While the bleak economic outlook spells trouble for early-stage space companies in 2023, analysts say the industry as a whole must largely prove resilient to any downturn.
Space companies are more flexible than ever in responding to changing market conditions, and governments around the world are expected to continue to subsidize growth for many of them, even as private funding sources dry up.
However, even those that can withstand tough financial climates will face operational challenges and weak growth prospects this year.
The year 2022 was marred by economic uncertainty. Spiraling inflation, supply chain disruptions, rising energy prices, and other headwinds have contributed to an unsteady and erratic recovery for markets still grappling with the lingering effects of COVID-19.
Forecasters are charting another year of uncertainty in 2023 as the pandemic and the ongoing war in Ukraine loom over the outlook.
In the United States, which is easily the largest player in the space economy, indicators of economic growth are complicated by high rates of inflation and very low consumer confidence.
After a series of rate hikes by the US Federal Reserve to slow the country’s runaway economy and keep commodity prices in check, inflation has fallen from a 40-year high of 9% in June to around 7% in November – still well below the Fed’s target. adult 2%.
Lower inflation would be good news for consumers; However, successive interest rate increases in the United States and elsewhere could push the overall economy closer to a global recession.
Even if the US can survive a recession without entering a recession – technically two consecutive periods of negative GDP (for two consecutive periods) – businesses will have to grapple with a restrictive and challenging economic environment.
During economic crises, or when interest rates rise, investors tend to pull out of risky projects and focus on profitable or cash-generating businesses — which “is not true of a number of companies in the space industry today,” notes Miguel Ouellette, principal advisor at Euroconsult. .
As in other industries, small, young companies in the space sector are more vulnerable to macroeconomic downturns than more established companies.
The cost of borrowing money is closely linked to how startups are valued, and Ouellette expects their ventures to be under threat if interest rates remain high.
It is very likely that early-stage investment rounds for these companies in 2023 will be fewer in number and smaller in size than in previous years.
According to Analysys Mason Research Director Brad Grady, pre-revenue startups already face challenges, “especially those with overtly optimistic business plans that require significant technical development” to create new markets with unproven business models.
“Any company with previous or early revenue with a high cash burn rate looking to raise cash is worried right now,” says Grady. related services.
There was a significant decrease in the number of growth stage funding rounds for the space sector in the second half of 2022 and the capital they were able to raise.
The challenges faced by young space companies can also be seen in the poor performance of shares of companies listed through a merger with a special purpose acquisition company, or SPAC, where they trade well below their initial public offering (IPO) price.
Companies that develop capital-intensive, hardware-heavy business models are likely to be more vulnerable to recession than companies that focus on software, according to Grady.
Likewise, purely commercial space companies are more likely to shrink than companies with a wide range of government opportunities.
Not only do governments offer a more robust source of funding to private players and academia, but they also act as clients of services for many commercial initiatives.
The war in Ukraine has increased demand from governments for Earth surveillance, cyber security, and other defense-related applications supported by the space industry. And China’s space advances encourage governments to enhance these capabilities.
Meanwhile, the growing political importance globally of finding ways to tackle climate change is expected to be another boon for space technology.
In stark contrast to the share prices of young aerospace companies that went public via SPAC, traditional aerospace companies in the aerospace and defense sector have outperformed the broader stock market in 2022.
“Theoretically, when the global economy is going through turbulent times, governments tend to allocate their resources to their core functions, which sometimes leads to budget cuts or delays to many projects,” says Ouellette of Euroconsult.
“But when it comes to global government funding in the space sector, it grew by 8% between 2020 and 2021, which indicates a certain resilience of space projects.”
This rate of growth would have been higher if it weren’t for COVID-19, according to Ouellette, underlining how government stimulus and investment — or sound and flexible policies — can mitigate macroeconomic uncertainty for the private sector.
Despite economic conditions that may slow industry growth, Euroconsult expects the global space economy to grow by nearly 75% by 2030 to reach $642 billion.
This is due in part to the speed with which the US economy has historically rebounded after a recession.
This time is different
The pandemic has clogged supply chains, disrupted workforces, impeded travel, and severely pressed the commercial expansion of the space industry.
However, it has also helped accelerate the sector’s transition towards more digital solutions that save costs and make companies smarter and more responsive to customer requirements.
Efforts to virtualize ground-segment hardware, for example, help satellite operators run their networks remotely via third-party data centers, reducing costs while increasing their efficiency and compatibility with other cloud-based services.
Phil Smith, senior space analyst at BryceTech, believes the space industry’s ability to regenerate is a key lesson for charting how it might respond to a macroeconomic shock.
In just 60 years, the industry has evolved from being confined to just two governments to a large number of players, including more than 60 countries and tens of thousands of companies.
Over the decades, the industry has seen a rebound from the post-Apollo and space shuttle downturns, post-Soviet commercialization – something that effectively ended during the later Putin era, and the revival of broadband towers in Low Earth Orbit (LEO) from the collapse of their “ante-era” In the late nineties.
The industry has also recently revisited reuse and mass production capabilities that have often been talked about before, and sometimes pursued, but are only now proving to be commercially successful.
“This ability to innovate is reinforced by a larger number of players around the world, a situation that encourages competition, the pursuit of excellence, and many innovative approaches to problem solving,” adds Smith.
The proliferation of broadband networks in LEO, and the general thrust of the commercial space industry into delivery markets, also pose new opportunities and challenges.
As more systems are digitized across all industries, Grady notes that connectivity and technology are becoming “essential building blocks of value in far more sectors than ever before.”
Thanks to the progress made in 2022 to standardize and integrate satellite and terrestrial communications, space data has never been more available in volume and price.
“Digitalization is becoming more advanced across more levels of the space value chain which is helping to lower unit economies and time to market,” says Grady.
However, there are downsides to space becoming “less alienated than the rest of the global economy,” he adds, such as the public cyber attacks seen amid Russia’s war in Ukraine.
“The more industry moves to adopt terrestrial practices, the greater their impact on terrestrial problems,” predicts Grady.
COVID-19 has shown how a broader uptake of space services can be a burden on the industry in markets that were once considered strong against terrestrial market trends, such as air connectivity, where demand has fallen as travel restrictions take effect.
Much will depend on the decisions central banks make this year, global GDP output, and the effects of geopolitical tensions that could act as a double-edged sword for the industry’s growth trajectory.
Aside from business failure, tough financial environments can lead to more mergers and acquisitions, which can improve business prospects but also dramatically change the state of play.
Dealing activity is already in full swing with multi-billion dollar acquisitions at the end of 2022 of Maxar Technologies and Aerojet Rocketdyne.
More massive acquisitions are expected this year – particularly by large aerospace companies seeking capabilities to complement their own with many companies’ lower prices.
Economic headwinds can also drive more companies to buy suppliers and partners to save costs and reap operational synergies by cutting down on middlemen.
This article originally appeared in the January 2023 issue of SpaceNews.