How Is the Satellite Industry Impacted by the Electronics Shortage?
The global chip crisis has significantly impacted a variety of industries, and Satcom is obviously not immune to this widespread components shortage. All Satellite equipment manufacturers (be it Ground or Space segments) are encountering challenges meeting growing demand in the current COVID-19 climate. Taking Ground Segment as an illustration, NSR detected a good recovery in the cadence of deals, but those were oftentimes difficult to serve due to the shortage in components. How deep and for how long will these supply chain challenges drag the Satellite industry?
There is no question infrastructure vendors will be among the winners in the new data-driven Satellite industry growth wave. In fact, NSR’s Global Satellite Ground Segment, 6th Edition report forecasts non-SatelliteTV equipment revenues to soar at 9.6% CAGR over the next 10 years. Undoubtedly, there will be some strains like the components shortage or more fundamental challenges such as the aggregation of demand into fewer-larger deals, large R&D requirements (virtualization) or changes in the value chain and business models. But, with a total 2020-30 cumulative revenue opportunity of $146.96 Billion, the long-term prospects for Ground Segment look spectacular.
COVID-19 Impact Lower than Initially Expected
Some stages of 2020 were particularly difficult for equipment vendors. During the strict lockdowns, installers were not able to get to the fields, activity in mobility markets was halted and the sales and delivery processes were extremely difficult. All this made Q2 2020 particularly painful. However, use cases like Consumer Broadband, Backhaul and Social Inclusion, together with the push to continue deploying infrastructure to get ready for future supply launches turned market conditions around. While 2020 equipment revenues were down -6.8% as forecasted by NSR’s recently published GSGS6 report (excluding SatelliteTV), performance was significantly better than initially expected as the former edition of NSR's projections from the GSGS5 report forecasted a -18.6% drop in revenues for 2020.
This upward trend consolidated in 2021 with the cadence of deals accelerating. Backhaul and Social Inclusion continued to perform well, albeit Consumer Broadband is experiencing some headwinds due to scarcity of supply. But perhaps more surprisingly was the strong recovery in Mobility with multiple airlines upgrading or equipping new aircraft. Unfortunately, vendors are experiencing difficulties serving that growing demand due to supply chain challenges mostly derived from the chipset and components crisis.
Supply Unable to Meet Demand
Multiple factors converged to generate a global scarcity of electronic components. Production facilities shutting down during COVID-19 lockdowns, the U.S.-China trade war, incremental prices of raw materials or the surging demand of electronics during the pandemic contributed to this global chip shortage. This is not a Satellite-specific challenge as the car and consumer electronics industries have likewise experienced huge challenges as well. For the satellite industry specifically, equipment vendors saw their capacity to produce terminals reduced and were and continue to be unable to meet all the current demand, pushing shipments and materialization of revenues to 2022.
While the impact in the Satellite industry is moderate compared with other sectors, NSR estimates that 10-20% of shipments and revenues that would have naturally resulted in 2021 will need to be postponed to 2022 because of these supply-related difficulties. This is obviously degrading companies’ bottom line as noted in various quarterly results calls: Gilat mentioned “we are experiencing the global shortage of electronic components and materials”, Comtech expressed similar concerns “We are closely monitoring our inventory needs and our supplier base, and we cautiously expect these constraints to ease up during the second half of fiscal 2022… we've seen lead times for parts that are normally 20 to 30 weeks being extended to 40, 50, and in some cases, 60 weeks.”
Uneven Impact Across the Industry
NSR detected that different companies are experiencing this crisis differently. Elements such as inventory management strategy or simply the state of the cycle of inventories when the shortage developed, influenced which struggles each company is enduring.
In some cases, vendors complained about getting access to highly specialized components for verticals such as Gov/Mil. This is also impacting multiple satellite programs delaying satellite manufacturing and launch and in a domino effect, postponing the roll-out of the corresponding terrestrial network.
Conversely, other equipment manufacturers placed more emphasis on accessing mainstream microprocessors and generic purpose components. The Satellite Industry has a comparatively lower scale than many other markets putting it at a disadvantage when competing for parts.
In any case, the scarcity in electronic components is not the only factor to blame in the slow recovery of Ground Segment performance. Some customers continue to show a cautious approach to new investments after COVID-19. Additionally, prices and lead times for shipping are going up. While this might be a relatively small contributor to the final price for manufacturers of smaller terminals, specifically Consumer Broadband and VSATs, this is becoming an issue for equipment with larger form factors such as Earth Stations and EO Ground Segment.
The Road Ahead
Despite the chipset crisis impacting equipment vendors in 2021, NSR reiterates these component shortages have had a modest and manageable effect on the satellite industry. The second half of 2022 should see improved conditions and this scarcity of parts will not stall the impressive growth prospects for the Ground Segment in the mid to long-term.
Unquestionably, the massive amount of capacity supply coming to the industry in the next few years in the form of VHTS, constellations, but also Flexible Satellites and SmallGEOs will create tremendous opportunities for Ground Segment actors, both from an infrastructure perspective (Earth Stations, Baseband Equipment, EO Ground Segment) and for terminals serving the new addressable markets (Consumer, Mobility, Backhaul, IoT and others).
Bottom Line
While lockdowns had a large negative impact on equipment manufacturers and Q2 2020 was a disaster for many vendors, a strong recovery in segments like Consumer, Backhaul and Social Inclusion made 2020 a not-so-bad year for the Ground Segment.
2021 started positively with deals coming at a faster pace and new verticals like Aero rebounding vigorously. Unfortunately, the shortage of electronic components hit the industry and at least 10-20% of the shipments that would have occurred in 2021 were postponed to 2022.
NSR considers this is as a temporary challenge and the industry will start to rebound by mid-2022. Long-term prospects for the Satellite Ground Segment look excellent, as it is becoming more strategic than ever to illuminate the massive amounts of supply being launched and to meet the growing demand from new addressable markets.
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