Buckle up, it could get bumpy: The space economy’s vaunted resilience will be tested in 2023

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While the gloomy 2023 economic outlook spells trouble for aerospace startups, analysts say the industry as a whole should largely withstand any downturn.

Space companies are responding more flexibly than ever to changing market conditions, and governments around the world are expected to continue supporting the growth of many of them even as private sources of finance dry up.

But even those able to weather the harsh financial environment will face operational challenges and a dampened growth outlook this year.

2022 was marred by economic uncertainty. Rising inflation, supply chain disruption, energy price hikes and other headwinds contributed to an unstable and uneven recovery for markets still battling the lingering effects of COVID-19.

And forecasters are forecasting another year of uncertainty for 2023 as the pandemic and ongoing war in Ukraine cloud the outlook.

In the US, by far the largest player in the space economy, signs of economic growth are hampered by skyrocketing inflation and extremely low consumer confidence.

Following a series of rate hikes by the US Federal Reserve to slow down the country’s runaway economy and contain commodity prices, inflation has fallen from a 40-year high of 9% in June to about 7%. % in November – still well below the Fed’s 2% target.

Lower inflation would be good news for consumers; however, successive rate hikes in the US and elsewhere could push the macroeconomy closer to a global recession.

Even if the US manages to pull through without going into recession — technically two consecutive three-month periods of negative gross domestic product (GDP) — companies will have to grapple with a constrained and challenging economic environment.

During an economic downturn, or when interest rates rise, investors tend to back away from riskier projects and focus on profitable or cash-generating companies — which is “not the case for a number of companies in the aerospace industry today,” notes Miguel up. Ouellette, principal advisor at Euroconsult.

And as in other industries, small and recent companies in the aerospace sector are more exposed to macroeconomic downturns than more established companies.

The cost of borrowing money is closely tied to the valuation of young companies, and Ouellette expects their projects to be jeopardized if interest rates remain high.

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It is “highly likely” that there will be fewer early-stage investment rounds for these companies in 2023 than in previous years.

According to Analysys Mason’s research director, Brad Grady, startups that don’t yet have revenue are already facing challenges, “particularly those with overtly optimistic business plans that require significant technology development” to create new markets with unproven business models.

“Any pre- or early-income company with a high cash burn rate looking to raise money is concerned right now,” says Grady, “it doesn’t matter if the company is a launch company, an antenna manufacturer,” or a company that simply provides space-related services.

There was a noticeable drop in the number of growth phase funding rounds for the aerospace sector in the second half of 2022 and the capital they were able to raise.

The challenges faced by young aerospace companies can also be seen in the poor equity performance of companies that have floated on the stock market through a merger with a Special Purpose Acquisition Company, or SPAC, as they sell well below their Initial Public Offering (IPO) price. ) to trade.

GOVERNMENT POWER

According to Grady, companies developing capital-intensive, hardware-intensive business models are likely to be more exposed to economic downturns than those focused on software.

Similarly, purely commercial space companies are more vulnerable to a downturn than those with an extensive pipeline of government opportunities.

Governments not only provide a more robust source of funding to private players and academia, but also act as customer of services for various commercial initiatives.

The war in Ukraine has only increased government demand for Earth observation, cybersecurity and other defense-related applications championed by the space industry. China’s advances in aerospace also encourage governments to strengthen these capabilities.

Meanwhile, the growing global political importance of finding ways to tackle climate change is expected to be another boon for space-based technology.

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In stark contrast to the share prices of young aerospace companies that went public through a SPAC, traditional aerospace companies in the aerospace and defense sector outperformed the broader stock market in 2022.

“Theoretically, when the global economy is going through uncertain times, governments tend to allocate their resources to their core functions, sometimes leading to budget cuts or delays for many projects,” says Euroconsult’s Ouellette.

“But when it comes to global government funding within the space sector, it grew by 8% between 2020 and 2021, indicating some resilience for space projects.”

This growth rate, Ouellette says, could have been even higher without COVID-19, highlighting how government stimulus and investment – ​​or sound and flexible policies – can reduce macroeconomic uncertainties for the private sector.

Despite economic conditions that could slow industry growth, Euroconsult expects the global space economy to grow by nearly 75% to $642 billion by 2030.

That’s partly due to how quickly the U.S. economy has historically recovered from a recession.

THIS TIME IS DIFFERENT

The pandemic clogged supply chains, disrupted the workforce, hampered travel and weighed heavily on the commercial expansion of the space industry.

However, it also helped accelerate the industry’s transition to more digital solutions that save costs and make companies more agile and responsive to customer demands.

For example, efforts to virtualize ground segment hardware help satellite operators manage their networks remotely through third-party data centers, reducing costs and increasing their efficiency and compatibility with other cloud-based services.

Phil Smith, senior space analyst at BryceTech, believes the aerospace industry’s ability to reinvent itself is an important lesson in mapping how it might respond to a macroeconomic shock.

In just 60 years, the industry has evolved from being limited to just two governments to a plethora of players, including more than 60 countries and tens of thousands of companies.

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Over the decades, the industry has bounced back from recessions following Apollo and the Space Shuttle, commercialization following the collapse of the Soviet Union – something that effectively ended during the later Putin era, and the resurgence of low Earth Orbit (LEO ) broadband constellations of a “before their time” collapse in the late 1990s.

The industry has also recently reconsidered reusability and mass production capabilities, which had previously been much talked about, sometimes pursued, but are only now proving to be commercially successful.

“This reinvention capacity is enhanced by a greater number of players around the world, a situation that fosters competition, pursuit of excellence, and many innovative approaches to problems,” adds Smith.

The proliferation of LEO broadband networks and the general pressure from the commercial space industry on connectivity markets also present new opportunities and challenges.

As more systems become digitized across industries, Grady notes how connectivity and technology are becoming “fundamental building blocks of value in many more industries than ever before.”

Boosted by progress made in 2022 in standardizing and integrating satellite and terrestrial communications, space-based data has also never been more available in volume and price.

“Digitization is much more advanced at more levels of the space value chain, helping to reduce unit economics and time to market,” says Grady.

However, there are also downsides to space “becoming less weird relative to the rest of the global economy,” he adds, such as the very public cyber-attacks during Russia’s war in Ukraine.

“The more the industry moves to adopt terrestrial practices, the more terrestrial problems will affect the industry,” Grady predicts.

COVID-19 showed how wider adoption of space-based services could be a drag on the industry in markets once considered robust to terrestrial market trends, such as onboard connectivity, where demand plummeted as travel restrictions came into effect.

THE FUTURE

Much will depend on decisions made by central banks this year, the output of global GDP and the impact of geopolitical tensions that could serve as a double-edged sword for the industry’s growth trajectory.

Aside from corporate failures, challenging financial environments can lead to more mergers and acquisitions, which can improve business prospects, but also dramatically change the state of affairs.

Deal activity is already well underway with multi-billion dollar acquisitions coming in late 2022 for Maxar Technologies and Aerojet Rocketdyne.

More large acquisitions are expected this year, particularly by large aerospace companies seeking capabilities to complement their own as price tags drop for many companies.

Economic headwinds could also drive more companies to buy out suppliers and partners to cut costs and gain operational synergies by reducing the number of middlemen.

This article originally appeared in the January 2023 issue of SpaceNews magazine.

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