Study on the Competitiveness of the GMES Downstream Sector

Transcription

1 Study on the Competitiveness of the GMES Downstream Sector Within the Framework Contract of Sectoral Competitiveness Studies ENTR/06/054 Final report Client: Directorate-General Enterprise & Industry Robert Piers (ECORYS) Team Leader Dick Mans (ECORYS) Sarah Whitehead (ECORYS) Jon Styles (Assimila Ltd) Rotterdam, 4 November 2008

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3 ECORYS SCS Group P.O. Box AD Rotterdam Watermanweg GG Rotterdam The Netherlands T +31 (0) F +31 (0) E [email protected] W Registration no ECORYS Macro & Sector Policies T +31 (0)31 (0) F +31 (0) c/fn

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5 Table of contents Executive Summary 7 1 Introduction Background and objective Aim of this report Sector definition Structure of the report 19 2 Key characteristics of the sector Performance Production of the sector Employment and productivity Location and nature of clusters Structure Industry structure and size distribution of companies Identification and ownership of key producers in EU Determination of the GMES downstream sector Introduction Assumptions Methodology for Mapping of EO value adding activities to GMES core service outputs Results Remaining Issues Conclusion 30 3 Competitive position of the sector Introduction Performance Developments in key product areas Developments in global market shares Imports by origin Developments in profitability and price-cost margins Structure Identification of key players in the world market and their strategies Identification of potential barriers to entry Market structure of suppliers and customers Processes Production processes Trends in production technology 53 c/fn

6 3.4.3 Development in expenditure on investment, marketing, training Share of different distribution channels Conclusion 57 4 Horizontal aspects affecting competitiveness Introduction The framework grid Conclusions from the grid Regulatory conditions Framework conditions Exogenous conditions Conclusion Effect of the framework conditions on the competitive position Grid Conclusions from the grid 86 5 Comparison with the US Downstream Sector Sources Revenues Structure and Employment Growth Markets and customers Drivers, opportunities and risks Earth Observation R&D funding schemes in the US Comparison of the regulatory and framework conditions Summary Conclusions and Recommendations Conclusions Recommendations Optimising the involvement of the business community Optimising framework conditions Mobilising EU policies and funds Further industry monitoring 110 Literature 112 Annex A 118 6

7 Executive Summary Introduction The European Commission considers the development of GMES (per September 2008 called Kopernikus) of strategic importance for Europe and its citizens. With the development of a set of core services there is a response to a (pan) European need, at either Community level or Member State level, to have information services available in the domains of emergency response, land monitoring, marine, atmosphere and security related services. In addition, it is anticipated that a series of value added services will be developed by public and private entities, based on the core services. These downstream services are expected to be innovative, contributing to the Lisbon objectives and contribute to the development of the competitiveness of the European society. What is the competitiveness of the European GMES downstream sector? In terms of the further development of the GMES programme, some fundamental choices are coming up. These will be presented in a Communication in November 2008, and concern the issue of Governance and Sustainability. This Communication will be substantiated by an Impact Assessment, as is required for initiatives which are in the Commission s Workprogramme. The choices to be made may influence the development of the GMES downstream sector. Therefore the Commission needs to have a clear picture of the competitiveness of the existing EU GMES downstream sector and of the regulatory and other framework conditions affecting the competitiveness of this sector. This report provides such picture. Scope of the study and definition The sector under study is defined as those organisations that offer value added services based on EO data. The geographical scope of the study is Europe, where Europe is defined as the EU member states plus the remaining European ESA member states which are not part of the EU (Norway plus Switzerland). Analysis of the structure, performance and competitiveness of the sector Content of the study An analysis has been made of the performance of the European EO downstream sector, in terms of revenues, employment and productivity. Subsequently, the structure of the sector is analysed. Furthermore, the competitiveness of the sector has been studied, taking into account aspects like production processes, imports and exports, profitability, and market structure. These issues have been related to a number of regulatory and framework conditions in order to determine the impact of these conditions on the competitiveness of the sector. Lastly, the EO downstream services sector has been compared with its US equivalent. Based on the analyses, a set of recommendations has been formulated. Performance of the sector Studies performed by Euroconsult and VEGA are two important sources for the quantitative assessment of the sector s performance. The figures from both Euroconsult c/fn

8 and VEGA are for all EO activity, even if the company concerned is not in the space sector. Hence they include, for example, both the EO related revenues of large engineering /survey companies that use EO as part of their overall business, and the EO revenues from large integrated satellite manufacturers. Euroconsult assessed the downstream value-adding sectors of space-based applications. This concerned earth observation (EO), communication and navigation. An overview of the world and European revenues and the compound annual growth rate (CAGR) is provided in the following table. Table 0.1 Revenues of the downstream value adding sectors of space-based applications for 2005 (Europe and Canada) Sector World revenues 2005 European revenues 2005 Europe % CAGR Europe Telecom 54.3 billion 18.1 billion 33% 6.5% Navigation 17.3 billion 2.3 billion 13% 22% Earth observation 1.3 billion 0.4 billion 31% 4% Total 72.9 billion 20.8 billion 29% 11% Source: Euroconsult (2007). data include Canada, an associate member of ESA, which accounts for around 10%. EO value adding revenues are small compared with value adding revenues from telecom and navigation. The table indicates that EO is the smallest of the three value adding space segments in absolute numbers. European revenues take up around one-third of world revenues. European revenues from EO amount to approximately 2% of total European revenues of downstream value adding sectors, which is equal the share that world EO revenues have in world value-adding revenues. The revenue figures above are for EO value adding activity undertaken on a contracted basis including public sector revenues, which account for around 150 million, mostly coming from Meteorology and Met-ocean. European data quoted above include Canada, an associate member of ESA, which accounts for around 10% of the total. European EO downstream revenue amounts to 390 million including public sector revenues from meteo and met-ocean. The Euroconsult figures mentioned above can be compared with the figures provided by VEGA. VEGA reports the total revenue in Europe and Canada for EO value adding industry at 285 in 2002, growing 2% per annum on average to 306 million in This figure does not entirely match with the 390 million in 2005, as presented by Euroconsult. However, these revenues include public sector revenues from meteorology and met-ocean, while we understand that this is excluded in the VEGA study. If we correct for this, there is a gap of around 60 million. Part of this can be explained by the difference in base year (2005 for Euroconsult, and 2006 for VEGA), but not all. The difference may arise from methodological differences. In the table below a reconciliation of the annual revenue figures from both Euroconsult and Vega is provided. 8

9 Table 0.2 European commercial downstream revenues amount to 175 million. Reconciliation of annual revenue figures Source of Revenues Vega (2006) Euroconsult (2005) Commercial Services 200M 200M Grants 100M Data Sales 100M Public Sector (Met+Ocean) 200M Canada ( 25M) ( 25M) Net European downstream industry commercial revenues 175M GMES Core Services impact two-third of EO commercial downstream revenues The influence of the core services From the table above it can be derived that the commercial revenues generated by European industry is estimated at approximately 175 million. Subsequently, an analysis has been made which share of these services would be impacted by the GMES core services (as currently defined) if the core services would be operational. This indicates for which share of the downstream sector the core services provide relevant inputs. It is estimated that the value of commercial downstream services industry potentially impacted by the GMES core services (as currently defined) is 117 million per annum based on 2006 turnover out of the overall 175 million if the core services would be operational. Employment and productivity VEGA estimates employment in the sector to have risen from 2,900 employees in 2002 to 3,000 in An overview of employment and revenue is presented in the following table. Table 0.3 The European downstream sector employs 3,000 persons. European revenue (nominal) and employment CAGR Revenue* 285 million 306 million 1.8% Employees* 2,900 3, % Labour productivity (revenue per employee) 98, , % Source: VEGA * Does not include revenue or employment generated by the public sector The table indicates that nominal revenues have increased by around 2% per annum on average between 2002 and 2006, while employment evolved in a lower pace, slightly under 1%. This implies that the productivity per employee has grown, but only in nominal terms. If inflation was above one percent, then real turnover per employee has fallen. Therefore it can be concluded that there is no evidence of productivity growth. Smaller companies have grown less in absolute terms than larger ones. c/fn

10 The European EO downstream sector is made up of many small enterprises. Structure of the sector There are 151 companies in Europe and Canada which can be defined as value adding companies (2006), excluding the public sector. In 2002 there were 162 companies identified. The decrease can be explained by consolidation activities that have taken place. The sector is primarily made up of small and medium sized companies. The distribution among categories is presented in the following table. Table 0.4 Size distribution of value adding companies (Europe and Canada) 1 Size class Number of companies Small (0-10 employees) 87 Medium (11-60 employees) 68 Large (>60 employees) 6 Total 151 Source: VEGA On average, the sector employs 20 persons per company and generates a turnover of around 2 million per company. Competitiveness of the sector The sector serves five overall market segments: land monitoring, natural resource monitoring, oceanography, defence and security and meteorology. The level of maturity of each of these segments differs significantly. Revenue growth within each of these five sectors has differed as well between these segments. Limited intra-european export, as well as export outside the EU No evidence of import of EO downstream services into Europe Overall, nearly 10% of all European products are also sold to global users. However, the majority of the users or customers of European value adding companies are located in the country of the company itself. This implies that intra-european export is relatively limited and that export to non-european customers is poor, and almost entirely carried out by few large companies. There is no evidence found in the literature studied that non-european companies serve a significant share of the European market, i.e. import into the EU of services is believed to be non-existent. Most of the EO markets are considered to be open to foreign suppliers at a global level and within Europe markets are open to competition in principle. However at a national level there is a tendency for value-adding from local providers for several value-adding activities. Foreign (non-eu) service providers therefore do not seem to provide services in Europe. In terms of profitability trend of the EO service industry as a whole, profitability is typically below 10% and concentrated in a few larger companies. However, smaller companies tend to show a higher margin on their revenue than larger companies. On the other hand, margins of smaller companies seem to be more volatile than those of their larger competitors. Companies with higher profit/revenue ratio are those for which the 1 The VEGA definition of size classes differs from the EU definition, that defines companies with 1-10 employees as microenterprises, with employees as small enterprises, with employees as medium sized enterprises, and >250 employees as large enterprises. 10

11 value adding activity represents a minor part of their overall activity. In terms of liquidity, many companies remain below a safe level, although this is improving. The European EO downstream sector is relatively open for new entrants, which generally originate from the R+D environment European downstream service providers are dependent of their data suppliers, serve generally public customers, and sell highly customised products and services Large influence of the public sector on the EO downstream sector Cost of data and labour supply are key input factors and are crucial for competitiveness Emergence of new China and India may affect competitiveness in future.. Barriers to entry the sector are relatively limited in number. Most important seems to be the influence of governmental policy and additionally the cost of data access, where incumbent producers that are part of a larger group of companies also providing data have a comparative advantage. Nevertheless, the initial set-up costs for a new company in the value adding industry are low, and many new entrants originate from the R+D environment. Given a high R&D intensity, funded by grants, the sector seems to be open for entry in this respect. Data providers are the most important supplier for the sector. The relation between the data suppliers and the value adders is a possible threat for the competitive position of the sector, as a large share of the value adders consider suppliers to have a negative impact on their performance. Additionally, nearly half of the supplier relationships are now supported by some form of framework agreement and of these framework agreements used, more than three-quarters are managed by the supplier, which indicates a strong dependency of the sector on their suppliers. The majority of the customers of the value adding organisations are public organisations. Takeoff of commercial business is slow, which seems to stem from a lack of knowledge about the EO potential to tentative private customers and the (perceived) high costs of EO products and services. EO products and services show a large extent of customisation. Less than ten percent of product and services is not customised at all. This level of customisation is decreasing. Horizontal issues affecting competitiveness The ability for EO downstream service providers to further develop will very much depend on whether the regulatory and framework conditions that govern EO activities provide a supportive environment for such activities. An analysis has been made of these regulatory and framework conditions that apply to the EO downstream sector. Our analysis has shown that the public sector has an important influence on the sector, not only because it sets the legal and regulatory framework for the sector, but also because it has a large influence as a client, by funding the development of the sector and by shaping policies that influence market demand for EO services. Other important issues are the input factors labour and data and R&D in supplying sectors. The EO sector requires highly skilled employees, a demand that also other industries have. At the same time supply of these employees decreases. This means that a possible reduced influx of new well-skilled employees is a potential threat for the sector. In terms of data input, this has been proven to be a major concern for service providers. They indicate that the costs are increasing, which could hamper profitability and innovation. Finally, the tendency of countries like China and India to develop their own space capabilities affects the competitiveness of the EO downstream sector in the longer term, especially in expanding on the non-european markets. c/fn

12 US downstream industry is 2-3 times larger than European equivalent with a similar market profile, but larger defence and security market and comparable dependence on public sector investment in R&D Comparison with the US In order to put the performance structure and horizontal conditions of the European EO downstream sector, a comparison has been made with its equivalent in the USA. The following observations can be made about the characteristics of the EO downstream sector in the US and its comparison with Europe. US Industry is between two and three times the size of Europe, depending on the exact definition of the sector. Revenue per head is approximately 20% higher in US. This statistic is related to the slightly larger average size of companies in the US. The size distribution of companies is similar in character, but in absolute terms there are more larger companies in the US. There are similar market profiles in terms of applications. The main difference is the much larger domestic defence / security market accessible to US companies. US industry appears to be growing faster than that in Europe. There is no direct evidence of any clear differences in export performance / market access between the US and Europe. Surveys on both continents reveal almost identical perception that other countries industry enjoys better protection in their domestic markets. Investment capacity is similarly limited within most companies. There is significant dependence on public sector investment in R&D. However, there is limited funding available for R&D for downstream industry from the federal budgets. In terms of service provision, the NOAA is as a public institution strictly forbidden to offer services that can be offered by private companies, which implies a significant market opportunity for private service providers. Attracting and keeping highly skilled workforce is considered a key impediment for development by EO companies in the US. Recommendations Based on the analysis, a set of recommendations have been formulated. These are summarised in the next table. Area Recommendation Explanation Optimising the involvement of the business community Minimising Business investment decisions are affected by risk. Uncertainty uncertainty over conditions of access, price and data policy for GMES data and (changes in) core service outputs mitigates against investment in new services to use them. Therefore there is the need to communicate clearly to industry on what the scope of the Core Services will be, what the limits of their growth will be, and under what terms will access be allowed to their outputs to different stakeholders Preserve If the core services grew greatly in scope and mat a large number opportunities of end users needs, then this would clearly damage the downstream commercial market for the downstream industry. Generally speaking, restricting the scope of the core services (so that they don t go too far downstream) will increase market prospects for downstream service providers. It is therefore recommended that the value chain of each CS is studied in detail to determine the optimum scope. Attracting industry While most of the EO industry is very well aware of GMES, there 12

13 Optimising framework conditions Mobilising EU policies and funds involvement Securing the supply of qualified labour Export promotion support Structuring of development projects Examine policy interventions encouraging use of GMES services may be other companies in the wider geospatial industry, or service companies in industry segments (e.g. oil an gas) who are not so aware. It is recommended to pursue approaches in terms of specific publicity to these other sectors and in terms of incentivising bidders in R&D programmes to include such companies in their teams. Well-educated professionals are crucial in the development of new services in EO. In future, a shortage may arise in the supply of such employees. It is therefore recommended to develop together with the sector a strategy to secure the supply of skilled employees in future. The analysis has shown that the large companies export outside Europe, while the small companies generally serve the domestic market only. It is recommended to assess with the industry association and the member states whether export promotion support can be set-up. National space agencies in co-operation with national export promotion agencies can facilitate the export development process with dedicated measures and facilities. It is recommended to restructure FP7 instruments to make the programme more suitable for EO service development, by introducing a phased approach and to reduce the evaluation time of proposals. One way to create or stimulate a market is through the policy interventions that encourage or mandate the use of certain technologies in this case for environmental monitoring. However this approach would need to be adopted with extreme caution to ensure that the benefits to one industry (EO) did not result in additional costs and regulatory burdens to another industry (that is responsible for complying with the regulations), and to prevent discrimination of technologies. The US comparison shows that the security and defence aspect is important in this respect as well. Further industry monitoring Develop sector monitor It is recommended to develop a sector monitor that enables to assess the development of the sector in terms of performance and trade. It is also recommended to start this monitor when a policy option for GMES has been adopted. After all, the Commission s policy programming cycle requires further monitoring, and a sector monitor would give the right input for this. It should be realised that such monitor would need to cover both the companies in the sector (production, employment, export etc) and the customers (import, cross check on production). c/fn

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15 1 Introduction 1.1 Background and objective The Commission considers the development of GMES (per September 2008 called Kopernikus) of strategic importance for Europe and its citizens. With the development of a set of core services there is a response to a (pan) European need, at either Community level or Member State level, to have information services available in the domains of emergency response, land monitoring, marine, atmosphere and security related services. In addition, it is anticipated that a series of value added services will be developed by public and private entities, based on the core services. These downstream services are expected to be innovative, contributing to the Lisbon objectives and contribute to the development of the competitiveness of the European society. In terms of the further development of the GMES programme, some fundamental choices are coming up. These will be presented in a Communication in October 2008, and concern the issue of Governance and Sustainability. This Communication will be substantiated by an Impact Assessment, as is required for initiatives which are in the Commission s Workprogramme. The choices to be made may influence the development of the GMES downstream sector. Therefore the Commission needs to have a clear picture of the competitiveness of the existing EU GMES downstream market and of the regulatory and other framework conditions affecting the competitiveness of this market. This study should be designed in such a way to allow the Commission to further assess the impact on the downstream market of different policy options. It is important to underline that the analysis concerns the current status of the sector, hence addresses the supply side, not the demand side. 1.2 Aim of this report The project consists of five tasks. These tasks are depicted in the following figure. FN97609 FWC Sector Competitiveness GMES Downstream Sector 15

16 Figure 1.1 Tasks in the project Task 0 Pre-analysis Task 1 Literature review Task 2 Data Presentation Task 3 Assessment of competitive position Task 4 Analysis of framework conditions Task 5 Recommendations This report is the final report of the study and presents the results of task 1-5 and thus provides the complete study results. 1.3 Sector definition It is important to define the sector at the beginning of the study. There are a number of considerations that are important to take into account when defining the GMES downstream sector for this study. We will address these below. Value adding chain An approach for defining a sector is to analyse the value added from raw material to end product, in other words the value adding chain. For the space services, the Euroconsult study 2 on downstream value adding sectors of space based applications described the value chain as follows: Satellite manufacturing Launch service provision Lease or sale of satellite capacity user ground equipment and terminals value added services. 2 Euroconsult, Assessment of the downstream value adding sectors of space-based applications, FN97609 FWC Sector Competitiveness GMES Downstream Sector

17 More specifically, Euroconsult defined a (EO) value added service as any service that corresponds to one of more of the following criteria: does not rely on the sole provision of the satellite signal, but enhance/upgrade it, or is designed for a customer, a final user, or, is provided for operational purpose (recurring service), mixes several applications. In addition the service is provided under a contract or for a definable budget. Downstream is here implicitly defined as the end of the chain, where EO data as used as input, and combined with other inputs to add value. This definition excludes internal value adding activity within an end user organisation, but includes value adding activity within the public sector where this is undertaken on a commercial basis (e.g. commercial metocean services offered by public met. offices). GMES Core services The terms reference of the current study describe the difference between GMES Core Services and Downstream Services. Core Services are services that provide data and information products based on space and in situ observations, from infrastructure specifically built for GMES or owned by third parties. GMES services are (co-)managed and (co-)funded by the EU and/or its competent bodies because they respond to (i) a need at Community level, or (ii) a need at Member State level that cannot be sufficiently met by the Member States themselves. Currently it is foreseen that the following Core Services will be provided: Emergency Response, Land Monitoring, Marine, Atmosphere and Security-related Services. The Downstream Services (DS) are Third Party Services that use GMES Core Services as an input. Matching both concepts While the definition of downstream services as stated above is in itself straightforward, the translation to a sector definition becomes difficult, since simply defining the GMES downstream sector as those organisations that offer GMES downstream services is not fully applicable. While the division between Core and Downstream can be understood from a GMES programming perspective, from an industry sector perspective this division is artificial. Often the same organisations develop and offer both of these types of services but would not normally make the same distinction in their services offer at the moment. Hence, only part of the activities carried out by these companies can be attributed to the GMES Downstream Services sector currently. In future, the distinction is likely to become more clear as core services are a public good and will not be offered on the market. Introducing the issue of the time frame The key focus of the study is on the existing EU GMES downstream market, as indicated by the ToR. Since GMES is at the moment still at the development phase, only preliminary services currently exist, based on the results of ESA GSE and EC Framework 6/7 projects. So, for the time periods for which industry data are available (Up to 2007) there were no operational GMES core services. FN97609 FWC Sector Competitiveness GMES Downstream Sector 17

18 When the GMES downstream services sector is defined as the EO value adding industry, the contamination of this sector by organisations that offer core services is virtually non-existent, as these core service are not yet offered on an operational basis. It would therefore be applicable to define the GMES downstream sector for this study as those organisations that offer value added services based on EO data. However, it was pointed out at the kick-off meeting that there will also be companies that will use EO data that is not related to GMES, i.e. the access to which would not change once GMES services are in place. This implies that the definition as suggested is too broad for the purpose of this study, which has to feed the EC s impact assessment on policy options for GMES. Therefore, it is necessary to consider only the GMES part of those organisations that offer value added services based on EO data. However, in many cases the available literature and data does not allow to make such distinction. If the data does allow such distinction, however, it would additionally be a distinction on judgement rather than on fact. Public sector While one of the objectives of GMES is to stimulate the growth of the downstream private sector in future, it is currently still the case that there are a lot of actors in the sector that are public. Therefore, it is necessary to take the public part of the downstream sector into account. However, as it is useful to understand the differences for the various indicators for competitiveness between private and public part of the sector, it was decided at the kick-off meeting to distinguish these two categories whenever possible in the study, if the data allows. Conclusion Based on the previous considerations, it has been decided that the sector is defined as those organisations that offer value added services based on EO data. In the analysis, two distinctions will be made in this respect when the data allows: Companies that use EO data the provision and availability of which would be affected by the introduction of GMES services, versus those that use other EO data Public entities versus private actors. This can be visualised as follows. Figure 1.2 The viewpoints for the study Earth observation input data Affected by GMES core services Value added service providers Public organisations Not affected by GMES core services Private companies 18 FN97609 FWC Sector Competitiveness GMES Downstream Sector

19 Definition of Europe Europe is defined in this study as the EU member states plus the remaining European ESA member states which are not part of the EU (Norway plus Switzerland). 1.4 Structure of the report Chapter two of this report provides some key characteristics of the GMES downstream sector. Subsequently, chapter three provides insight in the competitiveness of the GMES downstream sector. Chapter four addresses horizontal conditions affecting competiveness, while chapter five provides a comparison with the USA. This report ends with chapter six that provides conclusions and recommendations. FN97609 FWC Sector Competitiveness GMES Downstream Sector 19

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21 2 Key characteristics of the sector This section provides some key economic characteristics of the EO downstream services sector. It will address the performance of the sector in section one and the sector s structure in section two. In section three an assessment is made on which part of the EO downstream services sector is affected by the GMES core services. 2.1 Performance Production of the sector The economic performance of the EO downstream sector has been reported in three studies: a study by Euroconsult in , and two studies by VEGA, from and updated in The figures from both Euroconsult and VEGA are for all EO activity, even if the company concerned is not in the space sector. Hence they include, for example, both the EO related revenues of large engineering /survey companies that use EO as part of their overall business, and the EO revenues from large integrated satellite manufacturers. Euroconsult assessed the downstream value-adding sectors of space-based applications. This concerned earth observation (EO), communication and navigation. An overview of the world and European revenues and the compound annual growth rate (CAGR) is provided in the following table. Table 2.1 Revenues of the downstream value adding sectors of space-based applications for 2005 (Europe and Canada) Sector World revenues 2005 European revenues 2005 Europe % CAGR Europe Telecom 54.3 billion 18.1 billion 33% 6.5% Navigation 17.3 billion 2.3 billion 13% 22% Earth observation 1.3 billion 0.4 billion 31% 4% Total 72.9 billion 20.8 billion 29% 11% Source: Euroconsult (2007). data include Canada, an associate member of ESA, which accounts for around 10%. The table indicates that EO is the smallest of the three value adding space segments in absolute numbers. European revenues take up around one-third of world revenues. 3 Euroconsult, 2007, Assessment of the downstream value-adding sectors of space-based applications. 4 VEGA and Booz Allen and Hamilton, 2004, The state and health of the European and Canadian EO service industry 5 VEGA, 2008, The state and health of the European and Canadian EO service industry in 2006 FWC Sector Competitiveness Studies GMES Downstream Sector 21

22 European revenues from EO amount to approximately 2% of total European revenues of downstream value adding sectors, which is equal the share that world EO revenues have in world value-adding revenues. The revenue figures above are for EO value adding activity undertaken on a contracted basis including public sector revenues, which account for around 150 million, mostly coming from Meteorology and Met-ocean. European data quoted above include Canada, an associate member of ESA, which accounts for around 10% of the total. The following table provides a split of total European revenues per segment. Table 2.2 European revenues EO value adding industry per segment in 2005 Segment Revenue in 2005 Meteorology 211 million Defence and security 65 million Oceanography 49 million Natural Resource Monitoring 52 million Land Monitoring 13 million Total 390 million Source: Euroconsult (2007). data include Canada, an associate member of ESA, which accounts for around 10%. Euroconsult also indicated that EO value adding industry is the only segment where, in commercial activity, the downstream sector is smaller than the upstream sector (Satellites, launches, operations and ground equipment). The Euroconsult figures mentioned above can be compared with the figures provided by VEGA. VEGA reports the total revenue in Europe and Canada for EO value adding industry at 285 in 2002, growing 2% per annum on average to 306 million in This figure does not entirely match with the 390 million in 2005, as presented by Euroconsult. However, these revenues include public sector revenues from meteorology and met-ocean, while we understand that this is excluded in the VEGA study. If we correct for this, there is a gap of around 60 million. Part of this can be explained by the difference in base year (2005 for Euroconsult, and 2006 for VEGA), but not all. The difference may arise from methodological differences. VEGA also estimated that the value adding products and services provided by the EO value adding industry are made up for 80% from a combination of space-borne plus aerial or ground-borne data. The OECD 6 indicates that in the total EO downstream sector (commercial remote sensing, including data sales), the revenues amounted to 2 billion worldwide (satellite plus aerial component) in It was estimated that the satellite component amounted to one third of the total. 6 Space 2030, Tackling society s challenges, OECD, FWC Sector Competitiveness Studies GMES Downstream Sector

23 2.1.2 Employment and productivity VEGA estimates employment in the sector to have risen from 2,900 employees in 2002 to 3,000 in An overview of employment and revenue is presented in the following table. Table 2.3 European revenue (nominal) and employment CAGR Revenue* 285 million 306 million 1.8% Employees* 2,900 3, % Labour productivity (revenue per employee) 98, , % Source: VEGA, data include Canada * Does not include revenue or employment generated by the public sector The table indicates that nominal revenues have increased by around 2% per annum on average between 2002 and 2006, while employment evolved in a lower pace, slight under 1%. This implies that the productivity per employee has grown, but only in nominal terms. If inflation was above one percent, then real turnover per employee has fallen. Therefore it can be concluded that there is no evidence of productivity growth. Smaller companies have grown less in absolute terms than larger ones, according to VEGA. It should be noted that the reported revenue growth in the VEGA survey is higher than the factual. Surveyed companies indicate that they have experienced an average annual growth rate of revenues of 7%. However, when the total sector revenues in 2002 and 2006 are compared, only a growth rate of 1.8% per annum can be derived Location and nature of clusters The main operational centres of EO activity in 2006 according to VEGA are the UK and Germany. Additionally, France, Italy, Belgium and Spain are also taking up a relative important position. These countries also account for the largest concentrations in employment, which is obviously related to the number of organisations established in a country. However, the number of employees in France is higher than in Germany or the UK, which suggests that France accommodates relatively larger organisations. According to VEGA, almost all EO downstream organisations are located in the EU15, plus Norway and Switzerland. VEGA notes that regarding the new member states only the Czech Republic accommodates a few EO downstream organisations. 7 VEGA reports revenue per employee being 107,000, which is based on a correction for outliers in the survey sample. However, these outliers were not excluded when calculating total revenue, which does not seem methodologically sound. Therefore this table presents the raw figures without correction for outliers. FWC Sector Competitiveness Studies GMES Downstream Sector 23

24 2.2 Structure Industry structure and size distribution of companies According to VEGA, there are 151 companies in Europe and Canada which can be defined as value adding companies (2006), excluding the public sector. In 2002 there were 162 companies identified. The decrease can be explained by consolidation activities that have taken place. The sector is primarily made up of small and medium sized companies 8. The distribution among categories is presented in the following table. Table 2.4 Size distribution of value adding companies (Europe and Canada) Size class Number of companies Small (0-10 employees) 87 Medium (11-60 employees) 68 Large (>60 employees) 6 Total 151 Source: VEGA On average, the sector employs 20 persons per company and generates a turnover of around 2 million per company. There are a few large companies with multidisciplinary activities dominating the sector. These companies are all related to the upstream part of the value chain through their shareholders and business focus. The majority of companies in the sector are, as said, SMEs. These fall into two broad categories 9 : o Market oriented SMEs, starting from a service already developed for their customers based on current non space technologies, and proposing improvements that make use of satellite capabilities. o Technology based SMEs, starting from innovative technologies developed for ground use, and proposing to expand the capabilities of already developed space based services using such innovative technologies. The available data unfortunately do not allow to distinguish these two categories in the analysis Identification and ownership of key producers in EU The major players in the EO downstream sector in Europe are Infoterra, Spot Image, Telespazio, GAF and Eurosense. The majority of these five companies are subsidiaries of a larger industrial group of companies. A brief description of these five key producers is 8 VEGA defines employees as medium-sized companies. Traditionally these are still seen as small companies. Likewise, large companies are generally considered to have 250 (or even 500) employees or larger. 9 Source: Galant, S., T. Pagano and A. Vaféas, Doing business with the help of GMES, INVESAT, FWC Sector Competitiveness Studies GMES Downstream Sector

25 provided below. These companies are all member of the European Association of Remote Sensing Companies. Infoterra is a provider of geo-information products and services. It has over 350 staff in France, Germany, Hungary, Spain and United Kingdom. Infoterra is a wholly-owned subsidiary of Astrium (a space industry conglomerate) 10. Astrium in turn is a wholly owned subsidiary of European Aeronautic Defence and Space Company (EADS), a global company specializing in aerospace, defence and related services. The EADS Group includes the aircraft manufacturer Airbus and Eurocopter 11. Spot Image Group headquarters are based in Toulouse, France. It markets itself as a market leader for geographic information. The distribution of products is handled through partnership and an international sales network. The company has five subsidiaries in Australia, China, United States, Japan and Singapore and three international offices, based in Brazil, Mexico and Peru 12. Spot Image both sells data from its own satellites and provides value added services. Shareholders of the Spot Image Group are CNES (the French National Space Agency), EADS, Swedish Space Corporation, Alcatel, the French National Geographic Institute (IGN) and the state of Belgium. Telespazio, a member of the Space Alliance between Finmeccanica and Thales is a satellite services company. It is based in Rome, and employs 1,400 staff, operating from a network of four space centres and 22 global sites. Telespazio offers satellite services in different domains such as navigation, communication and observation, and is a re-seller of a/o Quickbird, Landsat en Envisat images. EO value added services are only a small part of their portfolio, which means that out of the 1,400 employees a smaller number is involved in EO value adding activity. 13. GAF is based in Munich, Germany and currently employs 60 members of staff. GAF belongs to the Telespazio group of companies 14. Its core services are described as data processing, information services and management consultancy. EUROSENSE is a commercial remote sensing organisation and has several offices in Europe. It has a presence in Belgium (HQ), The Netherlands, France, Germany, Hungary, Slovakia, Czech Republic, Poland Romania, Bulgaria and Ukraine. Eurosense 15 are involved in aerial photogrammetry, digital orthophotography, cartography, hydrography, GIS and other products and services build on the processing of satellite remote sensing data, based on aerial, space and ground based data FWC Sector Competitiveness Studies GMES Downstream Sector 25

26 2.3 Determination of the GMES downstream sector Introduction The Earth Observation value adding industry in Europe is active in a wide range of applications and produces outputs at a range of spatial scales in accordance with the needs of its customers. The Core Services are intended to improve the efficiency of the downstream sector by providing access to basic processed and modelled products more cheaply than would be the case if each company had to undertake the basic processing and modelling. The business case for GMES is that these core services will therefore improve the efficiency of the downstream sector, allowing it to offer better value for money in products and services to end users. In order to provide input for the GMES impact assessment, it is necessary to identify that part of the downstream sector for which Core Service outputs provide relevant inputs. Therefore an assessment is made here on which part of the EO downstream services sector, as presented in the previous sections, is affected by the GMES core services Assumptions The following assumptions have been agreed with the client in undertaking this exercise: 1. The quantitative starting points for the analysis are again the assessments of the European Value Adding EO sector undertaken by Euroconsult (2005 data) and Vega (2006 data). These reports produce different results due to differences in sampling, methodology and reference year. The reconciliation of the annual sector revenue figures is provided in the table below. 2. The analysis should exclude industry revenues from pure data sales. 3. Income from R&D grants should not be considered part of the industry revenue for the purposes of this exercise. 4. Given assumption (3), it is further assumed that any current industry activity that could become part of GMES CS under operational funding is currently funded from the grant income. Hence establishing Core Services will not directly reduce commercial service revenues. 5. The definition of what constitutes a GMES Core services is specified in the Annexes to the GEMS Bureau GMES Progress Report Table 2.5 Reconciliation of annual revenue figures from Vega and Euroconsult studies (rounded numbers) Source of Revenues Vega (2006) Euroconsult (2005) Commercial Services 200M 200M Grants 100M Data Sales 100M Public Sector (Met+Ocean) 200M Canada ( 25M) ( 25M) Net European downstream industry commercial revenues 175M 26 FWC Sector Competitiveness Studies GMES Downstream Sector

27 2.3.3 Methodology for Mapping of EO value adding activities to GMES core service outputs There are two possible approaches to identifying the downstream sector influenced by GMES core services. 1. A vertical segmentation analysing the levels of activity in different vertical parts of the supply chain and isolating the downstream part. 2. A horizontal segmentation identifying those thematic market segments that could be served by Core services. It was agreed to use the second method due to the better availability of information to segment the market horizontally rather than vertically and because the core services vary considerably in their vertical scope. The basic input is shown in figure 2.1, which is taken from the Vega report and illustrates the percentage of the overall industry revenues that were attributed in their survey to each of 17 applications. Figure 2.1 Proportion of industry revenues in horizontal market sectors (Vega 2008) Note: The VEGA definition of size classes differs from the EU definition, that defines companies with 1-10 employees as micro-enterprises, with employees as small enterprises, with employees as medium sized enterprises, and >250 employees as large enterprises. FWC Sector Competitiveness Studies GMES Downstream Sector 27

28 2.3.4 Results Using the GMES Core Services definitions as a reference point, each of the 17 applications was allocated into one of three categories: 1. Significantly impacted by the GMES CS outputs. 2. Partially impacted by the GMES CS outputs. 3. Not affected by the GMES CS outputs. For category 1) 100% of the value of the segment was counted as influenced by the GMES CS., for category 2) 50% was counted and for category 3) 0%. Although this categorization is quite crude, it was felt that uncertainties in the exact definition of the sectors and subsequent uncertainty in mapping to GMES CS outputs meant that a more detailed classification was not justified. In undertaking the mapping, it was necessary to make some interpretations regarding exactly which applications were included in the categories listed in figure 2.1. These are explained in the comments column in the table. The results of the mapping from application segment to GMES CS influence are shown in the following table. Table 2.6 Mapping of EO downstream application segments to GMES CS influence Sector % of Core Service Cat- Comments market egory Cartography & Topographic mapping 20 Land 2 Much of this work is very high resolution, site specific mapping. Land use/land cover & change 15.5 Land 1 Clearly related to Land CS mapping Marine and coastal surveillance 12 Marine 1 Provision of basic physical models Geological mapping 10 3 This sector is dominated by specific mapping for hydrocarbon industry Agriculture 7.5 Land 2 The yield prediction part of the sector is included, but others, including detailed mapping for CAP monitoring would be outside. Forest 7 Land 1 Clearly related to land CS Crisis / damage mapping 6 Emergency 1 Main purpose of Emergency service Risk/vulnerability mapping 4.5 Emergency 1 Main purpose of Emergency service Land motion monitoring 6 3 Not currently included in Land or Emergency services 28 FWC Sector Competitiveness Studies GMES Downstream Sector

29 Sector % of Core Service Cat- Comments market egory Ecosystem monitoring 4 Land 1 Clearly related to land CS Asset & Infratsructure mapping 3 3 Assumed to be very site specific high resolution mapping Other No specific information on what these services are (though only 0.25% of the market, so the impact is ngligable). Climate change 0.5 All 1 Assumed to be mostly impact studies that would benefit from a range of services, even though there is no specific climate CS Atmospheric monitoring 1.5 Atm. 1 Clearly related to atmosphere CS Weather 0 3 No specific weather forecasting products in CS this is the domain of the national met services Metocean monitoring and 0.75 Marine 1 Clearly related to Marine CS forecasting Water quality monitoring 1.5 Land Marine 1 Land for areal pollution source work, marine for coastal applications As a result of the combination of the sector mapping in table 2.6; the estimates of industry revenues from applications sectors in figure 2.1, and the estimate from table 2.5 of an overall commercial services business of 175M, it is estimated that the value of commercial downstream services industry potentially impacted by the GMES CS is 117M per annum based on 2006 turnover if the core services would be operational Remaining Issues In interpreting and using the results and using them for GMES impacts analysis, the following issues should be borne in mind: This analysis is based on the current definition of Core Services, but this is evolving both in terms of the horizontal scope of the core services and the vertical reach of the core services into the value chain. The analysis may need to be re-visited if there is a significant change in Core Service definition. The vertical scope within the value change varies significantly from core service to core service. For example the emergency core service covers almost the complete value chain to the end user, whereas the marine Core Service is restricted to higher level products. The scope for impact on and benefit to the industry will depend heavily on the vertical scope of each service. The business case for GMES benefits to the downstream industry is that it increases efficiency by centralising expensive and repetitive data collation, basic processing and modelling tasks. This should support better price/performance in the downstream sector and lead to better profitability in the sector, and/or FWC Sector Competitiveness Studies GMES Downstream Sector 29

30 increased industry turnover. However, this will only be the case where there is elasticity of demand for downstream services. 2.4 Conclusion The EO downstream sector employs around 3,000 persons in The total revenue in Europe amounts to million in 2006, excluding revenues by the public sector, which amount around 150 million. These values include revenues from grants; corrected for this, revenues from paying customers amount to million, excluding revenues by the public sector. It is estimated that the value of commercial downstream services industry impacted by the GMES CS is 117 million per annum based on 2006 turnover. The EO DS sector is a relatively small sector, composed of around 150 companies. More than half of these companies are small companies employing less than 10 persons. The average turnover amounts to 2 million per company. Note that the public sector is not included in these figures. The key players in the industry are to a large extent subsidiaries of a larger industrial group of companies. The main operational centres of EO activity are the UK and Germany. Additionally, France, Italy, Belgium and Spain are also taking up a relative important position. Almost all European EO downstream organisations are located in the EU15, plus Norway and Switzerland. 30 FWC Sector Competitiveness Studies GMES Downstream Sector

31 3 Competitive position of the sector 3.1 Introduction This section addresses the competitive position of the GMES downstream sector. This will be analysed from the perspective of the performance of the sector, its structure and the processes within this sector. 3.2 Performance Developments in key product areas Market segmentation The EO downstream sector can be divided into five overall market segments: Natural Resource Management, Defence and security, Land monitoring, Oceanography and Meteo. Each of these segments in turn can be subdivided in smaller segments. Such segmentation has for example been developed by Euroconsult, and is depicted in the following figure. Figure 3.1 Market segmentation Macro segment Natural Resource Management Defence & Security Land Monitoring Oceanography Meteo Environment monitoring Homeland security / law enforcement Consumer services Transport Professional Market segment Agriculture Forest Humanitarian Disaster management Cartography Land use / land cover Costal zone / engineering Weather forecast Energy Water FWC Sector Competitiveness Studies GMES Downstream Sector 31

32 Source : Euroconsult (2007) The level of maturity of each of these segments differs significantly. The picture below presents the various segments in terms of the traditional market penetration S-curve. Figure 3.2 Market penetration of the various segments Market penetration CYCLICAL PHASE DECLINING PHASE Public service meteorology Cartography MATURING Several market segments in Land Use/Land Cover PHASE emerging phase requiring support for development Energy and mineral resources GROWTH Agriculture PHASE Homeland Security/Law Enforcement TECHNOLOGY Marine transport PHASE Professional meteorology Forest resources Disaster management Water resources Humanitarian relief Marine eng. CZM Environment monitoring Consumer services Land market segments in NEW GROWTH cyclical phase requiring CYCLE support for transition Key growing segment where Europe lacks behind Time Source : Euroconsult (2007) Interesting to note is the difference between public service meteorology in the cyclical phase and professional meteorology in the beginning of the growth phase. EO has been an established tool in meteorology supported by dedicated public organisations (EUMETSAT, NOAA) that have brought about a stable and mature infrastructure which has delivered steady improvements in the scope of general purpose weather forecasting. Now the professional meteorology is rising, stemming a/o from new distribution channels of weather forecasts (internet), and the emergence of local TV stations requiring local information which is served by new private meteo companies (Spiegler 2007). Additionally, technological advances resulted in price reductions for meteo services, which resulted in additional demand from industrial sectors such as agriculture and construction, which could previously not afford these services. Additionally, new applications were developed. (Pirone, 2008). Also Output The total revenue of the EO downstream sector amounted million in 2005/2006 as indicated in the previous chapter, and showed a growth of approximately between 2% ( , VEGA) and 4% ( , Euroconsult) in the past years. The growth in the various market segments has differed significantly though. An overview of the compound annual growth rate of revenue in Europe per segment is provided in the figure below. 32 FWC Sector Competitiveness Studies GMES Downstream Sector

33 Figure 3.3 Compound annual growth rate of revenue per market segment Land Monitoring Natural Resource Monitoring Market segment Oceanography Defence and security Meteorology Total EO dow nstream sector 0% 2% 4% 6% 8% 10% 12% CAGR ( ) Source: Euroconsult Three of the major segments (Land monitoring, Natural resource monitoring and meteorology) showed modest annual growth of round 2% in terms of revenues. Revenues from Defence and Security grew by around 5% per annum, while revenues from Oceanography showed an annual growth rate of 10%. These rates reflect the dominance of public sector customers in the first category where budget growth is strictly limited. Defence and security revenues increased more due to external pressures this being one area of public expenditure that is increasing. Oceanography revenues showed strong growth, but this was form a very low base, indicating new services based on EO that are just starting to come on stream. Dependency on grants VEGA indicates that about 30% of all revenues are from National/ESA/EC grants, hence not from customers paying for services. This figure rises to 50% for small/medium sized companies Developments in global market shares As depicted in table 2.1, the European EO value adding sector takes up around one-third of global revenues. The following section first provides a picture of the global and European demand for EO value adding services. The growth of the sector as a whole is then summarised, followed by specific global market intentions at a national and firm level, including an analysis of competitive pressures. Global Market Reach of EU Companies - Global demand and growth for EO Adding Value Services EO services are in demand in local and international markets (VEGA 2008). Demand provides an indication of the international market and global market reach of Earth Observation industry and can be illustrated in a number of ways through; location of European product and services customers, customer profiles and product market sectors (VEGA 2008). The following section analyses these trends. FWC Sector Competitiveness Studies GMES Downstream Sector 33

34 Figure 3.4 shows where the users of EO products and services (the main buying contact) are located. Both the non revenue and revenue weighted graphs indicates that the majority of the users or customers of European value adding companies are located in the country of the company itself. The revenue weighted analysis shows that where there are activities outside Europe, the market is dominated by the activities of large companies operating in Asia and North America, which suggests these organisations remain better at accessing export markets according to VEGA. Figure 3.4 User locations for EO companies Source: VEGA Note: The VEGA definition of size classes differs from the EU definition, that defines companies with 1-10 employees as micro-enterprises, with employees as small enterprises, with employees as medium sized enterprises, and >250 employees as large enterprises. Figure 3.5 shows historical comparisons of growth in EO Services by customer location in the period This analysis supports the revenue and non revenue picture above, by showing that most operational customers are located in Europe, which is at least 2.5 times greater than any other category. This share of products sold to European customers has slightly decreased between 2003 and The other trend to note is that there was a growth in the share of products sold to the category global users between These are customers that exercise a global reach from a non-specific base location, such as the United Nations. 34 FWC Sector Competitiveness Studies GMES Downstream Sector

35 Figure 3.5 Geographic location of customers Source: VEGA Another way of assessing the global market position of value adding companies, is to look at trends associated with EO products and services, shown by figure 3.6. As expected, given the user profiles, Europe (EU local market) is the key geographic area covered by the products and services of European companies. One of the reasons for the relatively low representation of small value adding companies outside of Europe is associated with the high marketing and sales costs of gaining access to potential buyers in distant export locations according to Galant (2007). This conclusion was support by the VEGA (2008), which noted that only a quarter of organisations reported no problems with sales resource and geographical footprint when commenting on the main challenges in accessing export markets. Figure 3.6 Geographic areas covered by services Source: VEGA FWC Sector Competitiveness Studies GMES Downstream Sector 35

36 Note: The VEGA definition of size classes differs from the EU definition, that defines companies with 1-10 employees as micro-enterprises, with employees as small enterprises, with employees as medium sized enterprises, and >250 employees as large enterprises. Global Market Competition This section analyses the factors which are affecting competition. As with demand, there are significant linkages between supply aspects of the EO sector that have the potential to affect the structure and competitive position of the EO value adding sector. For example, satellite operators play a key role in the EO value chain and have an influence on the market with their involvement in generating value added differing according to the level of expertise necessary to deliver the products to the end user (Euroconsult 2007). Within the EO sector there is a growing concern for consolidation and vertical integration. The vertical integration trend of satellite operators is expected to continue for several reasons, including the necessity for them to get closer to the customer base and to integrate the expertise of value-adding companies The second reason for vertical integration is to secure market growth in a more competitive environment, even though it could mean a lower profit margin, when compared to their traditional data sale activity. Globally, the US industry seems to be more consolidated and integrated than the European industry due to the presence of larger companies in some key market areas (Euroconsult 2007). European organisations have a highly competitive positioning in meteorology, but these are predominantly in the public sector where, in contrast to the US, public met services also operate in a commercial manner offering value added services. They hence benefit both from substantial investments in capabilities as well as branding advantages. As a mature market it is forecasted to experience lower growth than other segments (such as Defense and Security). Yet, it is still anticipated to represent the largest market segment in Europe in In Defense and Security, European companies have a low competitive positioning even though the market is anticipated to show the highest growth perspectives. This is due to the relatively much smaller domestic market that European firms have to relay on, compared to their US counterparts. Natural Resource Management is a niche market, where European companies enjoy a high competitive positioning. The Energy and Minerals market segment includes leading companies with a worldwide client base; the Agriculture market segment is largely focused on reporting for governments. Land Monitoring has the weakest competitive positioning and lowest market perspectives (Galant et al, 2007). In general, the European EO industry faces increasing competition from US companies, supported by large government contracts for national security needs and global institutional operators, such as NOAA & USGS. Another strong competition on value adding companies is expected from India and China, when they will use the data coming from their own observation satellites to provide services worldwide (Galant et al, 2007). Most of the EO markets are considered to be open to foreign suppliers at a global level. Within Europe markets are open to competition in principle, however at a national level 36 FWC Sector Competitiveness Studies GMES Downstream Sector

37 there is a tendency for value-adding from local providers for several value-adding activities. In the future, market accessibility in developing countries is expected to become more difficult due to a large number of projects implemented in many countries such as Thailand, Nigeria. Turkey etc. (77 more satellites are planned over the next 10 years). More and more countries will gain national capabilities and be less inclined to procure foreign suppliers value added data. In addition, stronger competition from India, China and Russian companies and organisations will make the market more competitive and put greater pressure on price (Euroconsult 2007), although price is not the single critical factor to win business, as further addressed in section Imports by origin It is unclear whether non-european value adding companies are active on the European market. The sources available do not give any insight in this issue. In terms of imagery sold to Europe by US companies there is quite some import, especially in the high resolution segment. However, data sales are considered outside the sector definition of the downstream sector Developments in profitability and price-cost margins This section analyses both EO service industry price cost margins, and sector profits. Factors which influence pricing of EO products and services include; cost of data, return on development costs, cost of overheads, cost of labour, competitor price pressure, cost of technical infrastructure and other. Focusing on cost factors, the 2008 VEGA study survey showed that labour and data costs are dominant influences on pricing. In terms of cost trends, the table below shows that in the period from the cost of data remained a primary factor. Factors driving price therefore are on the supply side and show little indication of value-based pricing (VEGA 2008). Such pricing strategy is usually applied by advanced industries with substantiated marketing strategies, such as the software industry and pharmaceutical industry, allowing them to maximise profit by charging the customer a price which is close to the value of the product for the customer, rather than a cost-based pricing strategy. FWC Sector Competitiveness Studies GMES Downstream Sector 37

38 Figure 3.7 Price setting factors percentage of survey responses Source: VEGA The relatively high cost of input data was also identified by other literature sources as being just one of the industry perceived external factors influencing the sustainability and profitability of the EO value adding sector (Holt Anderson et al 2006) 16. It can therefore be concluded that raw materials and costs have emerged as key issues for the EO Service Sector. Other profitability external factors noted were the; heterogeneous and fragmented user community, insufficient and unreliable access to data for operational applications, and the lack of long term commitment from large institutional customers. Price of the product is seen a one of the important factors in winning business, but not the single factor. Only 15% of the respondents to the VEGA 2008 survey indicated that price is the single critical factor. More than 80% responds that price is an important factor amongst other factors, without specifying what these other factors are. In terms of profitability trend of the EO service industry as a whole, profitability is typically below 10% and concentrated in a few larger companies; in the VEGA survey (VEGA 2008) five organisations within the sample companies accounted for 89% of total profits. In 2006, a significant profit (greater than 1 million Euros) is limited to just five companies in the research sample 17, including all the large respondents and just one medium sized organisation. It is worth noting that when profit is calculated as a percentage of EO revenue in the VEGA (2008) study, there is great variation in the margin percentage achieved by the companies in the sample, which indicates that companies in the sample showing a high margin performance are typically smaller ones. There is also evidence to suggest that small companies have a more volatile profits margin, with large companies typically being more consistent performers. However, 16 Holt, Anderson et al (2006) What should the public sector do to incubate the Earth observation value-adding sector? 17 Source: VEGA (2008). It should be noted that profitability of EO companies is shown by this study to be typically presented in low single figures as percentage of revenue, variable between companies and volatile year on year. 38 FWC Sector Competitiveness Studies GMES Downstream Sector

39 there is little direct or consistent correlation between the level of customisation of products, and profit performance (VEGA 2008). Nevertheless, VEGA concludes that companies that focus on standard product lines have a tendency towards higher profit performance, and that loss-making companies only appear at the spectrum end where the products are generally customised. In terms of identifying why these profit trends have been observed, one of the reasons could be the structured supply agreements which exist within the sector. These agreements could lead to a more robust and reliable supply-side performance, and less cost directed into the procurement process. The opposing view is that framework agreements managed by the data supplier of the value adders could also be contributing to the smaller company s lower profitability statistics, due to limited flexibility and bargaining power. (VEGA 2008). In terms of the broader EO industry, including data provision, it could also be the balance of EO value adding and other type s services which effect profits. For example, companies with higher profit/revenue ratios are those for which the value adding activity 18 represents a minor part of their overall activity (Galant 2007). The structure of the market itself may also be an influencing factor on profitability. Overall, European companies have lower profitability than their US counterparts (except for the meteorology segment. Galant (2007) noted that this is probably due to the higher fragmentation of European markets. Whilst it is not directly related to profitability, the current ratio 19 of the industry has been analysed in the literature. Whilst the trend is upwards in the EO value adding industry, many companies remain below the safe level of 1 (for the current ratio) and the industry remains below benchmarks. For example, current ratios for engineering companies in the EU are 1.5 and in the US 1.1, while the EO industry as a whole is (Galant 2007). 3.3 Structure Identification of key players in the world market and their strategies In this section a number of key or leading players in the world market are described, in terms of their basic characteristics, history of their development and their future strategies. Leading companies are so defined for a variety of reasons, which could include large size, high profitability, high growth or capacity to change the way in which the market operates. Five examples are profiled: Digital Globe and GeoEye, which are dealt with together, being the leading US companies owning and operating their own high resolution optical satellites. MDA Geospatial a vertically integrated company of MDA Corporation, marketing Radar data and with significant business in Land Information Systems. 18 i.e. data providers and, in particular, companies operating high resolution optical satellites. 19 An indication of a company's ability to meet short-term debt obligations; the higher the ratio, the more liquid the company is. Current ratio is equal to current assets divided by current liabilities. FWC Sector Competitiveness Studies GMES Downstream Sector 39

40 Fugro EarthData, a US subsidiary of the Dutch-owned Fugro multinational engineering company, integrating remote sensing products with downstream engineering and survey applications. Microsoft and Vexcel, integrating remote sensing technology into the worlds largest IT business to support commercial geospatial applications Google, pioneer of the commercial virtual earth and market leader in mass market provision of satellite and airborne imagery. Digital Globe / GeoEye The licensing for civilian use in the US, of technology developed for military reconnaissance provided the foundation for the development of the high resolution satellite operation / sales industry in the US. US space companies responded both to the opportunity to exploit their technology, and to a change in acquisition policy that was signalled by the US government that it would increasingly acquire imagery from commercial sources as well as from its own assets. After the kind of financial difficulties typical of pioneer industries, consolidation in the sector has left two leading companies, Digital Global and GeoEye. Digital Globe is owned by Ball Aerospace, Hitachi Ltd., Morgan Stanley and Telespazio S.P.A/Eurimage Investment, but has recently announced a $250m IPO to raise capital for investment in new satellites. It had turnover of $107M in 2006 and $151M 2007, a growth rate of 42% GeoEye is now publicly traded and, having been formed by the merger of Space Imaging and Orbimage. It had revenues of $151M 2006, and $184M 2007, a current growth rate of 22% The business for both companies is based on contracts from the US Department of Defence for bulk purchase of hi resolution data in support of military operations. These anchor tenant contracts then underpin the companies sales into other market sectors. The largest part of the companies business is basic image sales, rather than value added products, but the companies offer customised processing and work with partners in the value chain to offer bespoke solutions. GeoEye maintains ownership in three downstream companies: MJ Harden (Aerial survey and GIS projects), SPADAC (image intelligence), Beijing Earth Observation Inc (providing geographic extension of its presence to China). The business model offsets the risks associated with investment in satellites but in turn is risky due to the lack of diversification in the customer base. Data from Digital Globe s IPO filing indicate that 60% of its revenues were from US government sources and a further 8% from other international intelligence agencies. Investor concerns about these high levels of dependence have caused a 20% drop in GeoEye s market capitalization in the past year. The future strategy for both firms remains to underpin their business with US defence sales and to attempt to diversify their customer base using both direct sales and traditional channels (resellers). 40 FWC Sector Competitiveness Studies GMES Downstream Sector

41 MDA Geospatial MDA Geospatial is a component of the Canadian MacDonald Dettwiler and Associates (MDA) Corporation. MDA has a long history in the remote sensing industry, specialising in receiving stations and ground segments, particularly processing of Radar data. MDA s history of vertical integration started with the purchase of a number of specialist value adding companies dealing with satellite and airborne data, particularly related to the real estate market. At the same time skills derived from EO data management and cataloguing were transferred to Land Information Systems (LIS) to build a business in electronic systems for information management in property conveyance in the UK. MDA also took ownership of Radarsat International and subsequently won the contract for construction of Radarsat-2 satellite and the rights for commercial exploitation, making a small investment in the satellite system to secure these rights. Revenues for the Information Services division of MDA totalled C$850m in 2007, and these were dominated by LIS - Geospatial service revenues (EO data sales and services) represented only C$72m of this. The bulk of the revenues are for data sales and MDA relies mostly on downstream partners for value added applications. By European standards this represents a quite a large EO company, and in particular given the specialism in Radar data. However compared to the LIS sales, this is a small business and considered non-core now for MDA who attempted to divest its Information Systems business and Geospatial Services in However, the sale was blocked by Canadian Federal authorities and it remains to be seen whether MDA will seek another buyer for the EO/Value adding side of the business. Fugro EarthDATA Fugro is a Dutch-owned multinational engineering company with a large number of subsidiary companies offering specialised services in technical survey and support functions to the offshore oil/gas industry, mining and civil engineering. Its capabilities include geotechnical surveying, satellite navigation, and operations support. Fugro purchased the US EarthData company in April 2007 to consolidate its capabilities in airborne and satellite mapping and GIS. EarthData was a long established company, having been formed in 1955, and employing 125 staff, placing it at the top end in size of European geospatial companies. Earthdata provides a range of mapping surveys for civil engineering, government, agriculture and transport customers. In common with other similar companies in the US, the significant revenues were derived from airborne survey and GIS in addition to value adding based on satellite EO data. Fugro has other assets in satellite applications, having previously purchased the navigation services arm of Thales, including its GPS augmentation services. More recently Fugro has announced the acquisition of NPA group in the UK, which specializes in satellite EO services for the oil and gas industry and in InSAR technology for ground motion detection. FWC Sector Competitiveness Studies GMES Downstream Sector 41

42 These EO companies are significant in the EO world, but very small fractions of the overall Fugro corporation. Previous studies have found that small EO specialist companies have difficulty in accessing markets not only because of their size, but also because customers often a require a portfolio of related services in a single package that only a larger company can provide. The strategic acquisition of these companies provides both access to specialist expertise and technology as well as offering access to market for these technologies. Microsoft and Vexcel Corporation Microsoft Acquired the US company Vexcel in May 2006, primarily for the company s digital aerial camera acquisition and processing technology. Vexcel s history was in high technology radar systems design and ground processing, but it added aerial technology to its portfolio to exploit photogrametric technology to produce 3-D models from planimetric and oblique photography. The purpose of the acquisition was to secure the Intellectual Property needed to support the development of Microsoft s Virtual Earth / Windows Live Local services. Microsoft considered it necessary to control some of the IP behind the automated processing of digital air photographs and decided that purchasing the company was the best way of achieving that. In addition to aerial photography, Microsoft purchases hi resolution EO imagery to populate its database. Microsoft has two business models, the B2C model based on advertising revenues and similar to Google s (see below) and a B2B model focussed on government and corporate applications. There are no direct fees related to the B2C model but for B2B usage the revenue model is based on charging an annual license fee plus a small (fractions of a cent) fee for each unit of imagery or other data downloaded from the sever. Target markets include real estate, retailing / marketing and asset management. The product is part of an overall strategy to integrate all the information a corporation needs to operate in Microsoft supplied systems. Since the acquisition of Vexcel it had been expected that Microsoft would divest of the remaining parts of Vexcel, but apart form a small unit in the UK and the sale of Microsoft Canada (formerly Atlantis Scientific that was acquired by Vexcel in 2003) to MDA in 2007, the company has remained intact. Vexcel now specialises in developing custom applications and databases for Microsoft virtual Earth and still offers services in radar processing, particularly InSAR for motion monitoring. Google Google Inc purchased Keyhole Corp in October 2004 to add the capability to view and search using 3-D satellite imagery to its search capabilities. Keyhole had developed the Earth Viewer application to navigate 3-D imagery held on a central database on a personal computer client and this product became Google Earth. The Google Earth application has subsequently been downloaded over 350 million times and Google has established a global database of imagery based on medium resolution data from Spot / Landsat, high resolution satellite data from GeoEye and Digital Globe and air photographs for urban areas. 42 FWC Sector Competitiveness Studies GMES Downstream Sector

43 Google s revenues ($4.8Bn in 2007) are almost entirely derived from advertising. Although Google does charge fees for professional versions of Google Earth, there is no direct fee for image views or downloads. Google Earth is seen as a mechanism to differentiate Google s offering, to drive site traffic and offer new spatially based advertising opportunities and services (eg find the nearest ). Hence the business model is different from Microsoft s Virtual Earth pay-per-download scheme. The target markets are also different, with Google focusing primarily on services offered to individual consumers. The real impact on the EO market of digital globes is as yet unknown, either for the upstream or downstream segments. Google and Microsoft both populate their databases from the archives of primary image capture agencies. Although commercial details are not known, it is unlikely that these products have actually driven large new image acquisitions, or that they represent very significant proportions of their imagery supplier s revenues. Downstream, there will certainly be an impact in terms of increased visibility of EO products and understanding of their potential. However in the short term it is still unknown what financial impact this will have on the EO industry. Summary Each of the examples, show integration of EO capabilities, driven by different strategic demands, and starting from different parts of the value chain and moving in different directions GeoEYE, Digital Globe and MDA have all come from an infrastructure starting point, as space manufacturers seeking involvement downstream in the value chain. In fact MDA moved in both directions starting as a ground segment supplier and acquiring both space segment and applications expertise. There are two motivations for this: one to get a piece of the action from the downstream market and secondly to support the justification for sales of upstream hardware. The same strategy and motivations can be seen in Europe with Astrium s ownership of Infoterra and part (40%) ownership of Spot Image. The main difference, however is that the US companies have large underpinning data buy contracts from the National Geospatial Agency (NGA) to rely on with an offering based on higher resolution technology. By contracts in Europe there is no equivalent agency to NGA and the highest resolution imagery available from SPOT s own satellites is 2.5m, compared to the sub- 1m imagery from the US suppliers. This limits the capacity for Astrium to invest in new systems both due to the increased market risk (lacking large government contracts) and the relative non-competitiveness of the technical offering. The growth of Fugro represents a European led initiative seeking to embed highly specialised technical capabilities in a large company offering a portfolio of products and services to its customers. Fugro s multinational set up allows it to integrate skills from all over the world in order to service local customer s needs. However at this scale the exercise may not be very repeatable. However it should be noted that Fugro is one of the FWC Sector Competitiveness Studies GMES Downstream Sector 43

44 few company listed here that deals significantly with the type of data coming from GMES Core services, specifically the marine core service. Turing to the examples of integration upstream, Microsoft and Google do not have any direct European peers, and it is hard to see any challenge to their dominance. The impact of their operations, of course may have benefit to European suppliers (eg Spot Image, who provide imagery) and to down stream industry that could benefit from the ripple effect of increased knowledge of and understanding of the potential of EO that Google Earth is expected to bring about. The situation for Microsoft is more complicated as it is expected, in mainly focussing on the B2B market, to internalize some EO/geospatial applications in its software offerings. The effect on the downstream market is likely to be highly variable, with a few EO companies benefiting greatly, possibly being purchased as happened to Vexcel, while other companies will struggle to complete as their value adding offerings become commodities offered by larger companies Identification of potential barriers to entry According to Bain 20, an entry barrier is anything that places a potential entrant at a competitive disadvantage when compared with the established firm. This section reviews the main possible barriers to entry to the EO downstream sector, and how these influence the sector structure. Bain identified seven major entry barriers: Economies of scale Product differentiation Advertising Capital requirements Patents Absolute cost advantages Regulation. The relevance of these barriers will be discussed below for the EO downstream sector. Economies of scale Economies of scale occur when the long run average costs of the firm decline as output expands. In order to achieve economies of scale in production, output needs to be on a larger scale and high labour and capital productivity is usually required. Thus economies of scale place potential entrants at an immediate cost-disadvantage and could act as a barrier to entry as new firms cannot earn the necessary economies of scale in the short term at least to be competitive. Given the current size distribution, this potential barrier to entry does not seem to be relevant in the EO downstream sector. As indicated in table 2.4, the majority of firms are small to medium. This suggests that economies of scale are not a relevant entry barrier in the GMES downstream sector. This is confirmed by Harris (2002) 21 who analyses 20 Bain, J.S., 1956, Barriers to new competition, Harvard University Press. 21 Harris, R. (ed.), 2002, Earth observation data policy and Europe, Balkema Publishers 44 FWC Sector Competitiveness Studies GMES Downstream Sector

45 economies of scale from the perspective of vertical integration, and notes that vertically integrated organisations in this industry get limited advantages through economies of scale 22. Increased and more standardised production procedures are likely to increase barriers of scale in the future however. Product differentiation Under a strategy of product differentiation a firm competes by offering a product which the customers perceive as more valuable than the competitor s product. It can do so by offering a product that differs from other products in quality, reliability etc. If buyers recognise the additional value, the firm can charge a higher price. By product differentiation firms may enhance customer s loyalty, which prevents new entrants to capture a share of the market. This is certainly applicable for the EO value adding industry as well: there is a high degree of customisation (see also section 3.4), however, a further standardisation of products is foreseen. Advertising In markets where advertising is key to capture market share, such as in consumer goods, this is an important entry barriers. EO value added products are generally not brought under the attention via advertising. Therefore this is not considered an entry barrier for the value adding industry. Capital requirements To start up a new value adding company requires very limited investments. Many value adding companies are started by individuals, often connected to research environments, using a wide range of knowledge and some hardware and software. This is possible despite the fact that many applications need investments business investments can be built up gradually (Harris 2002). Patents Potential entrants require access to equally efficient production technology as the incumbent producers, in order to freely enter a market. Patents give a firm the sole legal right to produce a product for a given period of time, and so restrict entry into a market. In the EO industry patents have been granted in the domain of remote sensing techniques (i.e. in de production of raw data) but also in the domain of processing raw data into services (i.e. in the value adding industry). The latter is important for this study. As many entrants seem do originate from research, and thus bring new processes and services to the markets, patents of incumbent producers do not seem to be a significant barrier to entry. Absolute cost advantages Cost advantages independent of scale such as proprietary technology, know-how or favourable geographic locations do not seem to be relevant for the EO value adding industry. Two issues could be considered an exception. One is the favourable access to raw materials, EO data in this case. Some of the incumbent value adders are part of vertically integrated companies that also have the role of data provider. This leads to a 22 It should be noted that there are other motivations for vertical integration, such as reducing the costs of data acquisition or a justification for upstream hardware selling. However, these issues are not economies of scale. FWC Sector Competitiveness Studies GMES Downstream Sector 45

46 cost advantage of EO data over companies that have to pay the market price for EO data. As pointed out in section , vertical integration is expected to occur more frequently, hence this entry barrier may become more significant in future. However, data costs are not only a barrier for entry for newcomers, these constitute also a barrier for development for incumbent players according to a survey undertaken by Holt Anderson et al (2006). A second issue in this respect are government subsidies, which can lead to significant cost advantages. Several main actors in the market have been built up entirely or partly by governmental subsidies. Examples are Spot Image, Infoterra and Novosat. In the past government subsidies may have been one of the main barriers to entry and in some cases possibly prohibiting any entry. However, in combination with other low barriers to entry, the impact of active governmental subsidies plays a diminishing role as a barrier to entry for new value adding companies (Harris 2002). Regulation Harris (2002) describes the role of regulation as entry barrier. Government policies play a major role in the EO industry and are, especially in Europe, a driving force for the industry. In every part of the industry governmental interests play a role. Nationally the usage, or the decision not to use, remote sensing data for national mapping is decisive for the future of the value adding companies, as well as for all other players in the industry. This constitutes a barrier to entry if state monopolies are preserved. Governmental policies concerning the use of satellite data for geographic information may be a force breaking down entry barriers Market structure of suppliers and customers In this section an overview of the market structure of suppliers and customers will be given. First the market structure of suppliers will be presented and then the market structure of customers will be presented. Market structure Suppliers Value-Adding companies (VAC) are companies that work with raw or semi-processed data from remote sensing instruments, and convert the data into information that brings value to end-users. The next figure gives an overview of the value chain of the space segment of the EO sector. Figure 3.8 Value chain of the space segment of the EO sector Source: Galant et al (2007) 46 FWC Sector Competitiveness Studies GMES Downstream Sector

47 However, most EO products use data from multiple sources and include integration with non spaceborne EO data sources (aerial data, ground sensors, socio-economic data). These are important for successful value adding, and so are data integration, assimilation and modelling. This is why the sector has a high level of technical sophistication and complexity 23. According to the VEGA 2008 study the level of sophistication of supplier relationships has increased in the last 3 years. Nearly half of supplier relationships are now supported by some form of framework agreement, more than double the number of agreements in place in Of the framework agreements used, more than three-quarters are managed by the supplier, which indicates the dependency of the industry upon the capability of the supply base. This can be seen in the figure below. Figure 3.9 Relationship with data suppliers Source: VEGA (2008) In the VEGA 2008 study it can be seen that supplier performance is generally rated as adequate for effectiveness and reliability. However, despite this nearly 25% consider suppliers to have a negative impact on their performance. Enhanced speed and timeliness of delivery are quoted as the most likely factors to improve satisfaction. The next figure shows that VACs use data from a variety of suppliers. 23 HOLT ANDERSON ET AL, 2006, What should the public sector do to incubate the Earth observation value-adding sector? FWC Sector Competitiveness Studies GMES Downstream Sector 47

48 Figure 3.10 Data usage of VACs from different suppliers Source: VEGA AND BOOZ ALLEN AND HAMILTON (2004) Market structure customers Roughly speaking, EO customers and / or end-users are: 24 : 1. Public, i.e. regional, national, European public services and agencies, which require up-to-date and reliable environmental information on European and global land, air and sea areas. Depending on the needs of end-users, such as urban communities or the European Environmental Agency, the area of interest could cover small towns or the entire globe; 2. Private, i.e. representatives of industrial companies, which can purchase EO services in order to increase their competitiveness (for instance, water utilities, insurance companies, oil companies, electric power producers, chemical manufacturers, mining industries), trading companies, which may speculate on the price evolution of agricultural products (they use extensively remote sensing to estimate the world production level for each product rice, cotton, wheat, etc) As can be seen in the figure below, most customers are from the public sector. 24 Source: Galant et al, 2007, Doing business with the help of GMES 48 FWC Sector Competitiveness Studies GMES Downstream Sector

49 Figure 3.11 Organisation types served by the EO sector by size class Source: VEGA (2008) Note: The VEGA definition of size classes differs from the EU definition, that defines companies with 1-10 employees as micro-enterprises, with employees as small enterprises, with employees as medium sized enterprises, and >250 employees as large enterprises. According to the Euroconsult 2007 study EO markets are driven in Europe by the public sector, either through returning government customers, e.g. monitoring agricultural activities, or through inter-government framework initiating pilot studies and looking to strengthen EO services. Takeoff of commercial business is slow. A number of market segments are still waiting to emerge with many remaining in a technology phase under government based initiatives where there is little or no commercial interest. Consumer related services are just emerging but with strong effort from large IT and web companies such as Microsoft, Yahoo! and Google, providing strong confidence for future market growth. According to the Galant et al 2007 study the barriers that prevent the EO industry from growing in the private sector are several: Relatively high cost of EO data ; Lack of knowledge about the EO potential to tentative customers. There is a need to improve the general awareness about EO services, which places a high burden on the marketing of EO companies. It can be seen in the next figure that the vast majority of products and services sell into more than one market sector, as indicated by the light blue. FWC Sector Competitiveness Studies GMES Downstream Sector 49

50 Figure 3.12 Markets of EO products and services Source: VEGA AND BOOZ ALLEN AND HAMILTON (2004) 3.4 Processes Production processes The next figure 25 provides an overview of a typical development lifecycle of a company active in the GMES Downstream Sector. Figure 3.13 Development lifecycle 25 VEGA and Booz Allen and Hamilton, 2004, The state and health of the European and Canadian EO service industry 50 FWC Sector Competitiveness Studies GMES Downstream Sector

51 Source: VEGA (2004) The value-adding production process is part of the operational processes. The Value-Adding Companies (VACs) are active in adding value to source data and in that way increase the internal complexity of their products and services. According to the study by Holt Andersen 26 the EO Value-adding industry is an extremely diverse sector which develops products and services that address a wide range of thematic domains. To support these thematic domains, it produces a wide range of products, which vary greatly in terms of what they deliver and how they are produced. As the applications are so diverse, no single company is able to cover very many of them. The typical profile of a VAC is a small, specialised organisation that focuses on one or two thematic and geographic areas. The industry is characterised by isolated expert groups offering niche services. The next table provides an overview of the different service types which are offered by Value-adding companies: Table 3.1 Service type description Service type Description Class Standardised products and services Standardised off-the-shelf geo-information solutions with Class 1 27 Customised products and services Integrated / Turnkey solutions routine/standard delivery. Typically corresponds to repeat sales offerings for many customers, in general high volume. Customised geo-information solutions based on EO interpretation and tailored to specific users. Typically corresponds to one-off offerings for individual customers, generally project-oriented. Offerings combining EO products and services plus other elements such as hardware, systems, maintenance, etc. Class 1 Class 1 Data products and services E-selling EO images/data (with little if any added value) Class 2 28 Software products and services Training Packages sold under license to support use of EO images or data, including maintenance. Stand-alone training courses available on a commercial basis including e-learning. Class 2 Class 2 Source: VEGA (2004) On average 29, each product draws data from three sources. Whilst the final products is presented in such a way that is easily used by the end customer, there is a lot of effort and/or sophistication involved in producing the product. So although a delivered product may not be seen as complex, the work done to get to that stage is. The more complex a product s supply chain and production methods, the more vulnerable the product becomes 26 Holt Andersen et al, What should the public sector do to incubate the Earth observation value-adding sector?, Class 1 products include one or more of the customised, integrated or standard service types as part of their definition 28 Class 2 products do not include any of the above service types, i.e services including one or several of data, software and training, but none of the the customised, integrated or standard service types 29 VEGA and Booz Allen and Hamilton, 2004, The state and health of the European and Canadian EO service industry FWC Sector Competitiveness Studies GMES Downstream Sector 51

52 to failures in the process. With respect to data supply, almost a third of products have no alternative if one of their data supplies fails. This is a risk which the VACs have little or no influence over. Within Europe 30, markets are open to international competition in principle, however at a national level there is a tendency for value-adding from local providers for several specific value-added services. Due to the sensitive nature of Homeland Security and Law Enforcement, value-adding activities in the defence and security markets tends to be done by national government bodies or companies under government licence. The Value-adding process consists of the following four main activities 31 : Integration of multiple data sources Interpretation and reporting Customisation User support services The first activity is integration of data from different sources. Results of the VEGA 2004 study show that 80% of the current services incorporate non-eo data and indicate there will be an increase in the integration of non-eo data into future products and services declared by the VACs, particularly with the incorporation of ground measurements. The second activity is interpretation and reporting. This activity transfers the EO data into a form of output that can be easily understood by users that are not EO specialists. The third activity concerns customisation. The degree of customisation indicates how much the services depend on the expertise of the providers for configuration or tailoring to meet specific user requirements. According to the VEGA 2004 study 70% of the current services are highly customised and only 8% are not customised at all. Future products and services are planned to have a lesser degree of customisation than current offerings. The fourth and last activity concerns customer support services. A high level of user support is provided. Only 41 of 162 products or services have not declared any user support 32. In each market area about one fifth of the services are offered with training. The VEGA 2004 study shows that value-adding services are a highly diverse set of services, internally complex and typically incorporating a wide range of data sources, including non-eo data. The industry relies heavily on expert services and it is characterised by a high degree of product customisation driven by the expertise of those conceiving and developing the products and services. The majority of products and services have been demonstrated to be complex offerings. The use of data from multiple sources, plus the incorporation of additional data sources such as non-eo data or DEMs (Digital Elevation Models) adds a level of complexity to 30 Euroconsult, 2007, Assessment of the downstream value-adding sectors of space-based applications 31 VEGA and Booz Allen and Hamilton, 2004, The state and health of the European and Canadian EO service industry 32 VEGA and Booz Allen and Hamilton, 2004, The state and health of the European and Canadian EO service industry 52 FWC Sector Competitiveness Studies GMES Downstream Sector

53 the service offerings, in turn increasing the added-value nature of the service. VACs understand the benefits of standard products and services, and the data on future products and services compared to the current offerings shows that the extent of customisation within each delivery is set to decrease. High added-value means high reliance on expertise and human resources, more variability in output, and so potentially more risk in terms of reliability or availability of the delivered product. The expert service model is identified by the VACs as a response to sophisticated requirements given by their clients. Stability of demand is not high and so VACs must be flexible and agile in their responses Trends in production technology In this section, relevant trends in production technology are presented. Automation and outsourcing The following two figures provide an overview of automation of the processing chain and outsourcing of production 33. Figure 3.14 Automation and outsourcing in EO Source: SAGE study The EO service industry world-wide is fragmented and fragile. This goes in line with limited evidence of mature and repeatable products in the face of immature requirements from industry and institutional markets. Most value adding companies have expert skills but a strong regional focus. They usually have only few automated processes and are very dependent on satellite data providers, i.e. availability of EO data. 33 Source: SAGE, 2004, S10 Infrastructure Systems Analysis FWC Sector Competitiveness Studies GMES Downstream Sector 53

54 Product specifications The market 34 has an increased focus on product specifications, hence becoming more demand-oriented. This means that the method of data collection is becoming less relevant. If the EO sector can adapt to this trend, for instance by supplying products and services that are following acknowledged standards, are GIS-ready, have a certified quality and are independent of data sources, then this will help to secure long term customers and open up new market segments. Effects of broader technological developments Broader technological developments of course have an effect on EO VACs and the environment in which they work. For instance broadband, LBS, on-line micro-payments and web services will all continue to open up new business models. Google Earth and Microsoft Virtual Earth themselves present a new market for EO products. They have also opened up a new business model for EO outside the traditional information product sales approach. Already the Google Earth effect has stimulated new demand from customers that has led to new EO products and services 35. Technical developments According to the VEGA 2004 study investment in technical development is higher than the general industrial average and consistent with other technology oriented industries. The profile of technical development is ill-defined as it is driven by a wide range of stimuli and receives support from a diverse set of funding sources public sector contracts and grants are the primary source of funding. Investment in technical development is higher than the industrial average, but consistent with other technology-oriented industries. VACs report that they spend an average of 20% of the value of their revenues, and an even higher proportion of staff time. Technical development is driven by a wide range of factors split equally between customer facing motives, and evolution of the VAC s own ideas and capabilities. Technological innovations The EO industry is characterised 36 by sophisticated products, constant technological innovations and ever-changing demand as the market evolves. Although EO products exist at all maturity stages, the majority of products are at a rising stage, i.e. sales are growing and expected to continue to do so. Increasing market opportunities According to the VEGA 2008 study many companies identified a generally growing market opportunity arising from public policy movement and increasing awareness of EO as a potential solution or component thereof. A growing customer awareness for the additional value of satellite data next to ground-based data has been observed. The focus will be on model development based on raw data (space and non-space) in various themes 34 Source: HOLT ANDERSON ET AL, What should the public sector do to incubate the Earth observation value-adding sector?, Ibid. 36 Galant et al, 2007, Doing business with the help of GMES 54 FWC Sector Competitiveness Studies GMES Downstream Sector

55 (atmosphere and air quality, water management and subsidence, security, mobility), next to further upstream instrument technology development Development in expenditure on investment, marketing, training The following section analyses the EO industry expenditure in both R&D and marketing. Public support for R&D in space technologies is, according to the EC White Paper 37, believed to be imperative because of the high costs and risks involved, and the comparatively low returns from commercial and institutional markets. Despite issues with funding relating to support from the public institutions 38, the EO sector shows above average investment in R&D compared with other sectors, with the average R&D expenditure accounting for 27.5% of EO revenue. It is important to note that technical development activities in the EO sector are funded by clients / public funds and not direct by internal investment (VEGA 2008). In terms of R&D trends, VEGA (2008) shows that investment intensity is highly correlated with company size. As a proportion of EO revenue, large companies spend 10% or less, compared to a comparable small to medium firm spend of 25%. It was also reported that a significant number of small and medium companies devote more than half their staff to R&D. One of the possible consequences of higher than average R&D expenditure is that each company in 2006, brought on average 4.5 products onto the market (VEGA 2008). In terms of distribution of R&D effort across the industry, the EO sector spread is indicative of the commercial strategies of the companies. For example, EO may not be a core service of the company and therefore R&D relating to this would be less significant to the overall firm strategy. Marketing related expenditure is evidenced in the VEGA (2008) study in relation user facing constraints of sales effectiveness. The study reports that the lack of marketing or promotion was particularly an issue for medium-sized companies. A common priority for VACs, identified in VEGA (2008) was the need to increase commercial activities, either to address new markets and geographies, or simply to drive greater volumes in existing market. The private sector is a key sales target of the industry. Future private sector acceptance of EO capabilities, VEGA (2008) noted would mean the creation of a large and truly competitive marketplace for products. The need for identified marketing follows findings that the capabilities and acceptance of EO solutions are not know to as wide a community as they could be (VEGA (2008). 37 White Paper, 2003, Space: a new European frontier for an expanding Union An action plan for implementing the European Space policy 38 Issues being that revenues are primarily generated from operational services but revenues grants still comprise about a quarter of company revenues on average (VEGA 2008). Organisations awarding grants to the EO sector included National public grants, European public grants - ESA EC & other (VEGA 2008) FWC Sector Competitiveness Studies GMES Downstream Sector 55

56 3.4.4 Share of different distribution channels The characteristics of the industry have implications for the way in which customers are contacted and products and services are sold and delivered. The ways in which EO value added service are ordered and delivered therefore form part of the overall industry sales process. The following section therefore first briefly discusses the relationship and engagement of customers and users, and then goes onto identify the methods, and constraints associated with the distribution of products and services. EO value adding companies describe typical commercial relationships with users in the following ways; mutual benefit partnership, standard terms framework agreement, data procured on a case by case basis (VEGA 2008). The data from the VEGA study implies that in cases where a limited number of value adding companies buy data from a small number of suppliers, company size and market presence are seen to be drivers. It is therefore concluded by VEGA that the nature of the product drives the customer relationship with data providers. As with the majority of industries, access and engagement of new and potential clients is seen as vital to the EO value adding sector. Evidence shows that a large percentage of the EO sector considers user accessibility to be an issue, affecting both large and small companies (VEGA 2008). The associated constraint on sales volumes is believed to be as a result of the EO sector users generally being dispersed, hard to locate, and limited access to resource which would facilitate identifying them. User access was shown to be a particular issue in export markets, and felt more acutely by smaller companies, which have limited resources. In terms of meeting the user requirements data requirements is proven to be a primary factor affecting the ability of value adding companies to meet customer requirements. Methods for distributing products and services include those that are distributed over the internet. VEGA (2008) reported that at the end of 2006, over a third of products are distributed via the internet. The use of E-Business tools for both ordering and delivery of products and services is also increasing. The VEGA study showed that in the ordering and delivery of products via E-Business has more than doubled in the period 2003 end of The ability of firms to implement E-business delivery of products and services has been proven to be restricted by their size. Large companies, for example make the most of web ordering and delivery facilities, where as small and medium companies appear to have not introduced these facilities to the level that was expected in a similar study, conducted in The study data was analysed to present a view of the industry as it stood at the end of 2006, and where equivalent data is available, this was compared to the scenario of 2003 to indicate trend and evolution of the sector. VEGA 2008) 40 (2004) The State and Health of the European and Canadian EO Service Industry 56 FWC Sector Competitiveness Studies GMES Downstream Sector

57 3.5 Conclusion The total revenue of the EO downstream sector amounted million in 2005/2006 and showed a modest revenue growth in the last eight years. The sector can be considered relatively small, in terms of turnover and employment. The sector serves five overall market segments: land monitoring, natural resource monitoring, oceanography, defence and security and meteorology. The level of maturity of each of these segments differs significantly. Revenue growth within each of these five sectors has differed significantly between these segments. The sector is strongly dependent on grants, especially the smaller and medium sized companies. Overall, nearly 10% of all European products are also sold to global users. However, the majority of the users or customers of European value adding companies are located in the country of the company itself. This implies that intra-european export is relatively limited and that export to non-european customers is poor, and almost entirely carried out by few large companies. Most of the EO markets are considered to be open to foreign suppliers at a global level. Within Europe markets are open to competition in principle, however at a national level there is a tendency for value-adding from local providers for several value-adding activities. There is no evidence found in the literature studied that non-european companies serve a significant share of the European market. In terms of profitability trend of the EO service industry as a whole, profitability is typically below 10% and concentrated in a few larger companies. However, smaller companies tend to show a higher margin on their revenue than larger companies. On the other hand, margins of smaller companies seem to be more volatile than those of their larger competitors. Companies with higher profit/revenue ratio are those for which the value adding activity represents a minor part of their overall activity. In terms of liquidity, it has shown that many companies remain below a safe level, although this is improving. Barriers to entry the sector are relatively limited in number. Most important seems to be the influence of governmental policy and additionally the cost of data access, where incumbent producers that are part of a larger group of companies also providing data have a comparative advantage. Nevertheless, the initial set-up costs for a new company in the value adding industry are low, and many new entrants originate from the R+D environment. Given a high R&D intensity, funded by grants, the sector seems to be open for entry in this respect. Data providers are the most important supplier for the sector. The relation between the data suppliers and the value adders is a possible threat for the competitive position of the sector, as a large share of the value adders consider suppliers to have a negative impact on their performance. Additionally, nearly half of the supplier relationships are now supported by some form of framework agreement and of these framework agreements used, more than three-quarters are managed by the supplier, which indicates a strong dependency of the sector on their suppliers. FWC Sector Competitiveness Studies GMES Downstream Sector 57

58 The majority of the customers of the value adding organisations are public organisations. The services provided by the EO downstream sector drive productivity increases at these customers. Takeoff of commercial business is slow, which seems to stem from a lack of knowledge about the EO potential to tentative private customers and the (perceived) high costs of EO products and services. EO products and services show a large extent of customisation. Less than ten percent of product and services is not customised at all. This level of customisation is decreasing. 58 FWC Sector Competitiveness Studies GMES Downstream Sector

59 4 Horizontal aspects affecting competitiveness 4.1 Introduction Task 4 of the GMES Downstream study focuses on the regulatory and framework conditions. The goals are twofold: 1. To identify the key issues of the regulatory environment and the framework conditions which influence sectoral performance and the competitive position of the GMES Downstream sector; 2. To provide a comprehensive and structural assessment of the relevant regulatory conditions and framework conditions that determines the growth and competitive position of the GMES Downstream sector. 4.2 The framework grid The overall aim of the framework grid is to provide a general synthesis of regulations, conditions and effects from literature and from previous sector analyses in order to generate a clear and accurate view on the framework within which the GMES Downstream sector operates. This synthesis should subsequently allow us to identify the most relevant indicators for the completion of the competitiveness grid. It should be noted that we address only current regulations and conditions, rather than future ones. Also, we have refrained from including GMES policy into the analysis. The framework grid is divided into three parts: 1. Regulatory conditions; 2. Framework conditions and 3. Exogenous conditions. For each type of condition, a list of items and sub-items is provided, according to the regulations and topics that are applicable to the GMES Downstream sector. It is at this level of sub-items that the grid is filled in, namely importance, trend, geographical level, source of literature, and potential effects / observations. The subsequent step after this initial analysis will be to match these results with the ones of the competitiveness analysis. This will indicate which of the potential effects that have been identified from a regulatory and framework perspective will have further consequences in the field of competitiveness. FWC Sector Competitiveness Studies GMES Downstream Sector 59

60 To comprehend the conditions and their effects described in the framework grid, it is important to point out the specific interpretation of each of the columns and how they were filled in. Importance The column Importance indicates the importance of the condition for the GMES Downstream sectors by means of a score between 1 and 10, 10 being most important. To grade the importance of the condition, a number of characteristics and issues were taken into account: Does the condition specifically/only apply to (a part of) the GMES Downstream sector? Does the condition apply to the GMES Downstream sector more than to other sectors due to its characteristics? Does the condition apply to the EU GMES Downstream sector in a way that influences its competitive position relative to non-eu countries? Does the condition apply to the EU GMES Downstream sector in a way that influences its competitive position relative to substitute products? Those deemed most important to the sector, and which are graded at 6 or above in terms of level of importance are expanded upon in the text immediately below the table. Trend The column Trend refers to the expectations stated in literature regarding the evolution of the condition s impact. Will the impact of this regulation or issue increase / decrease / stay the same in the future? The underlying reasons for this trend can be, e.g. an increasing importance of the characteristic to which the condition refers, or a strengthening of the regulation or condition. Geographical level The column Geographical level shows at which level the effect of the regulation or issue will be, e.g. in specific member states, at an EU-wide level, old and new member states, or at a global level. Source of the Literature The column Source notes the literatures main source of information. Each source of literature is categorised using the following numbering system, [1] Potential effects / observations / sector trends found in policy literature, [2] Potential effects / observations / sector trends found in theoretical literature, and [3] Potential effects / observations / sector trends deduced from ECORYS own appreciation of the issue, which is based on economic theory. Potential effects / observations / sector trends In the column Potential effects / observations / sector trends these factors are noted, and their relevance to the sector explained. 60 FWC Sector Competitiveness Studies GMES Downstream Sector

61 TABLE 4.1: FRAMEWORK GRID FOR THE GMES DOWNSTREAM SECTOR GMES Downstream Sector Importance Trend Geographical level Source Potential effects / observations / sector trends 1-10 < / = / > [1]=policy literature; [2]=theoretical literature; [3]=own appreciation based on economic theory I Regulatory conditions Labour market regulations Specific sector labour market regulations are not evident in the sector Intellectual property right issues 5 = EU wide Individual member states N/A [3] General European and National labour standards and regulations apply to the sector. Legal and International Framework 3 = EU wide Global Enforcement of IPR and data access rights 6 > EU wide Global Competition Policy OECD (2005) [1] A lack of legal certainty / international framework limits stakeholders to negotiate intellectual property rights. The above could influence space research. OECD (2005) [1] Uncertainty regarding the copyrighting of satellite images. Digitalisation of data is making it increasingly difficult to protect using IPR. Few formal regulatory entry barriers to competition. Industry Specific Standards (Technical) 8 = Global OECD (2005) [1] EuroConsult (2007) [1] Most EO markets are considered to be open to foreign suppliers at a global level. Consultative Committee for Space Data 3 = EU wide cooperation OECD (2005) [1] The Consultative Committee for Space Data FWC Sector Competitiveness Studies GMES Downstream Sector 61

62 TABLE 4.1: FRAMEWORK GRID FOR THE GMES DOWNSTREAM SECTOR GMES Downstream Sector Importance Trend Geographical level Source Potential effects / observations / sector trends 1-10 < / = / > [1]=policy literature; [2]=theoretical literature; [3]=own appreciation based on economic theory Systems with US Systems (CCSDS) 41 develop standard data handling techniques to support space research, including space science and applications. Sector specific regulations and policies US ITAR Regime 42 7 = EU wide US OECD (2005) [1] The US ITAR regulation adversely affects the ability of US Space firms to tap foreign markets. Restrictions also apply if a non US firm is using a classified component. UN Treaties and Resolutions 5 = EU wide Global OECD (2005) [1] A set of five UN treaties and resolutions on outer space and space activities govern the relations amongst National States 43. Resolution 41/65 44 specifically applies to the 41 CCSDS members agencies include: Agenzia Spaziale Italiana (ASI), British National Space Centre (BNSC), Canadian Space Agency (CSA), Centre National d'etudes Spatiales (CNES), China National Space Administration, Deutschen Zentrum für Luft- und Raumfahrt (DLR), European Space Agency (ESA), Federal Space Agency (FSA), Instituto Nacional de Pesquisas Espaciais (INPE), Japan Aerospace Exploration Agency (JAXA), and National Aeronautics and Space Administration (NASA) 42 ITAR means the International Traffic in Arms Regulation and is a set of United States government regulations that control the export and import of defence-related articles and services. This regime applies to the transfer of technologies abroad. In practice ITAR regulation concern not only commodities, but also the transfer of technical information (e.g. written documents, oral presentations) 43 Resolutions promote international co-operation in space activities, the dissemination and exchange of information through transnational direct television broadcasting view satellites and remote satellite observation of Earth. However, at the most fundamental level, the legal regime for space activities remain that of individual sovereign states. (UN OOSA (2004). 62 FWC Sector Competitiveness Studies GMES Downstream Sector

63 TABLE 4.1: FRAMEWORK GRID FOR THE GMES DOWNSTREAM SECTOR GMES Downstream Sector National Governments Interpretations of the U.N Principles Relating to Remote Sensing of the Earth Importance 1-10 Trend < / = / > Geographical level Source Potential effects / observations / sector trends [1]=policy literature; [2]=theoretical literature; [3]=own appreciation based on economic theory EO Sector, as it contains general principles relating to remote sensing of Earth by satellite. As an example Principle Two notes that remote sensing activities shall be carried out for the benefit and in the interests of all countries, irrespective of their degree of economic, social or scientific and technological development, and taking into particular consideration the needs of the developing countries. EU commitment to comply with UN Treaties and Conventions was noted in EU Space Policy document (2007). 6 > National The National Center The number of exceptions to the non EU wide for Remote Sensing, discriminatory access policy for highresolution Global Air and Space Law data is growing in Canada 45, 44 Principles Relating to Remote Sensing of the Earth from Outer Space [Resolution 41/65 of 3 December 1986] 45 Remote Sensing Space Systems Act 2005, OPERATION OF REMOTE SENSING SPACE SYSTEMS, Applications, Licences and Related Matters, 8. (7) In a licence, the Minister may restrict the provision of remote sensing products or classes of such products from the licensed system to persons or classes of persons other than the licensee or system participants on any conditions that the Minister considers appropriate. The conditions may include requirements that, in specified cases or circumstances, the provision of the remote sensing products (a) be subject to the Minister s prior approval; or (b) be done only under a legally enforceable FWC Sector Competitiveness Studies GMES Downstream Sector 63

64 TABLE 4.1: FRAMEWORK GRID FOR THE GMES DOWNSTREAM SECTOR GMES Downstream Sector Stakeholder interpretation of terms within existing International Agreements Importance 1-10 Trend < / = / > Geographical level Source Potential effects / observations / sector trends [1]=policy literature; [2]=theoretical literature; [3]=own appreciation based on economic theory (2007) [1] Europe (Germany 46, France and Italy 47 ) India 48, Israel 49, and the US 50. Governments are construing the U.N Principles Relating to Remote Sensing of the Earth from Outer Space 51 more narrowly. 2 = EU wide OECD (2005) [1] Terms such as space object, outer space, Global or launching state are not clearly defined in the space treaties. An increasing number of conflicting interpretations could be the result of more commercial firms becoming involved in the sector. agreement, entered into in good faith, that includes measures respecting their security or their further provision. available at [hereinafter Remote Sensing Act 2005]. 46 Interview with Wolfgang Schneider, Federal Ministry of Economics and Technology, (if proposed law passes, it will have no reference to the UN Remote Sensing Principles and non-discriminatory access) (November 30, 2006). 47 Turin Agreement, supra, note 47. Art. V.(e) Use of products of the Defence Ministries Products generated to meet specific Defence Ministry requirements may be placed at the disposal of commercial or private users, after having been subjected to a process of degradation and declassification, in accordance with the joint rules on the use of data which form the subject of a specific agreement. 48 For operating a remote sensing satellite from India, license and/or permission of the Government, through the nodal agency, will be necessary. 49 Imagesat International, Through the unique SOP and EPOD programs, Customers acquire a completely autonomous, secret, regional high-resolution imaging capability National Defense Authorization Act for fiscal year 2005., P.L. No (2004) 51 Principles Relating to Remote Sensing of the Earth from Outer Space (resolution 41/65 of 3 December 1986) 64 FWC Sector Competitiveness Studies GMES Downstream Sector

65 TABLE 4.1: FRAMEWORK GRID FOR THE GMES DOWNSTREAM SECTOR GMES Downstream Sector Importance Trend Geographical level Source Potential effects / observations / sector trends 1-10 < / = / > [1]=policy literature; [2]=theoretical literature; [3]=own appreciation based on economic theory Bilateral and Multilateral Agreements 3 = Global OECD (2005) Source of EU examples United Nations for Outer Space Affairs [1] Aside from the UN Treaty, other sources of space law and regulations include bilateral and multilateral agreements (e.g. memoranda of understanding) between governments and/or international and regional organisations 52. To date, none have been specific to EO activity. Legal Framework on space activities 2 = EU wide Global OECD (2005) [1] The lack of legal framework on space could impede a fair and competitive environment which will limit private sector participation 53. Community funds procurement practices 6 = EU wide EU Space Policy (2007) [1] Community funds are governed by EU Financial Regulation on the basis of open competition. ESA's Industrial Policy has a set of rules 52 An example relevant to the EU: Protocol between the European Space Agency, the Government of the Republic of Italy and the Government of the Republic of Kenya on the setting up and operation of European Space Agency equipment within the perimeter of the San Marco Satellites Tracking and Launching Station in Malindi, Kenya, and on the cooperation between the Government of the Republic of Kenya and ESA for peaceful purposes - 13 September Although a number of basic component of the legal framework are in place (international space law regime and legislation at national level in some countries), major gaps remain. For example a number of countries do not have national space laws. FWC Sector Competitiveness Studies GMES Downstream Sector 65

66 TABLE 4.1: FRAMEWORK GRID FOR THE GMES DOWNSTREAM SECTOR GMES Downstream Sector Importance 1-10 Trend < / = / > Geographical level Source Potential effects / observations / sector trends [1]=policy literature; [2]=theoretical literature; [3]=own appreciation based on economic theory relating to geographical distribution or fair return principle. This principle is the ratio between the share of a country in the weighted value of contracts, and its share in the contribution paid to the Agency 54. INSPIRE Directive 8 > EU wide The Munich Roadmap 55 [1] GMES information management and dissemination approach much be compliant with the provisions of INSPIRE Directive, which requires public bodies to make their "spatial information services" understandable and accessible across national boundaries Source: 55 Source: The Munich Roadmap, the way to European Earth Observation Services GMES (2007) Roadmap-accessible.pdf 56 Directive 2007/EC of the European Parliament and of the Council of 14 March 2007 establishing an Infrastructure for Spatial Information in the European Community (INSPIRE). 66 FWC Sector Competitiveness Studies GMES Downstream Sector

67 TABLE 4.1: FRAMEWORK GRID FOR THE GMES DOWNSTREAM SECTOR GMES Downstream Sector Importance 1-10 Trend < / = / > Geographical level Source Potential effects / observations / sector trends [1]=policy literature; [2]=theoretical literature; [3]=own appreciation based on economic theory GMES supporting EU objectives and policy domains 8 = EU wide Brussels, COM (2004) 65 Final 57 [1] GMES has to support Common Foreign and Security Policy, including the European Security and Defence Policy. Other European initiatives should also be taken into account 58. Environmental policy 7 > EU wide OECD (2005) [1] Environmental policies requires monitoring Global that can be supported by EO Allocation of frequencies procedure 2 = National EU wide Global Space and Remote Sensing Law Trends 6 > National EU wide Global OECD (2005) [1] International Telecommunication Union procedure for the allocation of frequencies and orbital slots is a source of uncertainty. The National Center National space law is on the rise, catalyzed in for Remote Sensing, large part by the practical issues raised by Air and Space Law commercial remote sensing activities. (2007) [1] A major catalyst for establishing space and 57 Source: Brussels, COM (2004) 65 final. Global Monitoring for Environment and Security (GMES): Establishing a GMES capacity by (Action Plan ( )) 58 For example, Directive 2003/98 on the re-use of public sector information adopted in December 2003 which aims to facilitate an internal market for digital content products and services. 59 For example, Austria, and Poland, among others, are planning to have, small satellite mission that are creating the need for space and remote sensing law. Source: National Center for Remote Sensing, Air, and Space Law (2007) The Land Remote Sensing Laws and Policies of National Governments: A Global Survey FWC Sector Competitiveness Studies GMES Downstream Sector 67

68 TABLE 4.1: FRAMEWORK GRID FOR THE GMES DOWNSTREAM SECTOR GMES Downstream Sector Importance 1-10 Trend < / = / > Geographical level Source Potential effects / observations / sector trends [1]=policy literature; [2]=theoretical literature; [3]=own appreciation based on economic theory remote sensing law is the availability of affordable satellite technology and small satellite missions 59. Worldwide, commercial high resolution remote sensing is increasingly being organised and institutionalised through law and policy to meet national security concerns. Consumer standards / Client Standard (health and safety) Data privacy conditions 1 = N/A N/A Nothing specified in literature. II Framework conditions Labour Force and Knowledge Skills Sector employment profile and non compliance with European Guidelines 7 > EU wide Adlen (2008) [1] The EO Service Industry workforce (generally highly qualified, to masters level or above, year old males) does not match the intended age or gender distribution guidelines published by the European Commission 60. Not currently considered to be a significant 60 Integrated Guidelines for Growth and Jobs ( ) 68 FWC Sector Competitiveness Studies GMES Downstream Sector

69 TABLE 4.1: FRAMEWORK GRID FOR THE GMES DOWNSTREAM SECTOR GMES Downstream Sector Importance 1-10 Trend < / = / > Geographical level Source Potential effects / observations / sector trends [1]=policy literature; [2]=theoretical literature; [3]=own appreciation based on economic theory constraint, but worth considering in terms of eligibility of allocation of future sector funding. Future Workforce availability 8 > EU wide OECD (2005) [1] Since 2002, a sharp decrease in the EU population under 25 years old in the space science workforce, including engineers and scientist all has been observed 61. Europe faces a severe reduction in Science, Engineering and Technology (SET) careers among young people, having an expected future effect on Europe s knowledge economy EU market access (Trade and FDI) 62. Export Restrictions 6 = EU wide Global OECD (2005) [1] The liberalisation of space markets remains limited. Aside from the specific case of the telecommunications market, many other space-related activities are not yet considered 61 Source: OECD (2005) 62 Source: European Space Policy (2007) FWC Sector Competitiveness Studies GMES Downstream Sector 69

70 TABLE 4.1: FRAMEWORK GRID FOR THE GMES DOWNSTREAM SECTOR GMES Downstream Sector Importance 1-10 Trend < / = / > Geographical level Source Potential effects / observations / sector trends [1]=policy literature; [2]=theoretical literature; [3]=own appreciation based on economic theory at the WTO. Because many space components and systems are considered as munitions or other military equipment, they are excluded from the mandate of the WTO, which does not intervene in the trade of military systems. Export controls restrict the ability to exploit market opportunities. The export restricting nature of ITAR was noted in DG Enterprise (2007), particularly the increased cost of doing business with US satellite manufacturers. Market access to space products and services 4 = EU wide DG Enterprise, 2007 [1] Due to strategic and/or security reasons, public procurement the largest segment of the market for space goods and services is often limited to the national or regional level. 70 FWC Sector Competitiveness Studies GMES Downstream Sector

71 TABLE 4.1: FRAMEWORK GRID FOR THE GMES DOWNSTREAM SECTOR GMES Downstream Sector Importance 1-10 Trend < / = / > Geographical level Source Potential effects / observations / sector trends [1]=policy literature; [2]=theoretical literature; [3]=own appreciation based on economic theory May impede the free flow of technologies. North Atlantic Free Trade Agreement 63 6 = EU wide OECD (2005) [1] Helps to create, to some extent a more open Global trading environment across the Atlantic and foster the development of space applications. Knowledge Base Development Role of SMEs 6 > N/A OECD (2005) [1] Pro-competitive regulations help growth by promoting innovation. SMEs constitute an important and dynamic element in all economies as they drive innovation. Knowledge Base Development Funding 5 = EU wide ESA [1] ESA actively encourage SMEs to become Source involved in its space programmes 64. It has in place a SME Initiative to promote the participation of SMEs in the Agency s space activities, including a procurement process, which issues smaller contracts, accessible to SMEs. 63 Established between North American Free Trade Agreement countries and the European Union 64 FWC Sector Competitiveness Studies GMES Downstream Sector 71

72 TABLE 4.1: FRAMEWORK GRID FOR THE GMES DOWNSTREAM SECTOR GMES Downstream Sector Importance 1-10 Trend < / = / > Geographical level Source Potential effects / observations / sector trends [1]=policy literature; [2]=theoretical literature; [3]=own appreciation based on economic theory ESA funding proposals proposing new R&D focused technologies 7 > EU wide Space Policy (2007) [1] ESA propose new technology R&D activities, in coordination with the EC through FP7, with one of the aims to reduce dependence on critical technologies from non-european suppliers. Technological capabilities of EO Data 7 > EU wide OECD (2005) [1] Technical capability gaps reduce the usefulness of EO data (in terms of resolution and revisit frequency. How Research / Technological Change is funded 8 = EU wide Adlen (2008) [1] Technical development activities in the EO sector are funded by clients / public funds and not direct internal investment. FP7 and ESA funding are key, as well as national funding. R&D in other sectors 8 = EU wide [3] The EO downstream industry is dependent from R&D in other sectors, that results in improved inputs in their production process leading to productivity increases. Examples are higher resolution images, or more powerful computer processors. Energy and Environment Increased attention for mitigation the consequences of natural disasters 7 > EU wide Global OECD (2005) [1] EO satellites can contribute 72 FWC Sector Competitiveness Studies GMES Downstream Sector

73 TABLE 4.1: FRAMEWORK GRID FOR THE GMES DOWNSTREAM SECTOR GMES Downstream Sector Importance Trend Geographical level Source Potential effects / observations / sector trends 1-10 < / = / > [1]=policy literature; [2]=theoretical literature; [3]=own appreciation based on economic theory Access to Finance Lack of financing system 6 < EU wide OECD (2005) [1] No established market for commercial financing of private space activities. Investor understanding of EO products and development of Public Private Partnerships (PPPs) Geographic Cohesion GMES Downstream companies clustering in member states 6 > EU wide EuroConsult (2007) The National Center for Remote Sensing, Air and Space Law (2007) [1] 3 = EU wide See above Section Member states (UK, [1] German, France, Italy, Belgium and Spain) Markets are heavily dependent on public money, which has limited growth perspectives. Private investors and insurers are showing limited acceptance and understanding of EO products. Development of PPPs, particularly in Europe are increasing access to private finance. PPP, is a term with no uniform definition but usually implies risk sharing. There is clustering of GMES companies in a number of member states. The main operational centres of EO activity are the UK and Germany. Additionally, France, Italy, Belgium and Spain are also taking up a FWC Sector Competitiveness Studies GMES Downstream Sector 73

74 TABLE 4.1: FRAMEWORK GRID FOR THE GMES DOWNSTREAM SECTOR GMES Downstream Sector Importance 1-10 Trend < / = / > Geographical level Source Potential effects / observations / sector trends [1]=policy literature; [2]=theoretical literature; [3]=own appreciation based on economic theory relative important position. Attitude to public sector Public sector role in setting framework 6 = EU wide OECD (2005) [1] Governments set the framework conditions conditions Member states that govern private space activities, for instance some efforts have been made to establish technical standards that help to facilitate the development and use of space assets. Public sector influence on EO Markets as a client 8 = EU wide EuroConsult Executive Summary (2007) [1] EO markets are driven in Europe by the public sector, either through returning Government customers, e.g monitoring agricultural activities, or through inter-governmental frameworks, which initiate pilot studies, looking to strengthen EO Services. A lack of policy support would considerably jeopardize the development of programs, products and services. Public sector funding influence 5 = EU wide The National Center for Remote Sensing, Air and Space Law (2007) [1] The European Union and Space: fostering applications, markets and industrial competitiveness. (COM(96)0617-C4-0042/97), (1998) notes the growth in the 74 FWC Sector Competitiveness Studies GMES Downstream Sector

75 TABLE 4.1: FRAMEWORK GRID FOR THE GMES DOWNSTREAM SECTOR GMES Downstream Sector Importance Trend Geographical level Source Potential effects / observations / sector trends 1-10 < / = / > [1]=policy literature; [2]=theoretical literature; [3]=own appreciation based on economic theory Europe website [1] commercial market, although important, must not be allowed to hide the fall in the public investment required for the development of this sector in order to guarantee technological progress. The FP7 65, the European Unions Research Framework Programme supports a number of participants, including universities, public authorities, small enterprises and researchers in developing countries appling to research and technological development for the period 2007 to Balance between the need for institutional funding and remaining a competitive industry 7 > Global / effect on EU EuroConsult (2007) [1] Europe s technology development strategy must ensure sustained and coordinated public investment while achieving a better 65 FP7 (EC) is implemented through specific programmes, corresponding to the main themes of European research policy: "Cooperation": on collaborative research, "Ideas": which includes the establi shment of a European Research Council (ERC), "People": for human resources; and "Capacities": dealing with the potential research capacities of EU SMEs. Source: FWC Sector Competitiveness Studies GMES Downstream Sector 75

76 TABLE 4.1: FRAMEWORK GRID FOR THE GMES DOWNSTREAM SECTOR GMES Downstream Sector Importance 1-10 Trend < / = / > Geographical level Source Potential effects / observations / sector trends [1]=policy literature; [2]=theoretical literature; [3]=own appreciation based on economic theory balance between technological independence, strategic cooperation and reliance on market forces. Access to third country markets Increasing investment in developing countries 8 > Global, effect on EU EuroConsult (2007) [1] EO market accessibility in developing countries is expected to become more difficult due to a large number of projects implemented in many countries such as Thailand, Nigeria, Turkey, Chile (77 satellites planned in developing countries over the next 10 years). Countries such as China and India are rapidly mastering space technology, becoming challenging competitors on the commercial market. Data Cost of Data 8 > EU wide Adlen (2008) [1] Increases in the cost of data is cited nearly Global twice as often in 2006 than in FWC Sector Competitiveness Studies GMES Downstream Sector

77 TABLE 4.1: FRAMEWORK GRID FOR THE GMES DOWNSTREAM SECTOR GMES Downstream Sector Importance 1-10 Trend < / = / > Geographical level Source Potential effects / observations / sector trends [1]=policy literature; [2]=theoretical literature; [3]=own appreciation based on economic theory Cost of Data ESA policy 8 > EU wide The National Center for Remote Sensing, The European Space Agency provides EO data free 66. Air and Space Law (2007) [1] Dual Use Data Policy / openness and 6 > EU wide The National Center France and Italy define dual use as a availability of National Data sets Member states, including France and Italy for Remote Sensing, Air and Space Law (2007) [1] satellite observation system developed for military and civil use (Turin Agreement supra note 15, at 6). The data policy flowing from this definition allows for direct access to the satellites by defence entities and all other users, including commercial. They must go through a civilian operator who has an exclusive worldwide license. Therefore data openness and availability must be considered in the context of changing and emerging State practice. III Exogenous conditions 66 FWC Sector Competitiveness Studies GMES Downstream Sector 77

78 TABLE 4.1: FRAMEWORK GRID FOR THE GMES DOWNSTREAM SECTOR GMES Downstream Sector Importance Trend Geographical level Source Potential effects / observations / sector trends 1-10 < / = / > [1]=policy literature; [2]=theoretical literature; [3]=own appreciation based on economic theory Socio-political developments Public Awareness 5 = EU wide OECD (2005) [1] Public awareness is crucial for the political sustainability of the space sector and for maximising the socio-economic benefits from space activities. Demographic Change Impact on availability of labour for a highly skilled sector Global Competition Competition amongst certain types of service provision Competition from aerial photography, landbased surveys and mass market geo web browsers 8 > EU wide [3] Demographic change (in the form of a decrease in overall size, ageing population, and no. of people with higher education) could affect the sector. 8 > EU wide OECD (2005) [1] Due to the international commercialisation of space related products and services competition issues arise across many applications 67 8 > EU wide DG Enterprise Growth in the satellite based high resolution (2007) [1] imagery has been hampered by competition OECD (2005) [1] from competitor products. 67 Factors which affect the competitive nature of the commercial terrestrial and space-based solutions in the commercial market are explained in detail below this table. 78 FWC Sector Competitiveness Studies GMES Downstream Sector

79 TABLE 4.1: FRAMEWORK GRID FOR THE GMES DOWNSTREAM SECTOR GMES Downstream Sector Importance 1-10 Trend < / = / > Geographical level Source Potential effects / observations / sector trends [1]=policy literature; [2]=theoretical literature; [3]=own appreciation based on economic theory Adlen (2008) [1] As a result, remote sensing satellite companies have become increasingly dependent on government business to maintain their competitive edge. Non EU competition, to what extent is 6 > EU wide Euroconsult (2007) EO services are in demand in local and competition really global? Global [1] international markets (VEGA 2008). VEGA (2008) [1] Within the EO sector there is a growing trend of consolidation and vertical integration (Section 3.2.2). Globally, the US industry seems to be more consolidated and integrated than the European industry due to the presence of larger companies in some key market areas. A few large companies with multidisciplinary activities dominate the sector (Euroconsult (2008). Competition from emerging countries (india, China) is increasing. Technological Change 7 > EU wide [3] Developments in ICT stimulate innovation in Global GMES Downstream market. FWC Sector Competitiveness Studies GMES Downstream Sector 79

80 80 FWC Sector Competitiveness Studies GMES Downstream Sector

81 4.3 Conclusions from the grid The following section focuses on the relative importance of each part of the framework grid, describing the key issues which are likely to have a potential impact on the competitive position of the EU GMES Downstream sector Regulatory conditions In terms of the number, and high grading of importance factors within the regulatory conditions section of the table above, Sector specific Regulations and policies have the biggest impact on the competitive position of the EU GMES Sector. Specific regulations / policies in response to regulations which affect the competitiveness of the sector include: US ITAR Regime 68, National Government interpretations of the U.N Principles relating to remote sensing, EU procurement practices (including GMES related EU policy objectives), and the INSPIRE Directive. Focusing on the INSPIRE Directive, the diversity of data that the GMES services require and produce is expected to benefit from the development of a data policy that takes INSPIRE into account (Brussels, COM (2004) 65 final) 69. National interpretation of U.N Principles and the number of exceptions to non discriminatory access policy for high resolution data is an increasing trend occurring in all countries. Controlled access by national member states will limit the opportunity for the European market to compete with the larger institutional market of the US, and the developing markets in India and China. This fragmentation of the European space market translates to the absence of tools at a pan European Level to structure market, in aspects such as regulation, licensing, or procurement process (EuroConsult 2007)). Implementation of competition policy differs at a member state level. In these markets there is a tendency for defence and security value adding activities to be done by national government bodies, or companies under license 70. In reference to national restrictions, framework conditions, described in the next section are also important influencing factors for competitiveness. In general, the increasing number of commercial remote sensing activities and availability of affordable satellite technology are impacting on the global, EU and national trend to form space and remote sensing laws (National Center of Remote Sensing Air and Space Law (2007)) Framework conditions In terms of relative importance of grid analysis sections (Regulatory, Framework and Exogenous conditions), Framework Conditions are expected to have a big impact on the 68 ITAR means the International Traffic in Arms Regulation and is a set of United States government regulations that control the export and import of defence-related articles and services. 69 Furthe source reference: Global Monitoring for Environment and Security (GMES): Establishing a GMES capacity by (Action Plan ( )) 70 OECD (2005) FWC Sector Competitiveness Studies GMES Downstream Sector 81

82 future competitiveness of the sector. Many of the identified factors scored seven or above in the factor importance scale, with the trends projected to increase. Important framework conditions identified in the analysis include, labour force and knowledge skills, market access (trade and FDI), knowledge base development (R&D and role of SMEs), and data considerations. Also R&D in other sectors is important, as this results in improved inputs that has a positive impact on the productivity of the sector. Higher resolution images are an example, or more powerful computer processors. The issues regarding the limited and decreasing availability of highly skilled labour are a general problem in the EU and are also observed in other European knowledge intensive industries. This may pose a serious problem for the sector in the future. Added to this is the fact that there is an identified need for the industry to attract a more diverse workforce as it currently does not meet the intended age or gender distribution guidelines published by the European Commissions Integrated Guidelines for Growth and Jobs ( ). 71 This may not be a significant constraint in the majority of cases, but given the typical customer base and funding sources behind the industry, it may be worth considering any constraints that the Commission may place upon non-compliant sectors, or non-complaint companies as future funds are allocated A major sector characteristic of the EO Global market, which has an effect on the competitiveness of the sector, is the involvement of the public funding. EO markets are, in part driven in Europe (and, globally) by the public sector, either through returning Government customers, or through inter-governmental frameworks, which initiate pilot studies looking to strengthen EO Services. Of relevance to the EO sector, an example of a public sector programme influencing the development of the sector is FP7. This European Union Research Framework Programme supports a number of participants in specific research and technological development projects. In fact, within the EO sector, most technical development activities are funded by clients / public funds, and not through direct internal investment. Also important in knowledge base developments is the role of SMEs. SMEs involvement in the sector has been identified as an important factor for its knowledge based development. ESA, one of the major EU public funded bodies have a number of policies which actively encourage SMEs to be become involved in its space programmes. 72 For example, since the second quarter of 2006, ESA procurement processes have been streamlined making them more accessible to SMEs. Access to finance, and therefore funding through public or private means has been identified in the literature as a factor influencing the competiveness of the sector. In both the space segment and the ground segment of remote sensing activities there is an increasing trend towards financing projects through Public Private Partnership (The National Center for Remote Sensing Air and Space Law (2007)). This trend reflects the 71 Brussels, COM(2007) 803 final PART V Source: annual-progress-report/ annual-report-integrated-guidelines_en.pdf 72 Source: 82 FWC Sector Competitiveness Studies GMES Downstream Sector

83 wider understanding by the private sector that this form of funding can facilitate a risk sharing. However, major programmes such as GALILEO and GMES are now financed publicly. In conclusion many of the framework conditions are either set, or influenced by the public sector. An advantage of this is that the public sector can influence in the future competitiveness of the sector. For example, continued access to public funding, could facilitate competitiveness in the sector by encouraging research, knowledge, growth and innovation Exogenous conditions Global competition and demographic change are both exogenous conditions which rate highly on the importance factor scale, and / or are recognised increasing trends of activity. The demographic trend is related to the availability of high skilled labour to the sector in the EU. The exogenous condition of global competition can be analysed by three factors which could influence the competitive position of the EU EO sector, these include: Competition amongst certain types of service provision, e.g terrestrial and spacebased solutions in a commercial market; Competition from aerial photography, land-based surveys and mass market geo web browsers; and, Evaluating the extent to which the EO market is global. One of the important influencing factors to consider, in the context of competition is the extent to which governments have invested in the application and are involved in its operation Conclusion The ability for EO downstream service providers to overcome technological and economic hurdles will very much depend on whether the framework conditions that govern EO activities provide a supportive environment for such activities. Our analysis has shown that the public sector has an important influence on the sector, not only because it sets the legal and regulatory framework for the sector, but also because it has a large influence as a client, by funding the development of the sector and by shaping policies that influence market demand for EO services. 4.4 Effect of the framework conditions on the competitive position 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 FWC Sector Competitiveness Studies GMES Downstream Sector 83

84 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 grid 73 ). 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 Inputs Industrial Structure Size of enterprises Level of specialisation and segmentation 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 73 The column Source notes the literatures main source of information. Each source of literature is categorised using the following numbering system, [1] Potential effects / observations / sector trends found in policy literature, [2] Potential effects / observations / sector trends found in theoretical literature, and [3] Potential effects / observations / sector trends deduced from ECORYS own appreciation of the issue, which is based on economic theory. 84 FWC Sector Competitiveness Studies GMES Downstream Sector

85 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 FWC Sector Competitiveness Studies GMES Downstream Sector 85

86 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 Structure Intra- and inter-industry relations Production processes Organisation 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 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: the Inspire directive regulations on environmental reporting 86 FWC Sector Competitiveness Studies GMES Downstream Sector

87 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. 74 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. FWC Sector Competitiveness Studies GMES Downstream Sector 87

88 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 subsectors). 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-àvis 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. 88 FWC Sector Competitiveness Studies GMES Downstream Sector

89 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. FWC Sector Competitiveness Studies GMES Downstream Sector 89

90 5 Comparison with the US Downstream Sector This chapter compares the European EO downstream sector with its US equivalent. The comparison is done on issues such as revenues, structure and the sector and employment, growth of the sector, markets and customers, and drivers, opportunities and risks. 5.1 Sources Data for comparisons of the European and US EO downstream industries comes from five main sources: [R1] Survey and Analysis of Remote Sensing Market Aerial and Spaceborne, Global Insights for NOAA, September 2005 [R2] ASPRS 10 year industry Forecast Phase III Results, January 2004 [R3] ASPRS 10 year industry Forecast Phase IV Results, September 2006 [R4] Assessment of the downstream value-adding sectors of space-based applications, Executive Summary, Euroconsult for ESA, April 2007 [R5] The State and Health of the European and Canadian EO Service Industry, Vega for ESA, April 2008 [DRAFT] The Global Insights report [R1] included a detailed questionnaire survey and 250 interviews across the whole stakeholder community (uses customers, suppliers etc.) and 242 survey responses from suppliers including 83 from the satellite sector. Unfortunately, aggregated results (in the style of the Euroconsult and Vega reports) are not provided so some interpretation is needed to derive comparisons. Also, although the survey is dominated by US companies, it also includes companies from other countries. The ASPRS report does provide aggregated figures, for the industry, but bundles together airborne and satellite revenues, so interpretation for disaggregating for a comparison with the European GMES sector is required. 5.2 Revenues US Situation Reported revenue for the satellite based sector for 2004 estimated from [R1] was $528M. However, there is some ambiguity in the report regarding the provenance of these revenues. They are based on a survey and while are predominately for US companies, there are non US companies involved. Furthermore there is no explicit statement of any method used to fill unreported revenues as is done in [R5], so it must be assumed that 90 FWC Sector Competitiveness Studies GMES Downstream Sector

91 these are only the revenues from the companies surveyed and do not represent the industry as a whole. Estimated revenue for the entire US geospatial (airborne and satellite, photogrammetry and images based GIS ) industry for 2005 from [R3] was 3.3Bn. The same source estimates the space sales to be $1Bn for the same year. However, the sales figures implicitly include data sales, which are explicitly excluded from [R4] and [R5]. From other sources, it is estimated that data sales may account for 1/3 of the total. Euroconsult [R4] estimated the US industry for satellite EO related value added services to be $867m in 2005, including applications in meteorology and oceanography which seem to be largely omitted from the other US studies. From a review of the methodologies of [R1] and [R3], the latter appears to be a more reliable source since it attempts to produce a complete survey specifically of the US industry. Comparison with Europe By comparison, the reported revenues from [R5] were 232m and 180m from [R4] (excluding meteorology). The figures are not directly comparable due to variations in scope and methodology. However, given the range of estimates for the US, the evidence suggests that total like-for-like turnover of US companies is approximately 2-3 times that of the European industry. 5.3 Structure and Employment US Situation Reported employment in the satellite sector for 2004 from [R1] is estimated at 3,219. The same caveats about applicability apply as in section. The implied revenue per employee is $164K. The implied size distribution is shown below. FWC Sector Competitiveness Studies GMES Downstream Sector 91

92 Figure 5.1 Size distribution of US companies in 2004 according to Global Insight Size distribution of US companies from Global Insights Number of Companies Over 500 Source: Global Insights [R3] States that the total US employment in the US remote sensing and geospatial information industry is 175,000. However, this definition includes commercial firms, not-for-profit organizations, governmental agencies, and academic institutions. Unfortunately, a specific figure for industry employment is not provided. However some deductions can be made from the data provided on the size distribution shown below. Figure 5.2 Size distribution of US companies according to ASPRS Size distribution of US remote sensing companies from ASPRS over 500 Source: ASPRS (2006) The total number of employees from the respondents in the remote sensing section of this sample was 6,925 with an implied revenue per employee of $144,000 based on the estimated $1Bn revenues. 92 FWC Sector Competitiveness Studies GMES Downstream Sector

93 In a different part of [R3] the figure below is presented for the size distribution of the whole geospatial industry. Figure 5.3 Size distribution of US geospatial industry Source: ASPRS (2006) The populations presented for the space activity in [R1] and the first chart of [R3] are quite similar the difference in total employment can be accounted for by different samples, but the revenue per head figures are consistent. The second chart from [R3], shows some combination of i) remote sensing companies are smaller than average geospatial companies, and ii) geospatial activities are often undertaken in (relatively) small divisions of larger companies. [R2] reports that in general the workforce is high skilled as shown in the figures below: Figure 5.4 Skills of US workforce Source: ASPRS (2004) Comparison with Europe Total employment in Europe is estimated in [R5] at 3,000 persons in 2006, with an average revenue per head of 102,000. Hence the number of employees in Europe is proportionally slightly higher with a lower productivity per head. The size distributions in the US are consistent with those of the European industry, with a large number of small firms and relatively few large organisations. However the overall average size is larger in the US, and there are more large companies. 18 companies in the FWC Sector Competitiveness Studies GMES Downstream Sector 93

94 US have remote sensing divisions larger than 100 employees [R3] with a maximum of five companies of that size in Europe. Employment profiles are quite similar, with large percentages of graduate and post graduate qualified staff in both regions. 5.4 Growth US Situation [R3] quotes estimated US growth rates of 14% in the earlier part of the forecast period, falling to 9% over the next few years. [R1] does not quote specific growth figures. It doesn t have a base year and comparisons so growth figures cannot be computed. It does contain opinions of future growth from questionnaires but these are considered unreliable. The main drivers of growth are reported to be: Government requirements for (homeland) security information Availability of higher resolution satellite data Exposure to digital globes increasing awareness of the potential of EO Comparison with Europe European growth figures are difficult to interpret, since reported growth in the surveys seems to be much higher than actual growth between the surveys. Actual growth measured in [R5] since the previous version of the same survey was 2% per annum, suggesting significantly higher growth rates in the US. 5.5 Markets and customers US Situation The ASPRS survey phases present two versions of the distribution of industry revenues across markets/customers. The first, shown below, shows the percentage of companies active in each application area in a 2004 survey. Figure 5.5 Percentage companies active per application area Source: ASPRS (2004) 94 FWC Sector Competitiveness Studies GMES Downstream Sector

95 The second, shows the percentage of revenues coming from each application area, reporting the figures for surveys in 2000 and in Figure 5.6 Percentage of revenues generated per application area Source: ASPRS (2004) The NOAA study [R1] also provides a breakdown of the numbers of companies active in each applications domain. Figure 5.7 Activity of companies per area Number of companies active in each area Environmental Monitoring National Resource Management Land Management Forestry Security (Defense/Homeland Secur... Utilities Damage Assessment Engineering Cadastral Sustainable Development Source: Global Insight Sources of funding are dominated by government customers. The figure below illustrates where the funding for data purchases came from the ASPRS report. The text from the report backs up the data in stressing the importance of the public sector both at local and national level as a customer. FWC Sector Competitiveness Studies GMES Downstream Sector 95

96 Figure 5.8 Source of funding for data Source: ASPRS (2004) It is also noted that many companies, especially smaller ones, relay on government agencies for R&D, either in the sense that those agencies undertake the R&D themselves, or that they fund R&D in industry. The report notes And The many smaller firms that under gird the industry are less inclined to support internal R&D and workforce development, are more affected by governmental competition with their services, and are less able to meet foreign competition forcefully. Because of their size, smaller firms generally do not have the financial resources to support a significant amount of R&D. these results indicate a fragile R&D base upon which to support future industry innovations and growth. The key points to note are: The significant revenues associated with security applications 35% 40% of all revenues. The overall dominance of public sector customers in the demand base. The comparison of revenue distribution and number of companies this implies that the security revenues are concentrated in a small number of (larger) companies. None of the distributions mention atmospheric or oceanographic applications. This implies that both surveys take a very traditional view of remote sensing this is very much land based, mapping / photo-interpretation. Hence there is probably some activity associated with other applications missing from the figures. The relative lack of investment capacity especially in the large number of small companies and the consequent reliance on the public sector for R&D. Comparison with Europe A number of consistent themes emerge when considering the two regions. Industry revenues as spread across a wide range of markets and there is a dominance of public sector customers. The most obvious difference in the market and customer characteristics between the US and Europe is the large defence/homeland security market in the US, which accounts for 40% of all revenues, compared with 12% 18% [R5 and R4 respectively] in Europe. 96 FWC Sector Competitiveness Studies GMES Downstream Sector

97 Both US and European surveys point to a lack of investment capacity, especially in the smaller companies and a reliance on public sector R&D funds. However, the large contracts for high resolution satellite data in the US have underpinned the investment deeded for several companies to launch satellite systems which have subsequently spunoff civilian applications 5.6 Drivers, opportunities and risks US Situation Both the main US references provide insight into the main drivers affecting the competitive success of the industry, based on either questionnaires or individual interviews. The surveys cover both airborne and satellite EO and a lot of emphasis is put on technical aspects of airborne acquisition and processing. However a number of factors that are valid to, or specifically relating to the satellite sector also emerge: Difficulty in acquiring and retaining skilled workforce there is a bi-polar distribution with a gap in the workforce in the mid range (10 years experience) Perceived competition from federal and state governments in-sourcing technical analysis skills Perceived Federal restrictions on exports with the consequent impression that US markets are more open to competition that overseas ones. Balance of demand for and availability data with higher horizontal and vertical resolution technology of products is improving, but demand for higher and higher resolution continues Emergence of new technologies LiDAR and InSAR enabling new applications Comparison with Europe The Survey in [R1] includes responses from international participants and thus provides an interesting comparison of the main drivers as perceived from industry in different regions. This is shown in the table below. Table 5.1 Political, economic and environmental trends 2010 by sector Source: Global Insights FWC Sector Competitiveness Studies GMES Downstream Sector 97

98 The perceptions of driving factors are perhaps not surprising, especially given the timing of the survey (2004), with security concerns and the rise of easy public access to EO data through digital globes ( Remote sensing data becoming a commodity ) dominant in North America and Asia. In Europe the main drivers were perceived to be enlargement in the EU and global warming. 5.7 Earth Observation R&D funding schemes in the US Introduction The ASPRS report on the US industry and 10 year forecast states that only about 40% of the US companies it surveyed had their own R&D programmes. The others depended on technology suppliers or academic and government institutions to fund R&D in new capabilities. The implication is that most R&D is undertaken in rather than funded by public sector institutions. An initial review of R&D funding opportunities specifically for EO applications development supports this implication US GEO has a different emphasis and structure to GMES, being focussed on coordinating public sector activity and provision of EO datasets. The emphasis in private sector participation seen in GMES is almost entirely absent in US GEO. The latest US GEO progress report (2007) states that USGEO will build stronger links to the academic and industrial sectors by creating formal processes for obtaining private sector input. Stronger partnerships to industry will ensure that USGEO utilizes and leverages the latest capabilities in such areas as spatially-enabled search portals, geo-referenced emergency alerting, modeling and data assimilation, and decision support tools. This indicates using private sector capabilities rather than investing in them. Earth observation oriented programmes NASA s Applied Sciences Program aims to use research results have the potential to serve US society by enhancing environmental management decision making capabilities. The programme is split into two parts. The first is in the National Applications program where prototypes are used to assess the incorporation of NASA research results into a user partner s decision support systems. Partners are generally federal or state agencies. The second is the Crosscutting Solutions program where prototypes that are low cost and quickly produced are used to evaluate the potential of a wider collection of NASA research results to serve society. The result is an evaluation of NASA research results for their potential to be candidates for further, more rigorous development. The National Applications programme is organized along the lines of the benefits areas identified by GEO. NASA s specific categories are: Agricultural Efficiency Air Quality Aviation Carbon Management Coastal Managment Disaster Management Ecological Forecasting Energy Management 98 FWC Sector Competitiveness Studies GMES Downstream Sector

99 Homeland Security Invasive Species Public Health Water Management The programme involves lot of in-house R&D and involves collaboration with a range of Universities and government operational agencies. The programme also includes an initiative for external funding known as Research Opportunities in Space and Earth Sciences (ROSES). ROSES allocates approximately $20M per year to a range of projects of 1-3 years duration concerned with applying the results of NSAS research or NASA mission data. The programme is open to all types of applicants and examining the recent results shows that most of the funded projects are led by Universities, research institutions or NASA centres. The statistics below show the budget, total number of projects and number of projects led by private sector organisations over the past three years. Table 5.2 Overview NASA ROSES program NASA ROSES Program Budget $22M $20M $23 Number of Project Industry Leads The US geological Survey (USGS) which is the other main US Federal Agency involved in remote sensing appears not to run an SBRI programme. The USGS Land Remote Sensing Program which is responsible for the Landsat program states in its mission with respect to the remote sensing industry The USGS LRS Program, with the help of its Federal, State, and private sector partners, provides leadership to the Federal civil community by developing and reviewing remote sensing space policies, by cooperating with other Federal agencies to validate data accuracy and to ensure the data's utility to the requirements of the remote sensing community, by developing contractual mechanisms for the civil community for accessing these data, and by calibrating cameras and other sensors for industry and government and advancing calibration methodologies. However there is no specific investment or R&D programme targeted at industry. Other intra-mural R&D programmes developing EO applications are also undertaken by several other government departmental agencies, including the US Department of Agriculture (USDA) Hydrology and remote Sensing Laboratory and the US Forest Service. Industry targeted programmes There are two US federal government schemes for R&D that fund some EO applications development work via NASA and NOAA: the Small Business Research Initiative (SBRI), and the Small Business Technology Transfer Program. SBRI funds research in small FWC Sector Competitiveness Studies GMES Downstream Sector 99

100 businesses that is relevant to the needs of a federal agency and also allows exploitation of the research by the business concerned. STTR funds research undertaken in an academic research institute in partnership with a small business. All government agencies with an extramural research budget over $100m per annum have to operate the SBIR and dedicate 2.5% of their budget to it and those with extramural research budgets over $1Bn must dedicate 0.3% of it STTR. The definition of a small business for these programmes is: Legally established and organized for profit with the place of business located in the U.S.; Operated primarily in the U.S. or makes a significant contribution to the U.S. economy; Majority owned and controlled by U.S. citizens or permanent resident aliens; and, 500 employees or less, including any affiliates. The stated aims of SBIR are to: stimulate U.S. technological innovation; use small businesses to meet federal research and development needs; increase private-sector commercialization of innovations derived from federal R&D; and foster and encourage participation by socially disadvantaged businesses. The programmes both operate a two phase system whereby a small first phase proof of concept project may be followed by a larger implementation project. NASA s operation of the scheme is described below: Phase 1 is the opportunity to establish the scientific, technical and commercial merit and feasibility of the proposed innovation in fulfilment of NASA needs. All Phase 1 contracts are selected competitively and require reporting on the work and results accomplished, including the strategy for the development and transition of the proposed innovation. NASA SBIR Phase 1 contracts last up to 6 months with a maximum funding of $100,000. STTR Phase 1 contracts are typically for one year with a maximum funding of $100,000. Phase 2 is focused on the development, demonstration and delivery of the proposed innovation. It continues the most promising Phase 1 projects through a competitive selection based on scientific and technical merit, expected value to NASA, and commercial potential. All Phase 2 contracts require reporting on the work and results accomplished, and whenever possible, the delivery of a prototype unit or software package, or a more complete product or service, for NASA testing and utilization. Both SBIR and STTR Phase 2 contracts are usually for a period of 24 months with a maximum funding of $600,000. Phase 3 is the commercialization of innovative technologies, products and services resulting from Phase 2, including their further development for transition into NASA programs, other Government agencies, or the private sector. Phase 3 contracts are funded from sources other than the SBIR and STTR programs and may be awarded without further competition. Examination of the NASA and NOAA implementation of these schemes, however shows that in absolute term the budget allocated to EO applications development is relatively limited. Statistics from the most recently published results for NOAA and NASA are shown below. Examination of the schemes shows that NOAA funding in recent years has 100 FWC Sector Competitiveness Studies GMES Downstream Sector

101 been more focussed on in situ sensors research related to fisheries, while NASA funding, which is spread across all space domains, focuses on space hardware. Table 5.3 NOAA STTR Budget NOAA Budget (US$, M) Total budget $5.8 $4.7 $3.2 EO applications related projects $1.9 $1.1 $0.7 Table 5.4 NASA SBIR budget NASA Budget (US$, M) (phase 1 only) Total budget $100 $97 $28 EO applications related projects $0 $ The other possible source of funding for developing new EO products and services would be from individual States and it is possible that R&D funding is embedded within contracts to provide operational products and services at state level. In summary while it is understood that US industry involved aerospace hardware and systems development has access to large research funds from both NASA and from defence budgets, the downstream industry does not have equivalent access. There appears to be no equivalent in concentration and scale to the ESA/EC funding for GMES. 5.8 Comparison of the regulatory and framework conditions In the previous chapter, an analysis has been made of the regulatory and framework conditions that affect the European GMES downstream sector. In this section, these conditions are compared with the US. The focus has been on these conditions that were scored important (score 7 or higher) in table 4.1 for Europe. The results of this comparison are presented in the table below. Table 5.5 Comparison of regulator and framework conditions Regulatory and framework conditions Comparison with US I Regulatory conditions Competition Policy Few formal regulatory entry barriers to competition. Sector specific regulations and policies EO markets are open for non-us companies. However, also imports fall under the ITAR regulations for security and defence applications. FWC Sector Competitiveness Studies GMES Downstream Sector 101

102 Regulatory and framework conditions Comparison with US US ITAR Regime The US ITAR regulation adversely affects the ability of US Space firms to tap foreign markets. Restrictions also apply if a non US firm is using a classified component. INSPIRE Directive There is no US equivalent to the INSPIRE directive. However, there is the public-private partnership Open Geospatial Consortium, that was founded in the US, and serves as a global forum for the collaboration of developers and users of spatial data products and services, and to advance the development of international standards for geospatial interoperability. It should be noted that is not specifically focused on the US. GMES supporting EU objectives and policy domains US develops Integrated Earth Observation system, as the US input to a Global Earth Observation System of Systems Environmental policy Intensity of environmental policy making seems to be less in the US compared to Europe. Environmental policy making is also scattered, many different institutions and departments play a role, and overall Department of the Environment does not exist. Provision of environmental information seems to be more supply driven than in Europe. NOAA policy NOAA, the National Oceanographic and Atmospheric Administration provides the National Weather Service (NWS). Current regulations prescribe: The NWS will not compete with the private sector when a service is currently provided or can be provided by commercial enterprises, unless otherwise directed by applicable law. 75 II Framework conditions Labour Force and Knowledge Skills Sector employment profile and non compliance with European Guidelines The EO Service Industry workforce in the US is highly qualified. 70% has a masters degree or above Future Workforce availability A survey of 2004 indicated that attracting staff with sufficient skills, and keeping them is difficult. There is strong competition from FWC Sector Competitiveness Studies GMES Downstream Sector

103 Regulatory and framework conditions Knowledge Base Development Comparison with US non-eo sectors to get the employ the qualified people. 76. How Research / Technological Change is funded No US equivalents on federal level in R&D compared to ESA/FP7 for downstream industry R&D in other sectors The EO downstream industry in the US is also dependent from R&D in other sectors, that results in improved inputs in their production process leading to productivity increases. Examples are higher resolution images, or more powerful computer processors. Energy and Environment Increased attention for mitigation the consequences of natural disasters NOAA stresses as well the contribution of EO for this topic. Attitude to public sector Public sector influence on EO Markets as a client Also in the US EO markets are driven by the government, although this is largely influenced by the security and defence part. Balance between the need for institutional funding and remaining a competitive industry The US sector is strongly dependent from institutional funding. Access to third country markets Increasing investment in developing countries The rising development of new countries in this domain such as China and India hinders US companies as these do hinder European companies Data Cost of Data The cost of data do not come forward as a barrier in US industry surveys. III Exogenous conditions Demographic Change Impact on availability of labour for a highly skilled sector Demographic change in the USA is similar to Europe, although it is less intense, a higher fertility and immigration offset the ageing trend. Global Competition Competition amongst certain types of service provision Due to the international commercialisation of space related products and services competition issues arise across many applications This is as valid for the EU as for the US. Competition from aerial photography, land- Growth in the satellite based high resolution 76 Source: European Space Policy (2007) FWC Sector Competitiveness Studies GMES Downstream Sector 103

104 Regulatory and framework conditions Comparison with US based surveys and mass market geo web browsers imagery has been hampered by competition from competitor products. This holds for EU as for US companies. Technological Change The US is ahead in innovation compared to the EU, and this has not been made up yet by the Lisbon initiatives. The most important points to note from the comparison are: The US ITAR regulation adversely affects the ability of US Space firms to tap foreign markets. There is a strict prohibition of public institutions offering services that can be offered by private companies. Attracting and keeping highly skilled workforce is considered a key impediment for development by EO companies in the US. No US equivalents on federal level in R&D compared to ESA/FP7 for downstream industry The cost of data do not come forward as a barrier in US industry surveys. 5.9 Summary The results from the comparison have been summarised in the following table. We refer to the explanations on sector definitions and sample methodologies in the previous sections which always need to be taken into account when comparing these figures. Table 5.6 The US and EU downstream sector compared Europe USA Revenues (m ) 306* 845** Employment 3,000*** 7,000 Average revenue growth p.a. 2% 9% Defence/Homeland security share in total revenues 12-18% 40% * Including revenues data sales, and including Canada. Based on VEGA (2008) ** $1 billion against a historic exchange rate of (31/12/05). This includes data sales. Excluding data sales total revenue is estimated at 730 million. *** Including Canada In summary the following observations can be made about the characteristics of the EO downstream sector in the US and its comparison with Europe: US Industry is between two and three times the size of Europe, depending on the exact definition of the sector. Revenue per head is approximately 20% higher in US. This statistic is related to the slightly larger average size of companies in the US. The size distribution of companies is similar in character, but in absolute terms there are more larger companies in the US. 104 FWC Sector Competitiveness Studies GMES Downstream Sector

105 There are similar market profiles in terms of applications. The main difference is the much larger domestic defence / security market accessible to US companies. US industry appears to be growing faster than that in Europe. There is no direct evidence of any clear differences in export performance / market access between the US and Europe. Surveys on both continents reveal almost identical perception that other countries industry enjoys better protection in their domestic markets. Investment capacity is similarly limited within most companies. There is significant dependence on public sector investment in R&D. However, there is limited funding available for R&D for downstream industry from the federal budgets. There is a strict prohibition of public institutions offering services that can be offered by private companies. Attracting and keeping highly skilled workforce is considered a key impediment for development by EO companies in the US. FWC Sector Competitiveness Studies GMES Downstream Sector 105

106 6 Conclusions and Recommendations 6.1 Conclusions In this report an analysis has been made on the competitive position of the EU GMES downstream sector. More specifically, the analysis addresses those European organisations that offer value added services based on EO data. No further breakdown has been made yet of which organisations use EO data the provision and availability of which would be affected by the introduction of GMES services. Performance of the sector The EO downstream sector is relatively small in terms of revenues, and strongly dependent on grants. The revenue per employee is also modest. The organisations in the sector generally make profit, also the smaller ones, however these profits are very volatile. These are all typical indications for a sector that is developing. The EO downstream sector focuses to a large extent on national markets, and to a minor extent on intra-european sales. Export to markets outside Europe is limited, and only done by some larger companies. There are no indications of significant imports from outside Europe of EO value adding services. Structure of the sector The sector consists of a large number of small and medium sized companies, and a few larger companies, which are almost all located in the EU15. Labour is an important factors, as well as data. EO value adders are highly dependent from their data suppliers. Many value adders have a framework contract that is managed by the supplier. A large share of EO value adding companies consider the supplier performance to have a negative impact on their own performance. The customers of the EO downstream sector are to a large extent public authorities/agencies. Private customers are limited, as commercial business takeoff is considered to be slow. Barriers to enter the private market are in the relatively high cost of data and the lack of knowledge about the EO potential to tentative customers. There are a few barriers to entry: government policy and data provision costs. Governments have a strong influence on the market when deciding whether or not to use EO products or services for their policies. New entrants have a comparative disadvantage compared to the larger incumbents, as these generally have their own data and are thus not dependent on external data providers. 106 FWC Sector Competitiveness Studies GMES Downstream Sector

107 Processes There is a large degree of customisation of the products and services offered by EO value adders. Around 70% of products and services are highly customised, while approximately 8% are not customised at all, i.e. are fully standardised. Future products and services are anticipated to have a lesser degree of customisation. Companies are keeping the production of products and services inhouse, there is limited outsourcing. The extent of process automation is limited and manual processes raise constraints in terms of staff availability and expertise, especially in small firms. The EO downstream sector shows a relatively high investment in R&D, which amounts to more than a quarter of revenues. However, many of the R&D funds originate from public funding/grants, and not from own investment. Smaller companies spend a smaller portion of their revenues on R&D than large ones. Regulations and Framework conditions Regulatory and framework conditions influence the development of the EO downstream sector. Our analysis has shown that the public sector has an important influence on the sector, not only because it sets the legal and regulatory framework for the sector, but also because it has a large influence as a client, by funding the development of the sector and by shaping policies that influence market demand for EO services. The competitiveness of the EO downstream sector thus is very depending on the influence of the public sector. Other important issues are the input factors labour and data, and R&D in supplying sectors. The EO sector requires highly skilled employees, a demand that also other industries have. At the same time supply of these employees decreases. This means that a possible reduced influx of new well-skilled employees is a potential threat for the sector. In terms of data input, this has been proven to be a major concern for service providers. They indicate that the costs are increasing, which could hamper profitability and innovation. The European EO downstream sector compared with the US The US Downstream sector is between two and three times the size of its European equivalent, depending on the exact definition of the sector. The revenue per employee is approximately 20% higher in the US than in Europe. The US downstream sector appears to be growing faster than that in Europe. The size distribution in the US is similar in character, but in absolute terms there are more large companies in the US. There are similar market profiles in terms of applications. The main difference is the much larger domestic defence / security market accessible to US companies. There is no direct evidence of any clear differences in export performance / market access between the US and Europe. Surveys on both continents reveal almost identical perception that other countries industry enjoys better protection in their domestic markets. The investment capacity is similarly limited within most companies. There is significant dependence on public sector investment in R&D in both the US and Europe. In terms of service provision, the NOAA is as a public institution strictly forbidden to offer services that can be offered by private companies, which implies a significant market opportunity for private service providers. FWC Sector Competitiveness Studies GMES Downstream Sector 107

108 6.2 Recommendations The terms of reference request to provide recommendations on three issues: 1. How to optimise the involvement of the business community, with particular reference to SME and to companies outside 'traditional' sectors such as space or remote sensing; 2. How to optimise framework conditions for stimulating DS industry's investment in Europe; 3. How to best mobilise EU policies and funds (including industrial policy, regional funds etc.) to stimulate DS market growth. We will address these issues in the next subparagraphs. Additionally, we will discuss further industry monitoring Optimising the involvement of the business community Minimising uncertainty One of the most important factors affecting business investment decisions is risk. Uncertainty over conditions of access, price and data policy for GMES data and core service outputs mitigates against investment in new services to use them. Uncertainty over future scope changes of core services (and potential future competition from them) will also mitigate against investment. Therefore, as important as the policy itself, is the need to communicate clearly to industry on what the scope of the Core Services will be, what the limits of their growth will be, and under what terms will access be allowed their outputs to different stakeholders Preserve opportunities downstream If the core services grew greatly in scope and mat a large number of end users needs, then this would clearly damage the commercial market for the downstream industry. Generally speaking, restricting the scope of the core services (so that they don t go too far downstream) will increase market prospects for downstream service providers. However, the optimum scope for a core service from an economic perspective will be different for each service. Furthermore, the overall economic optimum may well not coincide with the optimum from the perspective of: Core service suppliers Downstream industry End users Funders It is therefore recommended that the value chain of each CS is studied in detail to determine the optimum scope. This will require the development of a number of scenarios for each core service under which the costs and benefits of different scopes can be examined. It will require trade-off between the interests of the different stakeholders in order to recommend an optimal scope for each service. Annex A provides more detail on this. 108 FWC Sector Competitiveness Studies GMES Downstream Sector

109 Attracting industry involvement While most of the EO industry is very well aware of GMES, there may be other companies in the wider geospatial industry, or service companies in industry facing segments (e.g. private end users such as from oil an gas) or non-eo using companies for which EO could become an important input factor who are not so aware. Two approaches could be taken to widening participation: i) Publicity and information direct to other industry segments. This could be supported by the results of previous studies, for example those undertaken in the ESA EOMD programme; ii) Incentivising bidders into EC R&D programmes to include such companies in their teams. This could be done by making it clear that the evaluation of the proposals will reward those with a clear business plan, including a route to market, such as would be provided by including companies closer to the end-user in the team. iii) Assessment of a further development of the industry association and subsequent stronger involvement in the programme Optimising framework conditions Securing the supply of qualified labour The analysis of framework conditions showed that securing the supply of skilled personnel is key for the further development of the sector. Next to data, well-educated professionals are crucial in the development of new services in EO. The current profile of employees indicates that these are academic (masters level or above) year old males. The current greying of the European society, the diminished interest in science, engineering and technology careers and competition from other sectors looking for the same personnel could result in difficulties for the EO services sector. It is therefore recommended to develop together with the sector a strategy to secure the supply of skilled employees in future. One could consider connecting the EO downstream sector explicitly to ongoing initiatives in this area, such as the implementation of recommendations from the High Level Group on Science Education 77 and ESA s European Space Education Resource Office project 78. Export promotion support The analysis has shown that there are limited trade barriers for European EO downstream companies to export their services outside Europe. In practice, it has shown that the large companies export outside Europe, while the small companies generally serve the domestic market only. These indicated that limited resources for sales activities and the geographical footprint mainly prevent the SMEs in the EO downstream sector from accessing export markets. It is therefore recommended to assess with the industry association and the member states whether export promotion support can be set-up. National space agencies in co-operation with national export promotion agencies can facilitate the export development process with dedicated measures and facilities FWC Sector Competitiveness Studies GMES Downstream Sector 109

110 6.2.3 Mobilising EU policies and funds Structuring of development projects Industry studies (Vega 2008) have noted the time taken for development of new EO services. It is also evident that industry itself, being composed of many small companies, lacks the capacity to invest heavily in these services. Furthermore, the type of R&D support that is needed changes during the course of the development. It may be noted that the many R&D support programmes, including the ESA GMES Services Element and both SBRI and STTR in the USA, follow a phased approach. However the FP7 mechanisms used so for to develop downstream services does not. It is recognised that there are some constraints imposed top-down from FP7, but the following changes would make the programme more suitable for EO service development. i) Explicitly recognised a phased approach, with small Phase I projects (12-18 months for initial concept design, customer testing and business model development) leading to larger phase (24-36 months for development and roll-out). As in SBRI, there should be an expectation that a significant number (ca. 50%) of Phase I projects would continue to Phase II. This second competition will focus the quality of Phase I projects, while still giving bidders an incentive that if the project performs well there would be a significant chance of continuation. ii) New EO data and techniques develop quite quickly. In order to take advantage of these developments it would be desirable to reduce dramatically the time needed from initial call to project start for Phase I projects. At present this period is 18 months or more for FP7 integrated projects. The target should be 6 months (One months notice precall, two months for bid submission, two months for evaluation, one month for negotiation). Examine policy interventions encouraging use of GMES services One way to create or stimulate a market is through the policy interventions that encourage or mandate the use of certain technologies in this case for environmental monitoring. However this approach would need to be adopted with extreme caution to ensure that the benefits to one industry (EO) did not result in additional costs and regulatory burdens to another industry (that is responsible for complying with the regulations), and to prevent discrimination of technologies. The US comparison shows that the security and defence aspect is important in this respect as well Further industry monitoring For the quantitative aspects of this study, the authors have drawn from two previous studies, by Euroconsult and Vega, both commissioned by ESA. Although the VEGA study was a follow up from an earlier version from 2004, these studies are not considered to be structural industry monitors. These studies cover statistics like revenues and employment, but however do not address the issue of trade of downstream services between EU and the rest of the world. 110 FWC Sector Competitiveness Studies GMES Downstream Sector

111 The services sectors in general have problems with trade statistics. This is due to the fact that services can be traded in four ways ("modes of supply"), because often proximity between the service provider and client is required: 1) cross-border (e.g. internet) 2) by movement of the consumer (e.g. tourism) 3) by commercial presence (Foreign Direct Investment) 4) by movement of the service provider (temporary migration) For goods, trade statistics are collected at the border (goods trade only considers mode 1), but as services mostly do not visibly cross these borders, it is much more difficult to collect data on services trade. Even for more commonly traded services like management consultancy, data are lacking. An additional problem with the EO downstream sector is that this is not a separate statistical category, which will probably limit the attention for the sector of statistical data collectors (National Statistical Offices). Given the size of the EO downstream sector, this is only likely to change if policy makers make this an explicit priority. It is therefore recommended to develop a sector monitor that enables to assess the development of the sector in terms of performance and trade. It is also recommended to start this monitor when a policy option for GMES has been adopted. After all, the Commission s policy programming cycle requires further monitoring, and a sector monitor would give the right input for this. It should be realised that such monitor would need to cover both the companies in the sector (production, employment, export etc) and the customers (import, cross check on production). FWC Sector Competitiveness Studies GMES Downstream Sector 111

112 Literature Literature Referenced in the Report ASPRS, 10 year industry Forecast Phase III Results, January 2004 ASPRS, 10 year industry Forecast Phase IV Results, September 2006 Bain, J.S., 1956, Barriers to new competition, Harvard University Press. Diedrich. E, Tinz. M & Kuntz. S, 2004 SAGE Service Definition Phase, S10 Infrastructure Systems Analysis Euroconsult, 2007, Assessment of the downstream value-adding sectors of space-based applications, Executive summary. European Commission 2003, White Paper, Space: a new European frontier for an expanding Union. An action plan for implementing the European Space policy Galant S. & Pagano. T & Vafeas. A, European Knowledge Intensive Services based on Earth Observation Doing business with the help of GMES Global Insights, Survey and Analysis of Remote Sensing Market Aerial and Spaceborne, study for NOAA, September 2005 Harris, R. (ed.), 2002, Earth observation data policy and Europe, Balkema Publishers Holt Anderson et al (2006) What should the public sector do to incubate the Earth observation value-adding sector? National Center for Remote Sensing, Air, and Space Law (2007) The Land Remote Sensing Laws and Policies of National Governments: A Global Survey Pirone, M., 2008, The private sector in meteorology the next ten years. OECD, 2005 Space 2030, Tackling society s challenges Spiegler, D.B., 2007, The private sector in meteorology. VEGA and Booz Allen and Hamilton, 2004, The state and health of the European and Canadian EO service industry 112 FWC Sector Competitiveness Studies GMES Downstream Sector

113 VEGA, 2008, The state and health of the European and Canadian EO service industry in 2006 FWC Sector Competitiveness Studies GMES Downstream Sector 113

114 Webpage Sources Referenced in the Report FWC Sector Competitiveness Studies GMES Downstream Sector

115 Other Sources Reviewed ACIL Tasman, The Value of Spatial Information, 2008 Barbance. A, 2007 A market for GMES Results of the Graz conference British National Space Centre, 2007 UK Civil space Strategy and beyond Cambridge University, 2008, Models of Public Sector Information Provision via Trading Funds Dillion M, 2005 SPASEC march: Report of the panel of experts on space and security, prepared for the EC DG Enterprise & Industry. Doherty. M (Directorate of EO Programs, ESA), 2007 Perspectives on EO Exploitation Dufourmont, H., Extended Impact Assessment of INSPIRE based on revised scope, 2004, ESTAT. European Commission, 26 April 2007 Impact assessment of the European Space Policy. SEC(2007) 505 draft. European Commission - Research eu, September 2007 The Earth as a work of Art European Commission, 2003 Green Paper, European Space Policy European Commission DG Joint Research Centre, 2006 Assessing the Impacts of Spatial Data Infrastructures - Report of the International Workshop on the Cost to Benefit and Return on Investment Ratios of SDIs European Commission, 2008, Towards a Shared Environmental Information System (SEIS), COM(2008) 46 final EC-ESA Secretariat, 2005 European Commission European Space Policy - Preliminary Elements ECORYS/ESYS, 2006: SATMAC - Satellite Communication Market Assessment and Cost Benefit, Market Characterisation report and Satellite Communication Application and Services, prepared for EC DG Enterprise & Industry GINIE project, Geographic information in the Wider Europe, DG INFSO contract IST Harris R. and Browning R, 2003 Data Policy Assessment for GMES Draft Final Report FWC Sector Competitiveness Studies GMES Downstream Sector 115

116 Harris. R, 2000 Earth Observation Data Pricing Policy Free Data for All Users, Full Cost Pricing and Access Key Pricing Harris. R, Olby.N, 2000 European perspectives on trends in public sector. Earth observation data policies Holler. R & Banko. G, 2006 Gmes review Study ON In-Situ Monitoring Holt, Anderson et al, 2006 What should the public sector do to incubate the Earth observation value-adding sector? Position paper on the industry agenda, Holt, Anderson, 2006 EO Service Sector Representation Report T1: Analysis of Industry Issues Johnston S, Cordes J, 2003 Public good or commercial opportunity? Case studies in remote sensing commercialisation Macauley M.K (2005) Is the vision of the Earth Observation Summit Realisable? NASA, 2005, Geospatial Interoperability Return on Investment Study NOAA, 2002, Borders in Cyberspace conflicting public sector information policies and their economic impacts OECD, 2007 The Space Economy at a Glance OECD, 2005 Space 2030 Tackling society s challenges PIRA, 09/2000: Commercial Exploitation of Europe s Public Sector Information ftp://ftp.cordis.europa.eu/pub/econtent/docs/2000_1558_en.pdf RPA, Impact Assessment Relating to the Economic and Governance Evolution of Space in Europe, April Schieb. P.A, 2007 OECD Global Forum on Space Economics: The space sector and International Trade Space Foundation, The Space Report, Tortora J.J & Bialos J. P, 2005 Visions of the 21 st Century Space Industry How Can Emerging Demand, New Business Models and Transatlantic Cooperation Change the Market Demand VTT, 2007, Benefits of meteorological services in Croatia, Research Note FWC Sector Competitiveness Studies GMES Downstream Sector

117 Wyatt B.K, Briggs D. J and Ryder P, 2004 Building a European Information Capacity for Environment and Security. A contribution to the initial period of the GMES Action Plan ( ) FWC Sector Competitiveness Studies GMES Downstream Sector 117

118 Annex A Assessing the optimal scope of a core service 118 FWC Sector Competitiveness Studies GMES Downstream Sector

119 Context The content and scope of the Kopernikus Core Services could have a significant impact on the extent to which downstream suppliers can exploit the outputs to develop new commercial services. The ideal scope of a core service depends on the perspective from which it is viewed. Assuming core service outputs are free at the point of use, for any individual end user it is desirable that their service is included in the core. Otherwise additional costs would be incurred paying for a downstream service that meets their needs. From an industrial supplier perspective, it is desirable to provide one s service via a core service since the funding is perceived to be much more secure. However it is undesirable for a service similar to one which a company provides commercially to be offered by another supplier in a core service, since this would undermine the market. From an overall funding perspective it is most unlikely that sufficient funds will be available at a European level to fund all possible Kopernikus users needs. Moreover such extensive core services would not only conflict with the principles of subsidiarity but would also effectively kill off the downstream industry by flooding the market with free products and services. Given the multiple and conflicting ambitions for the scope of the core services, it would be useful to inform the debate with an objective economic analysis that seeks to establish the overall efficiency of different scenarios along with their specific impact on the downstream industry. Core and downstream services The basis for the business model of the core services, in respect of their capability to stimulate the commercial downstream markets, lies in the reduction of costs in the supply chain. The core services will undertake a set of processing steps that are common to a number of different end user needs. For example, the marine Core Service will undertake data reception and basic processing, followed by global and regional modelling. These core outputs then form the basis of a number of specialised thematic and local products each of which requires unique processing. So, downstream industry providers should incur lower costs in supplying services to their customers. These lower costs could result in some combination of higher profits, higher investment in new services or lower prices to customers. Assuming some elasticity in demand for services, this in turn would result in increased sales volumes. Furthermore, in cases where reduced costs bring service prices to levels that are below the consumer surplus (user benefit) for a service, entirely new markets could be opened. However there is also an opposite force at work as the scope of the core service increases, more and more end users become satisfied by the core service itself and have no need to pay for a downstream service at all. So theoretically, the situation would be shown in Figure 9 below. As the scope of the core service increases, downstream suppliers costs decrease. Lower prices cause an FWC Sector Competitiveness Studies GMES Downstream Sector 119

120 increase in demand. However there comes a point when too many users needs are met by an expanded cores service and demand for downstream services drops off. Downstream suppliers costs Demand for Downstream services Increasing scope of core service Figure 9: relationship between scope of core services, downstream suppliers costs and demand for downstream services Core service scope and specialised processing needs Depending on the exact requirements of end users, unique specialised processing may start earlier in the processing chain. This specialisation could include one or more of the following forms: Data Specialisation: the inclusion of a specific type of input EO or in situ data that is unique to that end product Thematic Specialisation: specialised thematic processing, involving specific algorithms, processing or manual intervention that is needed for the end product Geographic Specialisation: either processing data at a higher resolution than the standard core service to service specific regional or local needs, or processing data for a geographic region outside the core service remit. One scenario describing the situation in shown in the figure below which illustrates an EO service with 5 basic processing steps (1-5) and 8 different product lines (A-G). 120 FWC Sector Competitiveness Studies GMES Downstream Sector

121 A 1 BAcquire CAcquire Data Data DAcquire Data EAcquire FAcquire Data GAcquire Data Acquire Data H Acquire Data Data Discover, Discover, Collate Collate Data Discover, Data Discover, Collate Collate Data Discover, Data Discover, Collate Collate Data Discover, Collate Data Discover, Data Collate Data Processing Stage Pre- Process, Pre- Process, Model Pre- Model Process, Pre- Model Process, Pre- Model Process, Pre- Process, Model Pre- Process, Model Pre- Process, Model Model Customise Customise Customise Customise Customise Customise Customise Process Deliver, Customer Deliver, Customer Care Deliver, Care Customer Deliver, Customer Care Deliver, Care Customer Deliver, Customer Care Deliver, Customer Care Deliver, Customer Care Care Product Line A B C D E F G H Figure 10: Common and specialised processing steps in the service chain In this hypothetical example, the scope of the core service is shown by white arrows and the areas where specialisation is required with coloured arrows. So, product line E requires a lot of specialised data collation modelling and processing, whereas product line F only requires minimal customisation from the core service outputs before delivery to a customer. Looking at this qualitatively and assuming all the processing steps have the same cost and each product line serves the same number of customers, one might conclude that there would be little benefit in extending the scope of the core service beyond step 3, as from that step onwards seven out of eight product lines require (different kinds of) specialisation. Steps required for a quantitative analysis. The simplified scheme described above masks a number of complexities that would require further data collection before a reliable analysis could be undertaken. The following steps would be required: 1. Define an over view of the territory of the domain of the core service supplies. Who are the main users, what services do they use this should cover applications down to the end user, and not be constrained by the current scope of the core service. This would result in the description of a number of service chains. 2. Assess the number of potential customers served at the end of each service chain and their sensitivity to the price of the service. 3. Establish a modular architecture for the whole service chain. For practical purposes this may have to be slightly generalised. The modular architecture needs to identify the main processing steps and for which parts of the service chain the same processing step can be used. This basically means constructing a realistic version of the diagram described in the section above 4. Establish the costs involved in each step. FWC Sector Competitiveness Studies GMES Downstream Sector 121

122 Although there would be some considerable work involved in completing these steps, the input data ought to be available from Core Service projects, BOSS4GMES and previous ESA GSE project documents, with the exception of price sensitivity data for step 2. It would probably be unrealistic to attempt to define an accurate mathematical model, not least because of the uncertainty in several key parameters (e.g. customers and price sensitivity). So rather than attempting to model the perfect core service in financial terms, a more practical approach would be to establish a few (two or three) scenarios for the extent of the service and to assess the consequences for the downstream service industry of each scenario. 122 FWC Sector Competitiveness Studies GMES Downstream Sector