Buckle up, it could get bumpy: In 2023, the space economy’s vaunted resilience will be put to the test

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While gloomy economic forecasts pose problems for early-stage space companies in 2023, analysts say the industry as a whole should prove broadly resilient to a downturn.

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

But even those able to weather the harsh financial climate will face operational challenges and muted growth prospects this year.

The year 2022 was marked by economic uncertainty. Rising inflation, supply chain disruptions, energy price hikes and other headwinds contributed to an unstable and uneven recovery in markets still grappling with the ongoing impact of COVID-19.

And forecasters are drawing 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 complicated by sky-high inflation and extremely low consumer confidence.

Inflation has fallen from a 40-year high of 9% in June to around 7% in November after a series of rate hikes by the US Federal Reserve to slow the country’s runaway economy and keep commodity prices under control fallen – still well below the Fed’s 2% target.

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

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

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

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

The cost of borrowing depends heavily on how young companies are valued, and Ouellette reckons her projects will be at risk if interest rates remain high.

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

According to Analysys Mason Research Director Brad Grady, pre-revenue startups are already facing challenges, “particularly those with overtly optimistic business plans that require significant technological evolution” to create new markets with unproven business models.

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

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 was noticeably reduced.

The challenges faced by early stage space companies are also reflected in the poor stock performance of those listed through a merger with a special purpose acquisition company (SPAC) as they are trading well below their initial public offering (IPO) price.

STRENGTH OF GOVERNMENT

Companies that develop capital-intensive, hardware-heavy business models are likely to be more affected by economic downturns than companies that focus on software, according to Grady.

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

Governments not only provide a more solid source of funding for private actors and universities, but also act as customers of services for several commercial initiatives.

The war in Ukraine has only increased government demand for earth observation, cybersecurity and other defense-related applications that the space industry is championing. China’s space advances are also encouraging governments to bolster these capabilities.

Meanwhile, the increasing global political importance of finding ways to combat 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 space companies that went public via a SPAC, traditional space companies in the aerospace and defense sector have outperformed the broader stock market in 2022.

“Theoretically, during uncertain times in the global economy, governments tend to reallocate their resources to their core functions, sometimes resulting in budget cuts or delays in many projects,” says Euroconsult’s Ouellette.

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

That growth rate could potentially have been even higher in the absence of COVID-19, according to Ouellette, emphasizing how government stimulus and investment – or sound and flexible policy measures – can mitigate macroeconomic uncertainties for the private sector.

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

That’s partly because of how quickly the US economy has historically recovered from recessions.

THIS TIME IS DIFFERENT

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

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

Efforts to virtualize ground segment hardware, for example, are helping satellite operators to operate their networks remotely through 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 reinvent itself is an important lesson in how it might respond to a macroeconomic shock.

In just 60 years, the industry has grown from being limited to just two governments to a multitude of players, including over 60 countries and tens of thousands of companies.

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Over the decades, the industry has recovered from downturns after Apollo and the Space Shuttle, commercialization after the collapse of the Soviet Union – something that effectively ended during the later Putin era, and the revival of Low Earth Orbit (LEO) broadband constellations a collapse “before its time” in the late 1990s.

Industry has also recently revived the possibilities of reusability and mass production, previously widely talked about, sometimes pursued, but only now proving commercially successful.

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

The proliferation of LEO broadband networks and the general push of the commercial space industry into the connectivity markets also bring new opportunities and challenges.

As more systems across all industries go digital, Grady notes how connectivity and technology are becoming “fundamental building blocks of value in far more sectors than ever before.”

Spurred by advances in the standardization and integration of satellite and terrestrial communications in 2022, space-based data was also available in quantity and price at an unprecedented level.

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

However, there are downsides to space becoming “less weird than the rest of the world economy,” he adds, such as the very publicized cyberattacks seen in Ukraine during the Russian war.

“As the industry moves towards adopting terrestrial practices, terrestrial issues will impact the sector more,” predicts Grady.

COVID-19 has shown how broader uptake of space-based services could weigh on the industry in markets once considered resilient to terrestrial market trends, such as

THE FUTURE

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

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

Transaction activity is already in full swing as Maxar Technologies and Aerojet Rocketdyne head towards multi-billion dollar acquisitions in late 2022.

More big acquisitions are expected this year — particularly from big space companies looking for skills that complement their own as price tags come down for many companies.

Economic headwinds could also lead more companies to buy out suppliers and partners to save costs and leverage operational synergies by reducing middlemen.

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