The European space industry, an endangered species?

Christophe Venet April 2012

strong industrial base is the logical prerequisite for an ambitious and independent space policy. Established spacefaring nations (such as Russia, the US or Japan) all have an extensive space industrial base. China and India invested heavily to develop indigenous industrial capabilities and are now manufacturing their own satellites and

launch vehicles. Similarly, emerging spacefaring nations often seek to develop national industrial capabilities as their first priority in space (South Korea and Brazil being cases in point). Europe is no exception: the European Space Policy (ESP) would not have been possible without a constant development of the European industrial base in past decades. Most of Europe’s prominent successes in space were also industrial successes: the Ariane family, Spacelab, Columbus, Galileo, the ATV… As such, a space industrial base is not a goal in itself, but rather a strategic enabler that has a leveraging effect on entire space programmes. Industrial policy considerations are often at the heart of ESP debates. Recent examples include the discussions on the future of the launcher sector, the Galileo and Meteosat Third Generation (MTG) procurement processes or the debates over Public-Private Partnerships (PPPs) in the satcom sector

i. These examples show that industrial policy in the space sector is

both a central and a controversial topic. It is at the crossroads of the public sphere and commercial logics; it deals with dual-use synergies; it touches upon national strategic interests; and it is linked to the governance debate. As a matter of fact, these political implications might well outweigh the economic aspects of a European industrial policy for space. In the context of an enduring economic and financial crisis, of increasing international competition from both private and institutional actors and in the wake of a crucial year for Europe in space

ii, a strong political commitment for a sustainable European industrial base in

space is essential. This paper intends to shed light on the industrial aspects of the ESP, highlighting the specificities of the European space industrial base, the challenges it is facing, and sketching the contours of a coherent European industrial policy for space. The precise definition of the space economy is a challenging task

iii. However, a distinction is

usually made between the upstream sector (satellite and launcher manufacturers and launch providers) and the downstream sector, including satellite operators and providers of space-enabled products and services

iv. There are evident technological and commercial links

between the two sectorsv, but strictly considered, the space industry is limited to the upstream

sector. This paper will thus follow this narrow definition of the space industry.

To understand what is at stake in Europe, it is first necessary to focus on the specificities of the space economy (1). The paper will then analyse the strategic yet fragile nature of the European space industrial base (2), before sketching the objectives, elements and challenges of a common European industrial policy for space (3).

The European space

industry seems to be in a

paradoxical situation: its

strategic importance is

increasingly recognised,

but a European cons-

ensus on an integrated

industrial policy for

space is gaining ground

only slowly.

Christophe Venet is Research Associate to the Ifri Space Policy Program.

Ifri is a research center and a forum for debate on the major international political and economic issues. Headed by Thierry de Montbrial since its founding in 1979, Ifri is a non governmental and non profit organization. As an indepen-dent think tank, Ifri sets its own agenda, publishing its findings regularly for an international audience. Using an interdis-ciplinary approach, Ifri brings together political and economic decision-makers, researchers, and internationally renowned experts to animate its debate and research activities. With offices in Paris and Brussels, Ifri stands out as one of the rare French think tank to have positioned itself at the very heart of the European debate. The opinions and remaining errors are the responsibility of the authors alone. ISBN: 978-2-36567-006-7 © All rights reserved, Ifri, 2012

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The specificities of the space economy Due to their structural specificities, space activities are not comparable with other commercial activities. A first economic challenge relates to the high cost of access to space

vi. This is linked to the

characteristics of launch vehicles: they are expensive to develop, produced in small quantities and expendable

vii. Launch costs are unlikely to decrease drastically in the near future, as this

would require major technological breakthroughs. However, some recent trends could change the game in the long run. These are on the one hand the multiplication of low-cost launch options (such as SpaceX or the Chinese Long March vehicles) and on the other hand a renewed interest in reusable launch vehicles (RLV), driven by the high potential demand for suborbital space tourism

viii. This cost problem is acute in the launch sector, but it can be

generalised to the whole upstream segment, as the complexity of the technical issues at stake in any space-related project implies very high R&D costs

ix.

A second point is that the space sector is characterised by long development cycles. This increases the market risks, as market potential for new applications needs to be assessed long in advance, which can lead to spectacular failures. As a result, it is difficult for space entrepreneurs to attract investors. Moreover, the long operational life of space assets (10-15 years for a telecommunications satellite) makes the market very cyclical, and it is very difficult to quickly adjust supply to changing demand conditions

x.

A further issue is related to economies of scale. In the upstream sector, high fixed costs due to heavy R&D investments and long development times and the small size of the market prevent the creation of economies of scale. This encourages a tendency towards concentration in the launch business. On the other hand, large economies of scale are possible in the downstream sector, which make larger markets more viable economically

xi.

Finally, space technologies are dual-use by nature. On the positive side, the strategic value of space assets leads governments to invest in innovative systems, which in turn can have commercial and economic spin-offs. On the other hand, the high sensitivity of dual-use assets could bring governments to interfere with private activities

xii. Arms control regulations are

particularly representative of the latter aspect, the best example being the U.S. International Traffic in Arms Regulations (ITAR), which strongly reduces the possibility of exporting space components. The points mentioned above explain the most prominent feature of the space economy, namely the central role of governments. Most of the R&D activities are conducted (or funded) by public actors. In addition, space agencies represent the largest buyers of space goods and products. Finally, governments set up the framework conditions for commercial space activities through national legislation

xiii.

In addition to these general features, which are valid for all the spacefaring nations, the European space industry is characterised by a strong dependency on the commercial market. This has some positive effects, as it spurs competitiveness and it reduces costs for European institutional customers, but it is also an unstable situation, as the commercial space market is very cyclical. Europe must thus find the adequate balance between public support to the space industry and commercial logics. To do so, both intra-European factors (diverging national interests in the space industry, different national political philosophies regarding the public/private relationship) and external factors (international competition rules vs. subsidised competitors) should be taken into account. A strategic yet fragile asset for Europe In the course of its involvement in space, Europe acquired sophisticated and competitive industrial capabilities. However, specific aspects of the European space market as well as increasing external pressures raise questions as to the sustainability of Europe’s industrial base.

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A founding pillar of the ESP The development and strengthening of a competitive space industry was a major objective when ESA was founded in 1975

xiv. This was in line with the classical technology-push approach,

aiming at establishing the indispensable industrial and technological capabilities for a full-fledged space programme. The rise of the EU as the second major European actor in space added two dimensions to the space industry debate. First, the international competitiveness of the European space industry was to be strengthened

xv. In the evolving context of the 1990’s, the

major commercial competitor of Europe was the U.S. This led to the merger and consolidation wave of the 2000’s, with the emergence of two leading space primes in Europe, EADS Astrium and Thales Alenia Space (TAS). Second, the EU sought to better articulate the link between the space industry and broader socio-economic benefits to be provided by space

xvi. As such, it

fostered a shift towards a demand-pull approach, emphasising the role of space industry as a critical enabler for space services. As a result of these political efforts, the European Space Technological and Industrial Base (ESTIB) became a world-class instrument. This research intensive sector employs more than 30.000 highly skilled workers and generated almost €5,5 billion in 2009

xvii. European companies

capture a significant part of the satellite manufacturing market, and Arianespace is the leader in the field of commercial launch services. The strategic importance of the ESTIB is not so much linked to its direct economic impact (the space sector is a niche compared to other industrial segments such as the automotive sector for example). Rather, its significance lies in its leverage effect: a strong ESTIB is the necessary precondition for an ambitious ESP delivering tangible benefits to European citizens. As a matter of fact, the ESTIB is now directly contributing to the three priorities of the ESP (social, economic and strategic benefits through space)

xviii.

Is the ESTIB losing ground? Despite its current good health, the ESTIB faces a number of challenges that cast doubt on its future. This is first linked to the specificities of the European space market. The latter is characterised by a situation of structural overcapacity and by a growing tension between two conflicting trends. On the one hand, institutional actors are encouraging dual sourcing to stimulate competition. On the other hand, the European space industry tends to concentrate to reach a critical mass

xix. A further constraint is the increasing dependency of the ESTIB on

foreign technology (mostly from the US). This is particularly the case in the field of microelectronics and radiation-shielded components

xx. Finally, the institutional demand for

space products is lower in Europe than in other spacefaring nations, such as the US or China. This is linked to the small size of the European institutional space market (only a few spacecraft are ordered and launched by institutional actors every year), but also in recurring political difficulties to structure the European institutional demand. The most emblematic example for this is the lack of an institutionalised preference policy to launch European institutional payloads aboard European launch vehicles. Consequently, European industrial actors seek commercial prospects on international markets. This has long been the trademark of the successful “European model”. Recent trends however, could compromise Europe’s strong positions on the global markets. National actors which were largely absent from commercial markets in the past, such as China, India, but also Russia or Japan, are now showing increasing commercial ambitions. Similarly, U.S. satellite manufacturers, driven by increasing uncertainties over the US domestic market, are striking back on the open international market. Finally, low-cost options, such as SpaceX, are looming in the launch market

xxi.

In addition to these structural factors, the crisis worsened the situation. While the crisis had a limited impact on the European space sector until now, stagnating institutional budgets, very unfavorable euro/dollar exchange rates and the increasing cost-sensitivity of governments could adversely impact the ESTIB in the near future. Towards a European industrial policy for space Driven partly by the above-mentioned trends, European decision-makers recently put the development of an integrated European industrial policy for space on the policy agenda. Until now however, few tangible results have emerged from this process and it seems useful to recall

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what the major objectives and elements of a European industrial policy for space could be. Space industry in the spotlight

Recent EU documents called for the setting-up of a proper European industrial policy for space. The Lisbon Treaty set the broad political objectives, with Article 189 stating that the ESP should promote industrial competitiveness and support research and technological development

xxii.

Subsequent official documents tried to specify these objectives by taking a holistic approach, viewing the space sector as a contributor to the broader Europe 2020 Strategy

xxiii. This

illustrates the emphasis put by the EU on space services bringing tangible benefits to the citizens, and thus strengthens the nature of space industry as a strategic enabler. The crisis even reinforced the interest of European policy-makers for investing in the space sector. In the short-term, space was seen as a potential contributor to fight the crisis. In the long term, the crisis was seen as an opportunity to truly implement the paradigm shift towards a demand-pull approach

xxiv. This was to have concrete consequences for the space industry, as

space was to be included in the European Economic Recovery Plan (EERP), in the European Plan for Innovation and in the Lead Market Initiative (LMI) according to several EU decisions in 2008 and 2009

xxv. These initiatives were conceived to boost investment in innovative and R&D

intensive sectors, and space was presented as a perfect candidate. All in all, these decisions took a clear political stance by articulating the idea that space can generate economic and social benefits at the same time. Despite these encouraging signs however, space was not included in any of these initiatives in the end. In addition, recent documents evoking a European industrial policy for space are only laying down very general principles and objectives

xxvi. However, the consultation process

between the European Commission and industrial stakeholders aiming at defining the scope of such an industrial policy for space is ongoing. In this context, it might be important to briefly sketch the possible objectives and content of a future European industrial policy for the space sector. Building blocks for a European industrial policy for space By definition, the central principle of an industrial policy for the European space sector should be a strong and sustainable support by institutional actors. This necessity derives directly from the specificities of the space economy. What is important are not so much the modalities of the involvement (public investments in R&D, direct subsidies to the launch sector, adapting the regulatory framework…), but rather the common political will at European level to support a strong ESTIB. Given the specificities of the European model in space, the two pillars of an industrial policy for space should be the quest for cost-efficiency on the European institutional market and a high competitiveness on commercial ones. In addition to these framework conditions, four specific objectives could be highlighted. The first objective would be to continue building up a broad industrial base on three different levels. In terms of know-how, Europe is already a recognised industrial actor in most areas: Earth observation (EO), navigation and telecommunication satellites, launch vehicles, robotic probes, unmanned cargo supply to the ISS. While it is important to retain these strong positions, the ESTIB should also be given the capabilities to broaden is portfolio to future potential industrial markets (such as SSA, in-orbit servicing or data relay for example). The ESTIB should also expand its geographical scope, to reach a more balanced industrial picture and to increase the political support for a common European industrial policy for space, especially in central and Eastern European countries. The last element is the necessity to have a multilayered value chain, bringing together large system integrators and small innovative SMEs. This could both foster competition along the value-chain to reduce costs, and spread the social and economic benefits of space industry to a broader number of citizens. Second, the ESTIB should be a tool to guarantee Europe’s strategic autonomy. This is driven by political considerations – Europe needs autonomous access to space and get autonomous access to space-derived data and information in order to make autonomous policy choices – but also by economic rationality. For certain space components indeed, Europe is dependent on one monopolistic external supplier, which is decreasing its competitiveness

xxvii. Strategic

autonomy is a priority mainly in two areas: access to space – a politically sensitive issue with no real European consensus emerging yet – and critical technologies. As for the former, five key

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factors seem to be indispensable to maintain a guaranteed access to space for Europe in the future: strong support by institutional actors, a reorganisation of the launch sector, a sustainable commercial strategy, a complete launcher family and a Next Generation Launcher (NGL). As for the latter, the EC/ESA/EDA (European Defence Agency) task force set up in 2008 is a first step in the right direction. Third, there is a need to reinforce the attractiveness of the ESTIB both domestically (reducing costs) and externally (increasing competitiveness). An important tool for this is the harmonisation of equipments and components at European level

xxviii. In this perspective, the

European Space Technology Master Plan (ESTMP) plays an important concertation, coordination and harmonisation role between ESA, the European Commission (EC), Member States and the industry. A further need is steady public investment in space R&D, which has been decreasing in past years. The EU’s Framework Programmes (FPs) channel funds to the space sector, but they focus mostly on technology development, while it is important to concentrate on the transition between the technological maturation and commercialisation phases. Finally, the EU should seek to establish a level-playing field on the global space market (focusing among other on reciprocity in access to public markets. A last issue to be included in a European industrial policy for space is a harmonised procurement policy. ESA’s georeturn principle has been very efficient to implement scientific and technological programmes, and is also a strong incentive for smaller countries to join the European space effort. On the one hand, it proved to be a complicated tool to deal with more operational projects, such as GMES, given the commercial, political and industrial stakes

xxix. On

the other hand, the EU’s procurement rules, based on competition, may be ill-adapted to the specificities of the space economy. As a result, pragmatic approaches based on versatile and adaptable procurement tools that were suggested

xxx might constitute a suitable solution.

Conclusion The European space industry seems to be in a paradoxical situation: its strategic importance is increasingly recognised, but a European consensus on an integrated industrial policy for space is gaining ground only slowly. The European Space Technological and Industrial Base (ESTIB) has been the central enabler of Europe’s past successes in space. A strong political support is now needed to capitalise on these successes. What is at stake is not only Europe’s economic performances in the space (niche) market, but the continent’s future strategic autonomy and global leadership in space. i On recent developments, see for example: de Selding, Peter. « France Dumps Plan to Privatize Its Military Telecom Satellites. » Space News, 12 March 2012. For a broader overview, see: Nardon, Laurence and Christophe Venet. « The development of Public-Private Partnerships in the European satcom sector. » The Europe & Space Series #4, Ifri, May 2011. ii See Venet, Christophe. « 2012, a turning point for Europe in space. » The Europe & Space Series #9, Ifri,

February 2012. iii Venet, Christophe. « The economic dimension of space. », in: Brünner, Christian and Alexander Soucek

(eds.), Outer Space in Society, Politics and Law. Vienna: Springer, 2011, p. 58-60. iv OECD. The Space Economy at a Glance 2007. Paris: OECD, 2007, p. 17.

v Hayward, Keith. « The Structure and Dynamics of the European Space Industry Base. » ESPI

perspectives 55, December 2011. vi Typically, placing 1kg in Low Earth Orbit (LEO) costs around 10.000 U.S. dollars. This figure remained

more or less stable since the beginning of the space age. vii

OECD, 2004 op. cit., p. 107. viii

Spacetravel.com « The Age of Reusable Launch Vehicles is Coming, Again! », 3 June 2010 http://www.space-travel.com/reports/The_Age_Of_Reusable_Launch_Vehicles_Is_Coming_Again_999.html. ix OECD, 2004 op. cit., p. 29.

x Ibid. 111.

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xi OECD. Space 2030 Tackling Society’s Challenges. Paris: OECD, 2005, p. 112.

xii Ibid. 112.

xiii OECD. Space 2030 Exploring the Future of Space Applications. Paris: OECD, 2004, p. 11.

xiv See in particular Articles II and VII of the ESA Convention. ESA. Convention of the European Space

Agency, Doc. SP-1300, 1975. xv

This aspect is central to the European Commission’s first three communications on space, in 1988, 1992 and 1996. More specifically, see also: European Commission. « Communication. The European Aerospace Industry Meeting the Global Challenge. » COM(97)466 final, 24 September 1997. xvi

See: European Commission. « Communication. The European Community and Space: Challenges, Opportunities and New Challenges. » COM(92)360 final, 23 September 1992. xvii

ASD Eurospace. Space Industry Facts and Figures 2009. Quoted in: Hayward, Keith., op. cit. xviii

European Commission. « Communication. Towards a Space Strategy for the European Union that Benefits its Citizens. » COM(2011)152, 4 April 2011. xix

ASD Eurospace. « Toward a European Space-specific Industrial Policy. Food for thought paper from the European space industry. », 2011. xx

Centre d’analyse stratégique. Une ambition spatiale pour l’Europe. Paris: la documentation française, 2011, p. 76-77. xxi

Ibid. xxii

« Consolidated Version of the Treaty on the Functioning of the European Union. » Official Journal of the European Union, Doc. C 83/47, 30 March 2010. xxiii

European Commission. « Communication. Towards a Space Strategy for the European Union that Benefits its Citizens. » COM(2011)152, 4 April 2011. xxiv

Venet, Christophe. « The Economic Potential of Space – Towards a Long-Term Perspective » ESPI perspectives 30, February 2010. xxv

Ibid. xxvi

See for example : European Commission. « Communication. An Integrated Industrial Policy for the Globalisation Era Putting Competitiveness and Sustainability at Centre Stage. » COM(2010)614 final, 28 October 2010; European Commission. « Communication. Towards a Space Strategy for the European Union that Benefits its Citizens. » COM(2011)152, 4 April 2011. xxvii

Centre d’analyse stratégique. op. cit., p. 76. xxviii

Ibid., p. 80. xxix

ASD Eurospace. op. cit. xxx

See: Hobe, Stefan et. al. (eds.) A Coherent European Procurement Law and Policy for the Space Sector. Towards a Third Way. Berlin: LIT, 2011.