Effect of the framework conditions on the competitive position 1 Grid

In what follows, a summarizing grid is drawn up to present potential impacts of the framework conditions on indicators of the economic and competitive position of the GMES DS sector in the EU. These impacts are indicated by means of yellow, orange or red (depending on the intensity of the effect, where yellow is a light effect, orange a medium effect, and red an intense effect) cross points between the condition and the

indicator in question. For each coloured cross point, the direction of the effect (+, = or -) on the indicator from the EU service providers’ perspective and the source through which we have identified the effect is given (the numbering is the same as in the framework grid73). If the direction of the effect is unclear, this is shown by a question mark. The data are consistent with the indication in the framework grid.

First, the regulatory conditions are shown, then the other framework conditions and finally the exogenous conditions.

Figure 4.1 Regulatory conditions and competitiveness

Indicators GMES DS sector

Outcomes Production and Value added [1] [+] [1] [+]

Employment Productivity Profitability

Exports and Trade [1] [+] [1] [+]

Processes Intra- and inter-industry relations [1] [+]

Production processes Organisation

Structure Industrial Structure Size of enterprises

Level of specialisation and segmentation

Inputs Labour Capital

Intermediate goods & services, incl data [1] [+] Knowledge and technology

Regulatory condition: Labour market regulations IPR issues Competition policy Industry specific standards Sector sepcific regulations

Intense effect + Positive from perspective of sector

Medium effect - Negative from perspective of sector

Light effect = Postive and negative weigh out

1 From policy literature 2 From theoretical literature 3 Own appreciation

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Figure 4.2 Framework conditions and competitiveness

Indicators GMES DS Industry

Outcomes Production and Value added [1] [-] [1] [+] [1] [+] Employment [1] [-]

Productivity [3] [+]

Profitability

Exports and Trade [1] [-] [1] [-]

Processes Intra- and inter-industry relations [1] [+] Production processes

Organisation

Structure Industrial Structure

Size of enterprises [1] [+] Level of specialisation and segmentation

Inputs Labour [1] [-]

Capital [1] [=]

Intermediate goods & services, incl data [1] [-]

Knowledge and technology [1] [-] [1] [+] [1] [+]

Framework condition: Labour force and knowledge skills EU Market access Knowledge base development Energy and environment Access to finance Cost of data Access to third country markets Public sector influence (customer / R=D)

Intense effect + Positive from perspective of sector Medium effect - Negative from eprspective of sector Light effect = Postive and negative weigh out

1 From policy literature 2 From theoretical literature 3 Own appreciation

Figure 4.3 Exogenous factors and competitiveness

Indicators GMES DS Industry

Outcomes Production and Value added [3] [+] [1] [+]

Employment Productivity Profitability

Exports and Trade [1] [+]

Processes Intra- and inter-industry relations Production processes

Organisation

Structure Industrial Structure Size of enterprises

Level of specialisation and segmentation

Inputs Labour [3] [-]

Capital

Intermediate goods & services, incl data

Knowledge and technology [3] [+] [3] [-]

Exogenous condition: Technological change Socio-political developments Demographic change Global competition

Intense effect + Positive from perspective of sector Medium effect - Negative from eprspective of sector Light effect = Postive and negative weigh out

1 From policy literature 2 From theoretical literature 3 Own appreciation

4.4.2 Conclusions from the grid Outputs

On the output-side, we focus on five indicators that are potentially influenced by the different framework conditions presented in the grid. Often, an impact on one indicator has also derived implications on some of the other output-indicators. For example, changes in production volume and/or value can also imply changes in the employment level, profitability and/or export rate of the GMES DS sector. In this analysis we will focus on the direct impact. In the following paragraphs, we go deeper into the impacts of the framework conditions on these five output indicators.

• Production and value added

The production and value added of the European GMES DS sector are largely influenced by EU and national policies that demand for data/ reporting that can be supplied by EO downstream industry. Important examples are:

These regulations and policies drive the demand for EO downstream services. An important framework condition is the access to the EU market. The EU internal market opened markets for downstream service providers in intra-EU trade. In terms of extra-EU trade, markets seem to be relatively open in principle, as there are no clear import barriers for import of DS services into the EU. However, in practice there is little evidence of significant import, although this could stem from a lack of available data. The US ITAR regulations prevents US companies from exporting key knowledge to third countries (e.g. EU), and thus could prevent import from the US.

Furthermore, the industry is heavily dependent on the government, as a customer and in terms of R+D funds. This is potentially dangerous, as potential changing political preferences may impact the funds that are allocated in the budgets for these activities. • Employment

Employment is directly impacted by means of the employment policies and regulations on EU and national level. This impact is considered to be relatively limited. Indirectly employment is driven by factors that directly impact production and value added, as discussed above.

• Productivity

Productivity is impacted by R&D in other sectors, like for example in the satellite industry or semi-conductor industry. Improved inputs could drive productivity improvements in the GMES downstream sector.74

• Profitability

There are no significant horizontal conditions that directly affect profitability. Indirectly, profitability is affected by increasing demand on the one hand, and regulations that affect the input costs, such as the cost of data. This is addressed in more detail below.

• Exports and trade

Exports and trade depend on the relative competitive position of the EU downstream EO service providers vis-à-vis non-EU service providers and vis-à-vis EU and non-EU providers of EO substitutes.

The exports and trade of the EO downstream sector is strongly influenced by competition policy, and especially by the openness of the EU markets, as well as by the ITAR regime in the US, as already addressed under production. In terms of access to third country markets, there is an influence by the tendency by countries such as China and India which are developing rapidly their own space capabilities. This implies additional competitors on the world market as well as reduced exporting potential to these countries.

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It should be noted that the R&D in the EO downstream sector itself leads to productivity increases at their customers. However, this productivity is not meant here under the competitiveness of the EO downstream sector.

Processes

• Intra- and inter-industry relations

A different impact of the imposed regulations or framework conditions can generally influence the horizontal intra-industry relations (relations between the different sub- sectors). However, there does not seem to be any regulatory or framework condition that affects the intra-industry relations in the EU GMES downstream sector significantly. The vertical intra-industry relations are slightly influenced by some of the conditions of the grid. The large presence of SMEs and further development of these by the research funding could balance back a bit of the power that is currently at the data providers. Also the development of new products and services could improve the position of the service providers towards their customers.

The inter-industry relations (relations between the EU GMES DS sector and other substitute sectors) are mainly influenced by regulations that apply to the downstream sector and not to the substituting sectors. The policies driving the demand for EO data naturally support the position of the EO downstream sector compared to their

competitors.

• Production processes

Changes in the production process are generally due to the technologic adaptations in order to comply with the new imposed requirements or in order to stay competitive vis-à- vis competitors. In terms of the GMES downstream sectors there are no horizontal conditions that affect the production process significantly.

• Organisation

The organisation of the sector is not influenced by any horizontal conditions. Structure

• Industrial structure

Competition policies refer to the regulations on mergers and acquisitions. This policy does not seem not to be a major issue for the industrial structure of the EU GMES downstream sector. Most sub-sectors are populated by a large number of SMEs and there are no signals of a forthcoming wave of mergers, while the current vertical integration trend does not seem to result in market power that call for regulation.

• Size of enterprises

Most GMES DS sub-sectors in the EU are dominated by SMEs. Up to now, there are no clear indications that this situation will change. SME policy by the Commission

stimulates this.

• Level of specialisation

As described in chapter three, there is quite a significant level of specialisation among companies. It is anticipated that this continues, as research policy in EO is still set up per theme rather than horizontally.

Inputs • Labour

The workforce in the sector is highly skilled. However, the greying of the population and a reduction of people that choose for a career in science, engineering and technology could lead in future to a declining supply of highly-skilled workers. This could create a problem for the development of the EO sector.

• Capital

Capital needs are mainly affected by conditions that elate to the access to finance. Commercial financing of private space activities is still a problem. However, the development of PPPs is increasing in space in general in the space domain and in the remote sensing domain. There are no regulations or framework conditions that require significant investments.

• Intermediate goods & services

Here, we focus on the effect of the analysed framework conditions on data, as the main input factor for downstream services. The cost of data is considered very important by the industry itself, indicating that increases in data costs significantly impacts their business results. Hence any policies that affect the supply of data (either in terms of quantity or in price) have a significant impact on the downstream services.

• Knowledge & technology

The issue of knowledge of technology is largely affected by the R&D policy and funds in Europe and nationally. R&D grants currently take up 25% of turnover in the EO

downstream industry, and there are hardly any other sources for R&D deployed by the sector. This makes R&D funding by the Commission, ESA and national governments a key driver for the development for knowledge and technology in this sector.