Is it hard for upstream US space companies to build business internationally?

Space businesses in the US have some distinct advantages. They have access to the largest domestic private market, the biggest public anchor customers (such as NASA and the US Space Force), well-established capital sources (from angels to IPOs), and a business-friendly environment.

However, in our work across the global supply chain we have seen evidence of areas where US companies in the upstream of the industry are at a disadvantage compared to international competitors. In this article we take a look at some examples of these and discuss how they can affect US businesses.

We also share how satsearch can help US companies to assess international markets quickly and cost-effectively.

Compliance with export controls

The most obvious factor is the regulatory restriction on exporting that some US products face.

Several categories of commercial space products are restricted according to the International Traffic in Arms Regulations (ITAR) on the United States Munitions List (USML). In addition, commercial satellite technology may be regulated by the Export Administration Regulations (EAR) - as dual-use items on the Commerce Control List (CCL).

(If interested, you can find out more about the technical differences between ITAR and EAR at this link).

In some cases export controls can make certain sales impossible. In others, the increased costs, lead times, and regulatory burdens mean that US companies aren’t able to put together competitive bids for new missions, or may lose sales during the negotiation phase due to the extra time and friction involved.

This has been a well-known issue in the US industry for a long time. A report in 2007 by the United States Air Force , entitled Defense Industrial Base Assessment: U.S. Space Industry [PDF link here], stated that adherence to ITAR had led to $2.35 billion in lost foreign sales between 2003 and 2006. This was found to be primarily due to long license processing times.

Following this, in 2014 the U.S. Department of Commerce produced the report U.S. Space Industry "Deep Dive" Assessment: Impact of U.S. Export Controls on the Space Industrial Base (PDF link here).

This report collated information and responses from 3,780 organizations, who were involved in exporting various products and services to 75 countries. The publication clearly states that export restrictions resulted in:

lost sales opportunities due to space-related export controls, and adverse impacts of space-related export controls on their organizations’ competitiveness.

And in another section it states:

Respondents indicated numerous areas where the U.S. export control system has adversely impacted their organization’s health and competitiveness.

Many companies outside of the US consistently market components, subsystems, and other products as ‘ITAR-free’ or place a lot of emphasis on the fact that they aren’t subject to export controls. We’ve also seen several examples of components that are rigorously standardized even when sold in small volumes, so that export control regulation can be avoided (this is only applicable in certain circumstances).

Globalization and the continued democratization of design and manufacturing capabilities around the world is enabling the growth of new space suppliers in countries with more liberal export control regimes and by businesses that can develop technologies at lower costs than US suppliers.

As more and more of these options gain flight heritage and build brands across the global supply chain, US component/subsystem manufacturers, CNC machinists, materials providers and other upstream stakeholders need to carefully consider how best to compete for emerging international markets and manage their investments accordingly.

However, this isn’t a clear-cut issue. Some stakeholders have argued that assessments of the negative impact of export controls on the US space industry have been used inconsistently, and that global economic indicators and competition are more important factors.

In our view the actual strength of the US market itself could also be hindering growth opportunities for some US companies.

Over-reliance on the domestic market

As mentioned, US companies have some major advantages over those in many other countries; the size, structure, and health of both the public and private domestic market. And there are very strong and successful international brands in all areas of the downstream market, based in the US.

With large government organizations such as NASA - National Aeronautics and Space Administration , United States Space Force , the US Air Force Research Laboratory (AFRL) and many others, US companies can access the biggest budgets and programs for a wide range of missions.

The European Space Agency - ESA budget for 2024 is $8.5 billion, for example, whereas NASA's is around 3X as much, at approximately $24-$26 billion (depending on the final government agreement for 2024 - it's a political issue of course; you can read more about it here).

Likewise, the private sector is arguably the largest in the world. Measuring such things is tricky and it is difficult to compare statistics on economies in different countries due to variations in classifying business activities. However, the U.S. Bureau of Economic Analysis (BEA) states that in 2021 the space industry in the US accounted for $211.6 billion of gross output, while, in comparison, a 2021 European Parliament report [PDF] states:

Europe has the second largest space industry in the world, which employs over 231,000 professionals and is estimated to be worth EUR 53-62 billion.

But are these huge opportunities on their doorstep actually hindering upstream US companies from growth overseas?

We’ve seen various examples of American manufacturers over-optimizing for domestic customers, or even being completely reliant on one anchor government customer.

Many startups have developed relying solely on NASA programs and are ill-equipped to sell commercially in the first place, let alone overseas, in order to scale up. Or, indeed, just to survive when the Agency’s money is no longer available.

As McKinsey states in this 2022 article A different space race: Raising capital and accelerating growth:

While NASA and the US Department of Defense remain the largest customers in the space sector, their budgets grow slowly. It takes many years for a new venture to build relationships and credibility with the government, and legacy contractors typically retain a significant share of government spending on space. Many successful space start-ups are distinguished by their ability to gain traction in both commercial and governmental markets.

And if your target commercial market is overseas - then that's where you need to focus on developing new business opportunities and relationships. Which is no easy task for low-margin, high-volume, and/or highly specialized components or services.

In addition, the domestic market in the US is largely homogeneous. There are of course differences between the 50 states but none are as pronounced as, for example, the differences between the markets of India, Japan, and Spain.

So, companies only experienced in selling to fellow US customers can find themselves at a disadvantage when competing for international opportunities against teams that have grown up exporting from day one.

Obviously these issues don’t affect every US supplier, but we have seen many examples. In addition, as CNBC recently shared; the Export-Import Bank of the United States (EXIM) is currently working through a $5 billion pipeline of space financing applications. And as the article states:

EXIM generally sees more applications during tougher economic times, as the previous bulk of its financing for the space sector came between 2010 and 2015.

As many have commented, we could see some dramatic change in the space industry this year. And for US companies restricted by export controls, overly reliant on the domestic market, and inexperienced in selling overseas, these changes could place them in a risky position.

In the next section we discuss how satsearch can help address these challenges.

The challenge to explore new markets

As mentioned, the strength of the US market can result in some manufacturers focussing only internally. Another reason for this is the weakness of overseas markets, which can be a real issue or may be just perception.

This relative weakness is typically evident in three areas:

• Uncertain demand - without local market knowledge, understanding whether there is a genuine need or interest for a certain technology can be difficult. Sales opportunities look very different between countries and working out downstream requirements is a challenge. There are also issues of language and business custom to work through, as well as government agencies that operate very differently to those in the US.
• Lower sales volumes - the opportunities in emerging markets, programs, and services are typically smaller in scale and ambition than the most well-established procurement opportunities in the US. For exports to be successful, US companies need to ensure that low volume sales can be profitable.
• Price sensitivity - similarly, cost expectations can also be lower in other countries where purchasing power isn’t as high as the US. Again, overseas business development opportunities need to be carefully evaluated to determine whether the costs of finding the sale, converting the prospect (understanding you may be competing against local companies with lower prices, shorter lead times, and cheaper delivery costs), and serving the contract are worth it.

Making such strategic decisions isn’t easy, but this is something we can support.

To determine whether the time is right to invest in a new market, it is important to use the best data available. Building a brand and reputation overseas isn’t easy for any supplier and American companies might face the added hurdle of explaining the export control issue.

Before committing time, money, and resources to business development in international markets, it can be very helpful to test them out by presenting your capabilities to existing buyers and gauging potential demand.

This requires an established and accessible channel, with an existing community - and that’s where satsearch can help.

We support space suppliers all over the world, and right across the value chain, to access demand for their specific capabilities. This gives us unrivaled insights into how different countries and sectors are approaching the market and an opportunity for suppliers to test their potential opportunities while committing fewer resources.

If businesses are able to utilize hard data on the interest they can generate, or the latent demand they can access, for exporting, then smarter strategic decisions can be made at all levels.

For US companies this is a key issue, as we’ve discussed, but this is a problem that any company can face (to a greater or lesser extent) when looking to export to new markets.

So if you’d like to discuss how we can support your company with this process, please contact our COO Narayan Prasad today for a no-obligation discussion.

Thanks for reading!