basis satellites. Commercial satellite production, of US commercial space applications while the based on a basic “bus” also enables some reverse tends to apply in Europe. economies of scale. Similarly, standardisation of components helps to reduce costs. European National Interests and National Preferences The fundamental characteristics of the The European institutional context is space business create high barriers to complicated by the relationship between national entry, reinforcing a natural tendency and international institutions shaping space towards vertically integrated space policy and funding space programmes. National enterprises. funding accounts for over 40% of the European total institutional spending on space. Most of the Moving up the value chain to exploit an after rest is channelled through ESA. market is largely denied to space prime

contractors. Similarly, they are reluctant to Most of Europe’s security-related satellite compete directly with primary customers by programmes have been based either on national moving into commercial space operations. Still, or government-to-government collaboration. space manufacturers have begun to develop This has led to duplication and fragmentation. specialised space services. There is also more Similarly, European national preferences can scope for space manufacturers to launch Earth influence contract selection and continue directly Observation (EO) services’ operations where or indirectly to help define European space there is less established commercial activity. technology priorities. A stronger, more integrated

European-wide consensus or vision about the Limited Globalisation direction of future space investments would be an important step forward in maintaining the The globalisation of supply chains and competitiveness of the ESTIB. ownership that is increasingly characteristic of the aerospace sector is generally less evident in The Space Environment as a Determinant of the space sector. Even in Europe, where the Industrial Activity major European firms are multinational in operation, there are varying degrees of intra-firm The unique characteristics of space operations rationalisation. also shape the structure and performance of the

ESTIB. In particular, they help to create the The international trade in space products is “critical mass” requirement of space prime constrained by political issues, notably by the contractors and major suppliers, as well as US International Trade in Armaments Regulation creating barriers to entry that encourage vertical (ITAR). This has led Europe to reduce integrated industrial enterprises. dependence on US sourced components, which

has increased costs. On the other hand, it has Space represents a challenging environment, enabled European companies to offer ITAR free characterised by extremes of temperature, satellites to a number of customers. radiation and isolation. Getting there is

4 3. ESTIB Structure Follows Context Organisation for Economic Co-operation and Development. The Space Economy at a Glance 2011. Paris: OECD The European space industry is necessarily Publishing 2011: 50.

ESPI Perspectives No. 55 December 2011 2 The Structure and Dynamics of the European Space Industry Base highly concentrated, with a high degree of increase their share of European institutional vertical integration. Four multinational funding. companies (EADS Astrium, ThalesAleniaSpace, Finmeccanica and Safran) are responsible for Policies designed to encourage SME more than 70% of the total European space participation in the space sector, while perhaps employment. As a result, four European desirable for wider socio-political reasons, may companies are in the world space industry top have limited value in improving the ten and 14 in the top fifty. competitiveness of the European space industry. Increasing significantly the volume of European Concentration is particularly evident in the space production could support a larger number launcher sector: EADS Astrium Space of space suppliers by improving the business Transportation is the prime contractor for Ariane, case for investment in the space sector. with Safran leading development of the propulsion system. There are some 40 other Policies designed to encourage SME European suppliers involved, with a number (25) participation in the space sector may have highly dependent on Ariane business. The Italian a limited impact on improving European company Avio is prime contractor for the smaller space industry’s competitiveness. launcher. The Ariane competes in a global market, where non-market factors have a big impact on price and entry. Generally, the European Commission should be concerned to prevent the abuse of market Ariane suppliers were selected under the ESA position by dominant primes and systems’ geo-return policy, reflecting national participation integrators. However, the simple fact of vertical in development. New entrants generally have to integration is not in itself evidence of such wait for opportunities afforded by (infrequent) abuse. The overriding concern for public new programmes. Further opportunities for agencies should be to ensure that the ESTIB is European companies may arise, as Europe not handicapped in the face of external moves forward to the next generation of competition by an over-rigorous application of launchers. The fixed nature of the Ariane supply competition rules. chain has increased costs. 5 Launch Services Astrium, ThalesAleniaSpace and OHB dominate The European space services sector has European satellite systems integration. There achieved a commendable position in the global are similar international and structural pressures space economy. European launch services are towards vertical integration, but the development primarily marketed and operated by of “small” satellites has encouraged new , centring on the Ariane family of entrants. However, in some cases such as launchers. Arianespace will also soon begin Surrey Satellites (bought by Astrium) they have operating the Russian-built Soyuz rocket from been acquired by larger entities. Europe’s spaceport in , as well as the Vega. Arianespace has captured more than SMEs in the Space Supply Chain 50% of the world’s commercial launches and is SMEs represent less than 5% of European now the market leader, able to claim a price space manufacturing employment, but they can premium for reliability and flexibility. be qualitatively important, as they are part of a complex knowledge transfer chain and However, launch-pricing is determined by non- innovation network. market factors. In the future, the challenge from a new generation of US commercially developed New entrants in the space sector have been rockets, as well as the continuing pressure from aided by the application of ESA geo-return Chinese and Indian launchers benefiting from policies and by political support for “national low labour wages and subsidised by their champions”. This has contributed to the respective governments, will increase widening of the ESTIB, with commensurate competition and affect market share. More positive effects on the European political immediately, Europe faces some hard and constituency for space. Paradoxically, ESA geo- potentially expensive choices over upgrading return has encouraged a number of mergers and and/or developing a new vehicle. acquisitions, with larger companies seeking to Satellite Operations The European satellite-operating sector is 5 De Selding, Peter B. “ESA Industrial Policy Limits Ariane 5 relatively more diverse and it includes over 11 Cost-savings Potential”. Space News 27 June 2011: 6.

ESPI Perspectives No. 55 December 2011 3 The Structure and Dynamics of the European Space Industry Base companies. Several of them are major world profitable: over the last decade, only 23% of players, such as Inmarsat, Eutelsat and SES. European space activity led to a profit of more The vast bulk of space-based services are in than 3%. 19 space companies declared zero telecommunications. Profitability is relatively profits or made losses. Sub systems’ suppliers high, partly due to the limited nature of tend to be more profitable, typically in the 5-6% competition in a number of the space-based region. telecommunications markets. However, there is often direct competition from terrestrial service However, this is not atypical of the industry providers. globally, including the US. Together with the special market characteristics of space, low The overriding concern for public returns, combined with long-term risks, will agencies should be to ensure that the continue to deter private investment in the ESTIB is not handicapped in the face of majority of space activities. There are some external competition by an over-rigorous exceptions, such as OHB and RUAG, where application of competition rules. private investment has played a key role in developing capabilities. But in general, the future financial health of European space companies With the exception of the metrological services remains problematic and institutional funding will market, the European Earth Observation (EO) remain vital for the long term health of the services sector is still relatively underdeveloped, ESTIB. compared to the US. Fragmentation has hampered competitiveness in higher value EO On the other hand, satellite operation is more markets, but some rationalisation has occurred profitable. Overall, the European satellite as upstream companies acquire an interest in operator sector employs over 4,000 people EO, thanks to increased opportunities to deliver directly, with a turnover exceeding € 3 billion, integrated services with better economies of with some €1.5 billion traded outside of the EU. scale. Value added activity in this sector is over twice that of manufacturing. Eutelsat for example had Developments in EO and the space-based sales of €1.8 billion in 2009, up by 11% on the services business are highly sensitive to the previous year, with an average growth of 5%. affects of public policy on data dissemination and the perceived value of space-based The barriers to entry are less important than in platforms. EU policy choices in this area will space manufacturing, a fact illustrated by the have a major impact on the emerging EO UK’s Avanti start-up, which raised more than business. 70% of its finance in the City to top up a small

6 public sector R&D investment. ESTIB performance Over the last ten years, European 4. Public Policy Issues for the European manufacturers captured 28% of the accessible Space market for satellites, rising to 50% in 2009. The European space industry is still heavily Similarly, European share of launch services influenced by the actions of national was 41%, rising to 45% by value. Two thirds of governments. Nevertheless, European level all satellite sales were for telecommunications’ public policy is playing an increasingly important applications. The commercial satellite market role in shaping the industry. reflects the cyclical nature of demand for telecommunications. With a higher dependence on export sales, the ESTIB is more exposed to Despite the presence of heavy national these pressures than its major competitors. Over government influence, public policies on half (59%) of total sales were to institutional a European level play an increasingly important role in shaping the industry. customers, with ESA responsible for 66% of this revenue. Satellite applications revenue grew steadily over the last decade, compared to other The new relationship between the EU and ESA market segments. as the “executive” arm of European space policy has created a new dynamic. While increasing European space manufacturing is not especially the sector’s political salience, the transition to the new regime has nevertheless left some unresolved issues between ESA/EU practices. 6 For a detailed analysis of the European space industrial performance: European Space Agency (ESA). European Space Industry Survey 2003-7. Doc. 21070/07/NL/HE July 2009.

ESPI Perspectives No. 55 December 2011 4 The Structure and Dynamics of the European Space Industry Base

EU Performance as a Space Customer and characteristics that distinguish it from other Programme Manager sectors where open markets are generally beneficial. Policy should reflect the realities of With the EU ostensibly responsible for the the space economy, where international overall direction of European space policy, as competition is largely determined by non- well as the two major space infrastructure commercial factors. programmes of Galileo and GMES, its performance as a customer has a direct impact Regulatory Issues on ESTIB. The EU is responsible for the regulation of To date, the EU record as an active player in the telecommunications, which has a direct impact space market has been mixed. Although the on European satellite operations. There is an European Commission is confident that it will increasing concern that future legislation relating steadily acquire the necessary competences to to radio frequency licensing will undermine manage complex, long term space programmes, European competitiveness. the space sector is concerned at the absence of a coherent “vision” for space and a wider The EU position is one of technological understanding of the commercial needs of neutrality, expressing no preference to any given emerging markets, especially in EO. 7 platform. The industry position is that the investment cycles in the space sector require The continuing difficulty of reconciling the needs long term planning and recognition of specific of a complex, long term programme on the one technological limitations inherent in space hand and EU funding procedures on the other is platforms. Recent movements by the European perhaps the most worrying short term issue. Commission to recognise the value of space- There is a gap between long term space based broadband delivery are welcome, but in programmes’ needs and the EU budget cycle, general the ESTIB would benefit from a better which is complicated by varying levels of political awareness of space and an equal treatment of commitment and pressures from other sectors, space-based and terrestrial systems. exacerbated by the general parlous state of public finances throughout the EU. This has, for Future European Launcher Policy example already had an impact on the budget Rising costs of launching European satellites is allocated to the space component of the GMES potentially a politically divisive issue. Although programme. there are some competitive pressures, non-

market factors pervade the launch services’ Competition Policy sector. To some extent, historically Arianespace The application of EU competition policy to the revenues have been underpinned by the space sector has created some uncertainty in European Guaranteed Access to Space (EGAS) the European space market. This may be a agreement that identified Ariane as the launcher transitory issue, but it may hint of deeper of choice for European institutional programmes. problems. The Lisbon Treaty has been argued to imply that space must be consistent with general There are increasing calls to open up the market EU competition rules. An over-enthusiastic for EU institutional launchers to international application could undermine the competitiveness competition, which would be consistent with EU of European space by endangering critical competition law. But pressure to exempt the industrial mass and economies of scale. space market until there is “reciprocity” in the launch business remains a strong force in EU 8 ESTIB p olic ies should reflect the realities space policy. An extension of European of the space economy, where international preference is likely to meet resistance from competition is largely determined by non- some governments and European operators. commercial factors. While maintaining European access to space remains a key strategic interest, decisions about future launcher options must also take note of The Commission should be encouraged to the wider commercial interests of European accept that space is a special case, with space companies, especially of operators and other downstream players. 7 Despite a very difficult gestation, the cost of developing and 8 deploying Galileo is less than 10% of that of the roughly See for example: Bigot, Bernard, Collet-Billon, Laurent and equivalent US GPS system; and the latest (operational) D’Escatha, Yannick. “L’Enjeu d’une Politique Européenne phase of Galileo is proving much more efficient than the de Lanceurs: Assurer Durablement à l’Europe un accès development phase. Autonome à l’Espace”. Report to French PM François Fillon 18 May 2009.

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Technological Competitiveness and demonstration. A balance must be struck Technology Policy between support for generic development in technology and specific space applications Technological competence remains a programmes. fundamental factor in determining the competitiveness and effectiveness of European European space competitiveness requires a space. Without a world-class, cutting edge strong collective approach to R&D planning and capability in the core technologies needed to investment. Enhancing European space access and to operate in the demanding competence would not only increase the environment of space, the European space attractiveness of European space goods and industry will be unable to meet the challenge services, but it will also increase the wider socio- posed by other space-faring countries, or economic return from space technologies. maximise the wider socio-economic returns from public and private investment in the sector. Technological Autonomy

Europe has limitations in a number of key areas The lack of some capabilities in Europe poses a of space qualified components and materials. 9 problem of dependence on single sources for There is therefore a technology-led argument for strategic procurements. Furthermore, access to maintaining European competitiveness that these sources may be jeopardised by export would also underpin wider European economic regulations, especially by the US ITAR regime. and strategic capabilities. 10 However, driving By encouraging Europe to develop technology down costs should also be a key objective in the and equipment to circumvent US controls, deployment of technology. This includes European manufacturers may have incurred promotion of standardisation, adoption of open additional short-term costs, but in the longer systems and process improvement to encourage term they have acquired access to more innovation throughout the supply chain. Finally, dependable sources of supply. this implies paying close attention to market demands and anticipating commercial Despite the additional costs, there have been requirements, as much as promoting technology commercial advantages accruing to ITAR free for its own sake. space systems. According to US reports, ITAR restrictions have had the perverse effect of reducing US communications’ satellites market The Commission should recognise the 11 special characteristics of the space share, to the benefit of European industries. business and the space market. However, European policies in this field must be closely monitored, in order to ensure that the benefits of autonomy are not outweighed by the Maintaining technological capability is a long- increased ITAR free technologies’ development term issue, requiring investments with little costs. prospect of an early return. It is often best directed at generic concepts, which should be 5. Conclusion: Towards a European Space available for a wide range of applications. These Industrial Base Policy factors, combined with the very high cost of bringing novel application to the market, deter The overarching problem facing Europe is that private investment. Hence the continued the ESTIB is in transition from a predominantly importance of institutional funding. The national segmentation to a more integrated European Commission has recognised this by European context. 12 Notwithstanding the fact of committing to support generic technologies such transnational ownership of much of the ESTIB, as advanced materials and nanotechnology and national perspectives still affect policy-making recognising the scientific research’s potential to and industrial strategy to a considerable degree. anticipate “breakthrough” technologies. The role of European Institutions as the There is also a need for technology risk mitigation in advance of major projects. This 11 US Department of Defence. US Space Industry. Dayton 31 requires earlier and increased investment in Aug. 2007. technology acquisition, supported by technology Young, Tom, Ballhaus, William, Chao Pierre et al. “Briefing of the Working Group on the Health of the US Space Industrial Base and the Impact of Export Controls”. Presentation. Centre for Strategic and International Studies 9 European Space Agency (ESA). European Space Industry (CSIS), Washington. 19 Feb. 2008. 12 Survey 2003-7. Doc. 21070/07/NL/HE July 2009. For some tentative thoughts on the subject from an 10 European Commission. Towards a Space Strategy for the “unofficial” official perspective: European Commission, European Union that Benefits its Citizens. COM (2011) 152 Enterprise and Industry DG. Elements for an EU Space Final of 4 Apr. 2011. Brussels: European Union: 8-9. Industrial Policy, Food for Thought Paper: p.6.

ESPI Perspectives No. 55 December 2011 6 The Structure and Dynamics of the European Space Industry Base promoters of core space technology and the position on the other. In a European context, it is customers for space-based services should be also essential to position European industry well strengthened. European procurement law with a within a global, highly politicised environment. qualified approach to competition should be Finally, the existence of an indisputable “Space applied to the space sector; but ideally, this Champion” in the European Commission could should be balanced by negotiating comparable potentially prove beneficial for ESTIB. Such an “access rights” to other national markets and authority would develop and oversee ESTIB, by moderated by the recognition of the natural reflecting commercial requirements and creating tendency towards vertical integration in the an integrated space technology demonstration space sector. programme in close coordination with ESA. Such a programme should fill in the gaps in There is need of a “Sp ace Champion” in generic technologies and programmes that are the European Commission to develop and usually covered in the US by military space oversee European space industry policy. acquisition programmes.

This issue of the ESPI Perspectives’ series is The Commission should recognise the special derived from the final report of “ Conditions for characteristics of the space business and the Space Policy and Related Action Plan space market, as well as the fact that European Consolidation in Europe – C-SPACE” , a space is facing intensified competition from both research receiving funding from the European the US and emerging actors. Public policy must Union 7 th Framework Programme and coordinated note the difference between natural monopolies by the Foundation for Strategic Research based in and oligopolies on one hand and the abuse of Paris under grant agreement n°242507.

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