Global Supply Chain Challenges and Navigating Dual-Use Regulation in the EU

In recent years supply chains have been under heavy pressure as the world has been fighting an unprecedented pandemic, geopolitical instability, and, if that wasn’t enough, a ship lodged itself in the Suez Canal delaying more than 320 ships transiting. (AP, Magdy). Supply chains are also exposed to regulatory risk, and if you are a spacecraft manufacturer, export and import regulation concerning dual-use goods can be complex. Considering the cutting-edge nature of spacecraft components, the equipment can have both military and civil capabilities which classify them as ‘dual-use goods’. And, space manufacturers beware! Difficult legal frameworks regarding transportation and technical assistance await you. The European Union (EU) recently launched Regulation (EU) 2021/821 which is a binding regulation directly enforceable on all member states. This post will focus on supply chain management for spacecraft manufacturers within the European Union relating to the newly adopted dual-use regulation (Regulation (EU) 2021/821) and the restrictive measures against Russia.

The regulation has several segments regarding space technology (Regulation (EU) 2021/821). One type of equipment that is extensively regulated is rocket and propulsion systems used for spacecrafts. (Regulation (EU) 2021/821, Annex IV). These components also fall under the Missile Technology Control Regime (MTCR), which is an initiative by the G-7 countries to limit the proliferation of nuclear weapons by addressing the delivery systems of such weapons. (MTCR). The organization was founded in 1987 and was an informal political understanding among the founding states that seek to limit the proliferation and missile technology. (MTCR). The organization focuses on the limitation of delivery systems, such as rockets and propulsion systems, for nuclear, chemical, and biological weapons, in order to promote peace and international security. (MTCR). Today there are over 35 countries that are members of the initiative. (MTCR). The organization relies on its members to deploy Export Controls through continuous dialogue and the inclusion of non-partners. (MTCR).

The EU dual-use regulation brought force to the MTCR regime by adopting directly enforceable law within the Union. The European Union is a partner to the MCTR initiative and included the goals and objectives of the MCTR in its Dual-Use regulation to promote non-proliferation through the Union. (EEAS). Space Launch Vehicles are considered ‘Category I’ which means that they have a ‘strong presumption of denial’ meaning that export should only be allowed under limited conditions. (MTCR). This rigorous control on the import and export of rocket engines will especially impact the launching business through Europe and with more bureaucracy comes higher costs. However, the MCTR regime pursues a great good and is a much-needed safety net to continue the work for limiting weapons of mass destruction.  

The EU-Russian sanctions regime also adds an additional layer of complexity for rocket users when buying propulsion equipment. Although the sanction regime is intricate, and it may seem like there is an absolute ban on everything- that’s not the case. Even though the majority of dual-use goods are banned from trading, there is an exception for the export of dual-use goods which is intended for the space industry. (Council Regulation (EU) NO 833/2014). Goods intended for the space industry can be purchased and exported using authorization from the competent agency in each member state. (Council Regulation (EU) NO 833/2014). However, the reality of the sanction regime has caused Russia to halt participation in western space activity. Russia withdrew all personnel from Arianespace’s facility in Kourou, French Guiana in 2022 which rendered the Russian-built Soyuz rocket useless. (Space, Malik). It also resulted in several canceled launches, one of which was supposed to propel the earth observing rocket ‘Earthcare’, part of Europe’s climate monitoring constellation Copernicus. (Spacenews, Rainbow; Berger). European launchers also use the Union’s own Vega-C rocket which is currently under development and just completed its first inaugural flight showing promising results for the future. (ESA). It is likely that the EU is setting up for onshoring of their rockets, breaking loose from the old Russian supplier. 

Supply chain disruption is not limited to Europe but has also been present in the U.S. In 2021 SpaceX postponed launches due to shortfalls of liquid oxygen. (Scientific American, Klotz). United Launch Alliance’s (ULA) supplier of liquid nitrogen, Airgas, experienced delays due to increased demand of medical liquid oxygen in hospitals due to the pandemic which postponed the launch of their Atlas 5 rocket. (Id.) The consequences of the pandemic also spilled over to small and medium-sized space companies (Fortune) as the top global producers of semiconductors have seen more than 30% of their market cap erased in the midst of the pandemic. (Deloitte). The major production downfall has caused delayed launches and reduced research and development activities which will slow growth for small and medium-sized space companies. (Fortune). It’s worth noting that 80% of semiconductor production is in Asia and considering the heavy impact of COVID in this region a major shortage was imminent. (The Economist). The semi-production problems have sparked voices advocating for “onshoring” production of critical components. (SpaceNews, Foust). Developments are taking place in the EU as Aerospacelab announced a mega factory in Belgium capable of producing 500 satellites a year (Aerospacelab) and the U.S. adopted the CHIPS act which includes a USD 50 billion incentive program to stimulate domestic chip production and innovation. (White House Fact Sheet). 

In 2021, GEP concluded in a report that supply chain disruptions can incur costs up to 10% of annual revenues for companies. (GEP). Obviously, this can be devastating for companies with low liquidity and relying on investor money, which a lot of the space startups are. As seen in 2022 these potential investors tend to move to safer harbors when the risk gets too high and if companies must deploy capital-intensive business models. (Reuters, Sriram). As the space economy is still on the launching pad, it is crucial that the sector increases, or at least maintains, further investment volumes which is stimulated by high-quality and comprehensible regulation.

Currently, the space industry in the EU faces a complex supply chain environment due to the aggregate effect of the dual-use regulation and recent geopolitical instability. The EU regulation on dual-use fulfills a vital role in helping prevent potentially lethal equipment from falling into adverse hands. The trade-off is that legitimate businesses have to navigate a complex legal framework which inevitably will increase transaction costs and higher costs toward end-users. In effect, regulations like these will likely not deter actors from establishing within the EU but rather will increase the threshold for establishing new space companies in the Union. 

However, the dual-use regulation is more or less a reaction to the core issue in supply chain challenges – global events. As described above, the last four years have served the global community with unprecedented turmoil which has exposed critical vulnerabilities in the increased reliance on global supply chains. As far as the space industry is concerned, supply chain disruptions risk impairing the future of space exploration and prolonging key research which would help fight pressing issues here on earth. Changes are brewing and the increased appetite for onshoring will potentially prove to decrease supply chain risk which ultimately would benefit the flow of investment to the space industry. The downside however is that global space collaboration is key to speeding up innovation and preserving a sense of cooperation on space matters. I believe that small to medium-sized companies, which take a heavy blow when disruptions occur, is essential to keep innovation going. They can positively disrupt the market, by challenging the status quo maintained by space-faring nations and large-scale companies. The true effect of Regulation (EU) 2021/821 on the industry will still need to be seen, however without future safeguards in place to address these supply chain issues, small to medium-sized businesses in the developing space industry are put at risk.