Space Investors Question The Merits Of Vertical Integration

Republished By Plato

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TAMPA, Fla. — The benefits of buying space companies to pursue vertical integration are becoming less apparent in the current economic climate.

Buying out suppliers can give a company more control over prices and capabilities, enabling it to scale faster than others relying on a network of partners.

SpaceX’s ability to build and launch its own Starlink broadband satellites — and provide services directly to customers — has helped fuel the company’s rapid global expansion.

However, not everyone has access to SpaceX’s significant financial resources, Peter Cannito, CEO of space infrastructure company Redwire Space, said April 9 during the 39th Space Symposium in Colorado Springs.

“There is a great debate going on, I think, in the industry now,” Cannito said on a panel of investors discussing acquisition opportunities in the space sector, between “vertical integration versus not vertical integration.”

He continued: “If capital was cheap and you could go out there and buy every business that you needed in order to do a full system solution, then you could pursue that strategy. I think you could have pursued that strategy a lot easier two years ago.”

But now, against the backdrop of higher interest rates and other economic challenges, Cannito said he sees increased emphasis in the industry on leveraging supply chain partners.

“I actually think you see a trend towards vertical disintegration,” he added.

According to Cannito, this trend opens up more opportunities for venture capitalists to seek out areas where there is a lack of a supply chain for a critical component.

“It may not be worthy of becoming a public company someday,” he continued, “but you’ll get a good outcome by filling a need for the market that will then move up to a strategic acquirer.”

Xiao Yin, senior investment manager at Lockheed Martin’s venture capital arm, emphasised the need for nailing down a strong supply chain, and pointed to an investment in space refueling company Orbit Fab that her company expects to be a pillar for the future space economy.

She said the fractured global supply chain has become an increasingly important issue for space companies to address since the pandemic in 2020.

Defense giants like Lockheed suffered less than companies in sectors such as the automotive industry, she said, where a lack of electronics following outbreaks of COVID-19 in Southeast Asia significantly impacted Toyota’s revenues.

Still, she said vertical integration will become increasingly important for space companies as the world becomes more globalized and supply chain insurance becomes more critical.

Ultimately, Redwire’s Cannito said it does not make sense for the whole space industry to pursue the same acquisition strategy.

If every company was completely vertically integrated, it would be challenging for them to differentiate themselves to attract customers.

He said legacy space primes that aren’t fully vertically integrated have also shown the value of relying on specialized supply chain companies, which can offer them access to best-of-breed components with intellectual property protection.