Satellite Manufacturing: Issues And Opportunities
By Theresa Foley
The satellite manufacturing segment of the commercial satellite business has always held a significant role in the industry’s identity. One of the first things people visualize when thinking of the satellite industry is the vast clean rooms filled with engineers in bunny suits and shower caps, bustling about foil-wrapped pillars of high-technology.
The satellite manufacturing sector, however, is subject to many conflicting influences at the moment, and its future remains uncertain. Consolidation, export controls, reliability issues and many other factors are combining to ensure that this market continues to elude an easy path to profitability.
The 2000 Market
Last year, approximately 25 geostationary communications satellites were ordered from the five top manufacturers, making 1999 a slow year for the industry. Popular wisdom states that 30-35 satellite contracts are awarded in a typical year. Based on the contract awards publicized by mid-year, and the RFP activity the major manufacturers are reporting, 2000 seems to be witnessing a recovery in the market.
“For the moment, the market is booming once again,” says Jean Michel Aubertin, director of Astrium’s commercial satellite business unit. “We have seen all the major operators sending out RFPs and signing contracts for new or replacement systems. So far, according to my numbers, 16 satellites have been ordered since the beginning of the year, which is not very far from the total number of satellites ordered last year.”
Aubertin’s U.S. counterparts also agree with this assessment. “We’ve seen, in the last two months, a tripling of the proposal activity versus what would be a normal pace, and last year was not normal. We see Asia coming back, we see Europe very active, and we see North America and South America continuing to be very strong,” says Tig Krekel, president and CEO of Boeing Satellite Systems, formerly Hughes Space and Communications. “One of the biggest drivers has been the growing demand for Ka-band, which is increasing the need for high-power satellites such as the Hughes 702.”
The financial recovery of the Asia-Pacific region seems to be having a significant role in the market’s recovery. “Last year there were a number of awards we saw delayed, or, because of financing in the Pacific region, not occur. In 2000, we still have a number of big awards out there that represent significant orders, including orders coming out of China and the Asia-Pacific region,” says Dan Crowley, vice president of operations at Lockheed Martin Commercial Space Systems (LMCSS).
Numerous orders for replacement birds and next-generation spacecraft from established players have also contributed to the return of contract awards. “I would say the year 2000 is going to look significantly better than 1999 before the year’s out,” Crowley adds. Krekel is also cautiously optimistic. “We at Boeing see, not a big ramp-up like we did in 1998, but more of a conservative growth pattern.”
Feeling The Weight Of Export Controls
While an increase in orders for satellites is cause for celebration, the distribution of this increased business is a subject of concern for all of the U.S. manufacturers. This is because the U.S. satellite manufacturing industry, in the first half of 2000, has garnered a record low market share. The benefactor of this shift has been Europe.
Clayton Mowry, executive director of the Satellite Industry Association (SIA), has gathered some alarming figures on the shift in market share between U.S. and European prime contractors. According to Mowry, between 1995 and 1999 U.S. satellite manufacturers were awarded contracts to build 75 percent of the world’s commercial geostationary satellites. Yet, in the first seven months of 2000, U.S. manufacturers’ share of the market for satellite contracts dropped to just 38 percent.
Although many factors have no doubt contributed to this shift, Mowry and most of the U.S. manufacturers place a large portion of the blame on U.S. export controls. “The SIA data speaks for itself, and it is real,” says Krekel. “We certainly have faced a tough time competing against non-U.S. manufacturers when they don’t have any of the restrictions we have regarding technical interchange.”
“We have lost competitions, such as the Inmarsat 4 award, to European suppliers, and it’s always a mix of factors that contribute to the loss, not one,” says Crowley. “I think export controls have affected us. In early 2000 we’ve seen a number of contracts where LMCSS thinks that European customers had concerns about access to data and the ability to participate in discussions being inhibited. It was a factor, but not the only factor.”
The European manufacturers disagree with U.S. claims that export controls are driving business their way. “I don’t think we can credit U.S. export controls with winning any contracts, because we are flying a significant amount of U.S. hardware,” says Aubertin. “So I think we are more or less in the same situation they are. The contracts won in 2000 are not due to export license issues, but to the fact that the Eurostar 3000 platform corresponded to what Intelsat and Inmarsat were looking for, and specific efforts we did to be fully compliant with customer requirements.”
Alcatel Space’s president and CEO, Jean Claude Husson, concurred. “I do not agree that the manufacturing market share favors European providers because of the U.S. export controls. You must realize that in France, we too, have to conform to export controls. Each request is judged on a case by case basis.”
Regardless of the actual impact export controls have had on U.S. manufacturers, they are taking the matter very seriously. Space Systems/Loral (SS/L) has augmented its staff to a dozen people to monitor their operations for export implications both in importing subcomponents and exporting the finished satellite.
“Here at Boeing, if you go back five years, we had three to five people working on export controls, usually on a part-time basis,” Krekel recalls. “Now, we have over 20 people working full-time on this issue. More than 60 percent of our sales are outside the United States, so these licenses are our lifeblood.”
All of the manufacturers, European and U.S. alike, agree that export control licensing amounts to a considerable amount of paperwork and some increased risk. LMCSS has taken a somewhat unique perspective on the whole phenomena: “It has affected our ability to get licenses, and it’s increased the amount of effort and time required to get those licenses,” Crowley concedes. “I think some of our competitors have shied away from responding to and participating in opportunities coming out of China. Lockheed Martin has not stopped our involvement in those types of opportunities.”
Despite the hardships this development may have caused, the entire industry seems committed to working with the State Department to improve the situation. “We’ve seen significant improvement in terms of the performance of the State Department,” Krekel says. “Is the system perfect? No. Could it be faster, more efficient? Yes, but I see the State Department not only adding more people, but also moving towards a paperless system that will improve the cycle time of processing the licenses. We’re cautiously optimistic that this will improve in time.”
Perhaps another factor in the eroding market share of U.S. satellite manufacturers is the phenomenon of the “brain drain.” This term encompasses the loss of key personnel from two causes: first, “dot.com” companies hiring away telecommunications personnel, especially engineers; and second, retiring personnel who do not adequately pass on their legacy of expertise to the next generation.
Regarding the dot.com effect, this phenomenon appears to be localized in the United States. “I don’t believe that this is as true in France, at least, not in the space industry,” says Alcatel’s Husson. “It does seem to be true that in the United States, young talent is taken up in Internet start-up companies. We still have the view in Europe that space is fantastic, something for the future. The result is that in France, our real wealth is our people, whose mean age is younger than in the United States.”
Astrium’s Aubertin agrees: “We have not really been suffering from the dot.com effect, but what we see is that recruiting a good telecom engineer on the market is becoming more and more of a challenge. Finding experienced people is harder than it was in the past.” Astrium is concerned about losing legacy knowledge, however. “Yes, we have the issues of experienced people retiring. This is not brand new and can only be sorted out through careful planning and preparation of our younger staff. It is a process in which we are very careful. We know you can completely destroy your skill base if you are not careful with this, but we are not in a drastic situation on this,” he says.
In the United States, the situation is quite different. It seems that all the manufacturers have felt the dot.com effect to one degree or another.
“This is a very serious issue, and the first aspect to work on is retention, rather than recruitment,” Krekel says. “We have, for the first time in the history of Boeing, developed very creative retention, compensation and stock option packages to retain our irreplaceable employees. It’s very clear that Boeing, Lockheed, Loral, TRW, all of us, are ‘in the crosshairs’ of the recruitment efforts of the dot.coms, and we recognize that.”
Boeing tries to present its employees with a “balanced view” of the opportunities and risks inherent in a dot.com employer. Indeed, Krekel reports that Boeing has seen 30 employees return to the fold after leaving for dot.coms. Boeing also provides career counseling for employees seeking to define their career goals at Boeing.
“We found that when we were losing people it wasn’t always for money, but for more career and professional factors,” Krekel adds. This counseling also establishes formal mentoring arrangements between key personnel approaching retirement age and their successors. In addition, Boeing has mounted an extensive recruitment effort, hiring over 600 people in 2000 alone, an event “unprecedented in our history,” Krekel explains.
When it comes to the dot.com effect, “we’ve encountered it in spades,” says LMCSS’s Crowley. “We’re at ground zero in Silicon Valley. We’re 150 feet from Yahoo.com’s headquarters. There’s constant demand for good labor, and many companies are experiencing software engineer turnovers of 20-30 percent. We’ve lost many good engineers to start- ups.”
LMCSS also has an employee retention team, and is experimenting with telecommuting and giving more responsibility to employees at a younger age to hold their interest. LMCSS has combatted the retirement issue by using a number of retired and experienced employees as consultants, calling them back to train younger employees on subsystems and individual boxes.
Has SS/L also felt the effects? “Absolutely. Fortunately, they tend to be the younger people that we’ve lost,” says Robert Owiesny, vice president of engineering and manufacturing at SS/L. “We haven’t seen any large attrition in the senior employees, for which we consider ourselves lucky.” Owiesny credits this trend to the fact that many of the senior personnel first entered the satellite industry “because space was cool,” and remain in the industry because of this love.
“We’ve redoubled our efforts at the recruiting level from colleges,” Owiesny says. “We’ve instituted this year a new program of college graduates coming in and going through a two-year program of rotational assignments.” According to Owiesny, this allows new employees to experience multiple facets of the satellite manufacturing business before settling down to the position of their choice. “We’ve had some really good success with this,” Owiesny says.
Owiesny also observes that SS/L is fortunate to operate in the San Francisco Bay area, as retirees tend to remain in the vicinity during their retirement. “We’ve had great success bringing back retirees,” Owiesny explains. In particular, he relates that SS/L was able to recall five retired employees when a critical manufacturing process was endangered by a wave of dot.com-inspired departures.
Reliability continues to be a prime concern among satellite manufacturers. “Whenever you’re talking about quality, your product is only as good as how it’s performed in the last hour,” says Krekel. “You can have one highly-visible satellite failure or anomaly, and it can cast a long shadow on the entire industry.”
“I probably spend a full 20 percent of my time working on quality issues, both fixing problems or planning for the future to avoid them,” says Crowley. “Customers are asking for on-orbit maneuver lives of up to 20 years.”
Some solutions have been echoed by each manufacturer. “I think most industrial players have spent a lot of effort to have more robust processes,” says Aubertin. “We are also tracking, at the end of the chain, every deficiency. We are even more cautious than before in launching satellites that we think may have defects, even defects with a low probability.”
Also, the issue of subcontractor management came up in almost every discussion. “At a system engineering level, we have been imposing process indicators on our subcontractors. We are now tracking whether or not they have changed internal processes,” says Aubertin.
Boeing has also created a supply chain management function to monitor subcomponent quality from outside sources, which comprise almost 40 percent of a Boeing satellite, according to Krekel.
“There are some things that are going on in the supplier base that really are causing all the primes some genuine concern,” agrees Crowley. “We often buy components from suppliers that are very small, sometimes less than 10 employees, and their ability to maintain design and process controls, given that they don’t have deep technical teams, is a genuine concern. You’re only a good as your weakest supplier.”
LMCSS’s solution has been to increase the number of supplier audits and educate suppliers on LMCSS engineering review methodologies. Crowley also reports that more and more customers are asking for increased redundancy in their satellite designs.
SS/L’s Owiesny credits accelerated life testing with allowing the company to evaluate design margins more accurately in its satellites. The company has also created a Flight Assurance organization, an internal body that chairs all internal reviews, and reports right to the top, according to Owiesny.
Boeing has recently rolled out a six-sigma system, a system that seeks to eliminate defects as early in the manufacturing process as possible, well before final testing. “All 8,000 of our employees will be trained on six-sigma principles, and we will employ them in every aspect of our business,” Krekel says. And Boeing has also implemented an even more intriguing system for ensuring reliability.
“I would say that the most important thing that we’ve done is work with our customers to identify and refine the satellite specifications and requirements very aggressively up at the front end, to minimize changes,” Krekel says. To this end, Boeing has implemented what it refers to as a gated system. According to Krekel, this system “forces the satellite design and manufacturing stages to go through rigorous steps that have to be approved and signed off on by the different responsible parts of the organization. When you pass a certain point, everything is locked in and completed.”
Krekel explains that, in the past, modifications were often deferred to a point where they required expensive rework. This, in turn, has a negative effect on quality. “The significant push in-house is to maintain schedules and eliminate re-work. We realize that during the course of time, a customer might need to change the requirements of a satellite, but this gated process ensures that this is done quickly.”
The gated system that Krekel describes has the added benefit of shortening production cycles, another issue for manufacturers that often goes hand-in-hand with reliability. Many of the satellite manufacturers are taking steps toward this goal. For SS/L, “What we’ve found is that we needed inventory available to make these shorter schedules,” Owiesny explains. As a result, he says SS/L has entered into a lot of long-term procurement agreements with suppliers of major equipment.
Satellite manufacturers are also quick to point out that reduced production cycles do not result in reduced reliability. “In fact, improving quality and reliability, in as far as it is fixed with better processes, leads into reduced manufacturing cycles,” says Aubertin. “If improvement of quality means that you fix the issues at the beginning of the production cycle, as a net result you reduce your cycle time.”
The recent formation of Astrium in Europe has also been another event to cause ripples throughout the manufacturing industry. Astrium was formed in May from the merger of the space businesses of Aerospatiale, Matra and DiamlerChrysler Aerospace, and BAE Systems. It is now the largest space company in Europe. Because Astrium is only newly arrived on the scene, reaction to the event is guarded.
Astrium itself is quick to play down any drastic changes to the industry. “There will not be any automatic effect associated with the creation of Astrium on our market share,” says Aubertin. “It’s more a long-term tendency, in that it allows us to reinforce our internal value on very critical equipment, such as solar arrays, propulsion, elements which are key to master in order to dominate quality issues. It’s a better financial base, which is important if there are financial efforts to be made either in R&D or direct investment. All this will contribute to help us get a better market share, but nothing automatic.”
SS/L’s Dan Collins, vice president of worldwide sales and marketing, notes that both Astrium and Alcatel are stronger competitors this year than they ever have been before, for a number of reasons. “They’re going to have their hands full,” he says, referring to the larger market share the European manufacturers have won this year, and the strain this will place on their facilities.
“I have a high degree of respect for the capabilities of the Astrium team, many of whom have been either past suppliers or partners with Boeing on particular programs,” says Krekel. He says that Boeing knows their capabilities, and consolidation definitely makes sense for them. “We have our eye on them, and we expect that it will raise the stakes in terms of trans-Atlantic competition.”
Once again, LMCSS has a slightly different spin to put on things. “Astrium has obviously been able to win recent competitions, so there’s definitely an impact, no doubt about it. We are concerned about the strengthening of our competition in Europe, but we’re also looking for teaming opportunities. We don’t always need to look at the two companies as competitors,” Crowley says.
Financing And Equity Investment
The last topic we questioned the manufacturing industry on concerned financing. The failure of Iridium and doubts about the viability of Globalstar have caused some satellite ventures difficulty in obtaining financing. Are satellite manufacturers feeling pressure to make an equity investment in a customer in order to win the contract?
“As far as we are concerned, our customer base is made up of well-established operators, and they are not really suffering from financial issues,” says Aubertin. “It happens that we are presented with some equity stakes for new ventures, and there we are prepared to take some equity positions when the business case is sound.” He clarified that Astrium does not currently have any equity positions at the moment.
For Alcatel, “The satellite financing situation has not been a threat–there have been some slowdowns, but, again, not enough to seriously affect business or put our business in danger in any way,” says Husson. “In terms of feeling pressure to take equity–yes, I believe that is a trend, but Alcatel Space carefully weighs the risks before entering into any type of equity participation. Obviously, there is no point in winning a contract if the company loses money down the line due to a bad investment.”
Collins is of the opinion that entrepreneurs are the ones who need financing, and his observation is that an entrepreneur with a strong business plan can find financing. “We have taken equity stakes in customers in the past, but that’s generally a separate decision,” he says.
Krekel reports that, over the last three years, in a small number of cases, Boeing has taken a small equity stake, but these were for very large systems like Thuraya and ICO, for instance.
An Industry Evolving
Despite many different viewpoints, one conclusion is clear: the satellite manufacturing market is changing. European competitiveness is at an all-time high, even eclipsing the traditionally dominant U.S. companies. Manufacturing processes are under constant review and revision, and politics have entered into the industry to a level never seen before. Consolidation is also removing familiar names and introducing new ones, and the industry that emerges from this transitional period may bear little resemblance to what it was only a few years ago.
Rob Fernandez is Via Satellite’s Senior Editor.