UK space industry optimistic for future growth amid challenging conditions

A UK Space Agency (UKSA) report on the size and health of the UK industry, which primarily draws on data from the 2022/23 financial year, has highlighted an upbeat sector that is expecting future growth for real incomes, employment, exports and research and development (R&D) expenditure.

The comprehensive market survey carried out for the UKSA by consultancy London Economics also identified robust optimism across the industry in 2024 amid ongoing challenges faced by the UK economy.

Sector challenges

The report leads with the sobering statistic that income generated by the UK space industry in 2022/23 fell almost 9% in real terms when compared to the 2021/22 financial year.

The UKSA report identified several potential causes for this decline. In particular, the long-term nature of space projects means that the impact of recent challenging macroeconomic conditions experienced more generally, caused by Brexit, the Covid-19 pandemic and the Ukraine war, is only now being exhibited in industry outcomes.  

A more specific challenge which has been presented to UK space companies is the loss of income resulting from the cut-off to EU space programmes, particularly Galileo, following the UK-EU withdrawal agreement becoming effective in the 2020/21 financial year. The report notes this as a key driver behind exports decreasing as a proportion of total income from 37% in 2016/17 to 31% in 2022/23. Satellite communications companies have also faced increasing competitive pressure from overseas market participants, particularly Starlink.

The report also noted that the concentrated nature of the UK space industry could also be a factor contributing to these pressures, with its lead contractors or "primes" playing a significant role in driving overall income changes. Companies further down the supply chain have been suffering a significant decline in income when major government contracts come to an end or move past their peak and an absence of follow-on contracts has flowed down the supply chain. 

Optimistic outlook

Despite this headline statistic, it is not all doom and gloom in the UK space industry, as demonstrated by:

• Employment figures. Compared to 2021/22, these have exhibited strong growth of 7% as a result of 151 new market entrants.
• Productivity. Measured through gross value add per employee, productivity has also exhibited a decline from £148,908 in 2021/22 to £128,939 in 2022/23. However, this remains more than twice the UK's average labour productivity level, reflecting the highly skilled nature of the workforce in the UK space industry.
• Research and development. Over £1 billion was spent on space-related R&D during the period, representing a 5.1% increase from the previous year and demonstrating continued investment in the sector. 

Market participants also appear to remain optimistic about the future growth of the sector amid positive signs. Some 60% of respondents to the survey that underpinned the report said they expect their income to increase over the next three years, with 52% expecting that spending will increase and a similar number expecting employment to increase. Nearly half of respondents (46%) expected to increase their R&D spend over same period.

Inward investment in 2024

The report also utilised data from Crunchbase to evaluate the amount of investment into the UK space industry in 2024. It identified 92 investments into 85 UK-based space organisations totalling £481 million of investment. The total number of investments was the highest recorded in the last decade, representing a 31% increase from 2023. These investments mainly comprised of grants and prizes from public bodies and venture capital investments.

The total amount of investment was at its lowest level since 2018, driven by a challenging merger and acquisitions (M&A) market producing a lack of stand-out transactions compared to recent years. However, the 2023 figures were buoyed by two M&A deals in particular: the £5.9 billion acquisition of Inmarsat and the Eutelsat-OneWeb merger worth £2.8 billion. The UKSA, UK Research and Innovation and Innovate UK were the most active investors in 2024, displaying the importance of public funding to the sector.

Osborne Clarke comment

As a sector dependent on engineering and manufacturing, it is little surprise to see the impact of macroeconomic effects caused by geopolitical shocks since 2020 being felt. However, as noted in the UK government's recent strategic defence review (SDR), space is a critical infrastructure sector as well as central to its defence strategy. The SDR stated that investment into the resilience of military space systems is urgently required in the UK.

This should manifest in significantly more public funding being made available for UK space companies in the coming years, which will hopefully also unlock private capital investment into the sector. The central message coming from industry at the recent UK Space Conference in Manchester was that public funding must be simple to access and allocated in a coordinated manner in order to return the greatest return on this investment and enable growth.

The UK must also continue to build partnerships in Europe in order to prosper, both in terms of enabling economic growth and ensuring its security in light of the attitude of the current US administration towards international relations and commerce. The UK is an important contributor and partner to the programmes run by the European Space Agency and, with the European space market forecast to grow by a factor of 10 in the next decade, it will be an important ally in establishing its place in an increasingly competitive global market. The UK government's recent participation in a fundraise by Eutelsat alongside the French government demonstrates its recognition of the opportunity and its commitment to the European space ecosystem.