Memorandum 99
Supplementary submission from UKspace
REQUIREMENT FOR GOVERNMENT INVOLVEMENT IN
THE MARKET FOR SPACE
INTRODUCTION
1. This submission is from UKspace, the
main Trade Association for the UK space industry. Membership covers
upstream satellite manufacturers, equipment suppliers and ground
support providers, including Astrium, SSTL, QinetiQ, Logica, Vega,
SciSys, SEA and Serco and downstream operators and service providers
such as Inmarsat, BT and Infoterra. It is submitted to the Committee
to expand on evidence provided by Sir Martin Sweeting and Messieurs
Martin, Paynter and Williams on 6 December 2006.
SUMMARY
2. The UK's space industry represents a
vital high technology national capability, where the upstream
satellite manufacturers enable a wide range of high value-added
downstream businesses in a rapidly expanding global market for
space-based services. However, the upstream industry does not
operate in a true commercial environment and this represents a
substantial risk to the valuable downstream business, thus necessitating
HMG intervention.
3. The downstream business benefits strongly
from having a vibrant upstream sector in the UK, as this enables
the UK community to influence market direction, definition &
adoption of standards and regulatory controls, and to be positioned
to recognize and move rapidly to exploit new business opportunities.
4. Whilst the downstream businesses already
operate in a fully commercial marketplace and do not require special
support from HMG, the upstream space segment manufacturers (on
which the downstream rely) are in an international environment
that is not yet commercial since it is highly distorted by the
strategic interests of national governments. The upstream space
market is thus not yet commercially mature, even in communications
and certainly not in Earth Observation and Remote Sensing.
5. This intervention will be needed until
the market matures and control of space assets is no longer seen
as of national strategic importance.
6. Without this intervention producing a
healthy UK upstream, the UK downstream will be less competitive.
The UK upstream requires HMG intervention to "level the playing
field" when competing with foreign manufacturers who are
supported very substantially through their government's long-term
investment in strategic interests. The UK upstream has been remarkably
successful in converting limited HMG support into substantial
ROI for the UK economy, however there is a discontinuity in the
value chain that prevents these economic returns reaching the
upstream players and without intervention these UK players are
at risk of steadily slipping behind foreign competitors as the
market for space expands.
7. The decline in long term investment by
HMG in space technology is already seriously limiting UK industry's
ability to build on its capabilities and maintain international
competitiveness; and this kind of long term investment is beyond
the horizon of the UK's capital markets. Continued decline in
HMG long term investment will inevitably lead to a further erosion
of our national high technology capability in space. This will
result in a corresponding decline in the UK's ability to play
a leading role in key space business opportunities, wealth creation
and national security.
8. The following notes detail the immature
nature of the space market and the essential need for a degree
of sustained HMG support to restore and maintain UK industry's
ability to exploit our national capabilities and create opportunities
for growing commercial businesses.
DISCUSSION
9. Space is crucially important for the
global economy and for national and international security. There
is a commercially competitive and growing international marketplace
operating in conjunction with major government and institutional
procurement of satellite infrastructure and services. Key commercial
and security applications include broadcasting, communications,
global navigation and remote observation.
10. This infrastructure is complex. Access
is restricted by governments in areas of strategic national interest,
including secure communications, surveillance and security as
well as certain technological capabilities that also underpin
industrial leadership. Some space assets are procured directly
by national governments; others are provided by multinational
government funded collaborations (eg ESA) and institutional customers
(eg EUMATSAT). In some more commercial cases such as satellite
telecommunications, industrial contribution in development of
new technology and infrastructure is matched (50:50) to support
received from national governments and from key international
collaborations.
11. Government investment in major collaborations
(e.g. Galileo, GMES) is essential in order that UK industry is
able to access the investment via European governments via ESA,
EU, and GJU etc... These programmes are fully funded by governments,
recognising that self sustaining commercial activity will only
occur in the longer term. If the UK government does not invest
at this stage it has a direct impact on the distribution of work
during development and subsequently—due to lack of positioning—a
much larger impact on the hoped for commercial follow through.
GMES in particular has great political and environmental importance
as well as commercial implications for industry.
12. The commercial market at operator and
downstream levels is driven by organisations offering innovative
satellite services, leveraging advantage directly or indirectly
from technologies developed under government funding.
13. An additional factor distorting the
market is the selective availability of technology arising from
military programmes. This seriously affects those countries without
substantial national engagement in such activities, enabling strong
nations such as the US and France to hold most of the upstream
cards and therefore a significant advantage in controlling the
downstream game. Furthermore, countries with a strong home defence
market are less vulnerable to manipulation of export controls
by others. In a number of areas, particularly Earth Observation
and Remote Sensing, the UK is not capturing the advantages of
dual use of space technology through an involvement in military
applications and this increases the challenge facing industry
in overcoming overseas competition in the civil sector.
14. This interrelationship between government
and private sector means that if its own government does not participate,
a nation's industry finds itself unable to engage with advanced
technology development as effectively as its competitors. As a
consequence, industry will then find it extremely difficult to
develop the vital leading edge products and services needed to
outperform competitors in the commercial marketplace.
15. The strategic importance of the space
and satellite infrastructure, its relationship to commercial markets
and its capacity to deliver social benefit is recognized by the
majority of the world's leading nations and by many developing
nations. Their governments therefore fund national programmes
and local industry to ensure national sovereignty and leverage
over strategic assets, skills and capabilities. However this is
not the case in the UK. The UK's policy is to rely on the US for
space related defence surveillance and it has invested only on
a very modest scale in European space, apart from ESA's science
programmes. This is weakening industry's ability to serve a number
of important space markets, including satellite surveillance and
civil Earth observation in particular.
16. The problem is exacerbated by the strong
"user pays" philosophy which is at the heart of the
UK space policy. This means that Government (apart from the Research
Councils) almost exclusively uses what it can already buy on the
commercial market or receive free of charge from institutional
suppliers. This results in:
— limited opportunities for the UK
space industry to supply innovative products and services to its
home market;
— unbalanced UK involvement in space
programmes, weighted strongly towards science, generally without
a holistic approach to engaging industry in programme implementation;
— dwindling support for technology
development in the UK in support of space;
— weakened bargaining power in international
dealings involving space;
— weakened industrial positioning for
competitive ESA procurements; and
— diminishing UK geo-return from ESA
and progressive attrition of UK space industry capability.
17. A further difficulty compounding the
problem for industry is the "disconnected" nature of
the value chain. The bulk of the R&D to provide the infrastructure
used by the downstream service segment is carried out by the upstream
component of the industry. Yet downstream suppliers exploiting
the space infrastructure do not need to procure space assets from
upstream suppliers on the scale needed to fully fund the necessary
R&D and, in any event, a significant proportion of the upstream
R&D is already funded by other governments from tax revenues
(much of it collected from profitable downstream service providers).
In the UK, this source of support for upstream R&D is significantly
lacking in comparison to most other countries.
18. Where R&D investment has been made
in space, UK industry has shown that it can achieve well above
average financial returns, but this type of investment is becoming
increasingly sub-critical.
19. From a private sector investor perspective,
the commercial return on investment in space continues to look
attractive at the operator level where an international market
has developed, but this is dependent at marginal cost on access
to nationally funded technologies. However, further investment
in new innovative services that are dependent on new infrastructure
looks unattractive in the short term—the time scale to realise
a return is long (sometimes 10-15 years) and there are multiple
risks (technical, execution and delivery, market, political/regulatory).
Industry cannot take on all of these risks by itself, particularly
when the return is a long way into the future. The HYLAS model—where
ESA is a contributor—looks like a step towards a solution,
but this still involves significant government involvement to
be able to attract commercial investors.
20. Investment in downstream satellite services
looks more attractive but it too has to invest heavily from its
own resources to stay ahead and expand into growing markets. The
return here can be rendered uncertain by the fact that some governments
are involved in procuring assets for public good, from which space
derived images and information are then frequently made freely
available to institutional end users. This is perhaps a good means
of stimulating an initial downstream market but it does not facilitate
a free-market nor permit development of a vertically integrated
value chain.
21. Downstream service revenues are where
the government derives its financial return on investment in space
through commercial tax take. By not re-investing sufficient of
this tax return from downstream satellite services in the upstream
R&D activity, the space in the UK is becoming a "cash
cow" in a market that is still growing and developing. The
inevitable result is going to be a forced withdrawal from space
by the rest of the UK upstream industry and a weakened competitive
position for UK downstream service suppliers. The UK would lose
its aerospace and pharmaceutical industries without governmental
involvement in market. With space it also risks loss of long term
sovereignty over strategic security assets.
22. UK decisions not to engage strongly
in a number of institutional programmes has already led to the
withdrawal of UK largest prime contractors in space, such as BAe
and Marconi, leaving remaining capability in the UK at this level
largely in foreign hands and the only UK space segment prime contractor
left is SSTL.
23. Nevertheless, the remaining UK space
industry is very efficient and productive and has shown itself
capable of winning greater up- and downstream market share, when
it can gain access to leading edge technology quickly. However,
this will only be sustainable if the government supports the relevant
strategic research, technology development and international engagement
at an appropriate level.
24. The industry has also shown itself able
to develop niches ahead of the main stream international dependence
on government procured infrastructure. UK leadership in small
satellites was achieved during the 1990s, before the niche was
recognised by the US, France, Russia, China, India. That niche
is now subject to growing competition, non tariff barriers and
export controls. The UK government needs to engage in national
technology development and demonstrations of innovative capability
in order to encourage further niches to develop, to sustain the
UK presence long term and obtain a good return on initial investment.
25. For the future, the government should
use its procurement power to drive innovation and competitiveness
in the space sector, as in aerospace and pharmaceuticals. Recent
analysis by OEF shows clearly that space offers considerably above
average leverage compared to many other areas of economic and
social activity.
26. The conclusion is that the UK cannot
operate successfully and commercially in the growing space market,
or successfully protect its national strategic interests, without
more substantial government involvement in space. This is particularly
important in the development and application of innovative space
technology and in the development of a more holistic, "joined-up"
space strategy for the UK.
27. Government intervention will be needed
for some time, but only for as long as the upstream market remains
subject to distortion by the national strategic interests of other
nations. The options of "leaving the upstream infrastructure
provision to others" will not serve UK interests well as
it results in loss of control over the critical technologies,
intellectual property and rights of ownership that are needed
to underpin a strong downstream position on which to base economic
growth in the future.
January 2007
| 
