Satellite Manufacturing: A New Landscape

Satellite manufacturers suffered a dearth of orders from 2001 to 2003, but the famine has ended and contracts for new satellites are rolling in at a steady rate. While good times appear to have returned to the satellite manufacturing segment, the market’s future has become clouded somewhat by consolidation among the fixed satellite services companies. Will this change the competitive landscape for spacecraft manufacturers? Does one manufacturer stands to gain while others may lose? And could this ultimately lead to consolidation among the satellite manufacturers?

The satellite manufacturing market is dominated by six major manufacturers — Boeing Satellite Systems, Lockheed Martin, Orbital Sciences, and Space Systems/Loral in the United States and Thales Alenia Space and EADS Astrium in Europe, “each focusing on a sweet spot,” says Ken Lee, vice president of space systems management & planning for Intelsat. “For instance, Orbital Sciences is very efficient at building small, cost-effective satellites, while others are better at building medium-sized satellites and others at building large ones.”

These manufacturers serve 35 different fixed satellite services operators in a market that is very cyclical, says Rachel Villain, an analyst with Paris-based Euroconsult who tracks the satellite manufacturing market. But following recent consolidations, the top three -— Intelsat, SES Global and Eutelsat — “represent 60 percent of that market,” she says. “You simply can’t discount their effect on the overall market.”

Compact, Midsize, SUV

One impact that consolidation will have on the manufacturing market is the size of the satellites being ordered. “Historically, Intelsat’s satellites were very large and complex, while PanAmSat opted for medium-sized satellites,” says Villain. “Transoceanic telecommunications traffic on satellites is declining due to the growth in fiber optic cables. It is interesting that after the merger, Intelsat is ordering more smaller satellites.”

While the mix of satellites may be changing, Intelsat provides an encouraging view of the future for the major manufacturers in the market. “Things are looking very good for new orders right now,” says Lee. “We have eight active programs underway. …We expect to sign one to two more contracts by the end of the year. Our core strategy is to replace assets as they near their end of life. We have a master plan that goes out 10 to 15 and even 20 years. In addition to replacing existing assets, there are opportunities for new satellites that come up every year as well.”

Marco Caceres, an analyst with the Teal Group of Fairfax, Va., believes that consolidation among the largest satellite operators ultimately could be a boon for those that make the largest satellites, such as a Boeing’s 702 that weighs about 6,000 kilograms and can be outfitted with more than 100 transponders. “These satellites are tremendously expensive, both to build and to launch,” he says. “Industry consolidation has allowed more orders for very large satellites.”

European manufacturers EADS Astrium and Thales Alenia Space intend to challenge Boeing for a slice of this market with the development of the Alphabus program, says Matthieu Roulet, marketing manager for EADS Astrium. The satellite’s mass is estimated around 8,000 kilograms. “It is important for our companies to be represented in this segment of the market, and we intend to offer an entire range of products,” he says. “The Alphabus satellite will provide product capability beyond our Eurostar platform and Thales Alenia Space’s Spacebus satellite.

There are significant commercial challenges to developing a satellite of such proportions, says Caceres, because while the largest operators may look for satellites of that size, there are still “a limited number of customers for such an expensive satellite,” he says. “In addition to the cost of the satellite, its massive size would require a dedicated launch vehicle. The Ariane 5 satellite can launch multiple satellites, allowing several companies to share launch costs, but the Alphabus satellite is so large you will have to dedicate the entire mission to one satellite. Who can afford to pay $150 million to $200 million for a single satellite?”

Launching a super satellite is only the first hurdle. Leasing the large number of transponders will take time — perhaps too much time, says Caceres. In many ways, leasing the transponders on a satellite is akin to leasing office space in a skyscraper, as occupancy rates ultimately determine the economic success or failure of the venture. Caceres noted that the Empire State building stood half-vacant for a large number of years before it was finally leased out. The same could very well happen to a jumbo satellite. The major difference is that the owners of the Empire State Building did not have to worry about the building running out of fuel.

While there are challenges, EADS Astrium still considers Alphabus a good investment based on the current state of the market. “We agree that the market for Alphabus is small, but there is a value proposition in certain applications where the combined costs of the satellite, launch vehicle and insurance is significantly lower per transponder than those of a smaller satellite,” says Roulet.

While the market size for very large satellites is debatable, it is clear that there has been a tremendous uptake of small and medium satellites among operators due to the downturn in the market five years ago. After the telecommunication bubble burst, the investment community put the brakes on capital spending. Coming out of the slump, the operators have a nice balance between capacity and demand and are taking a more disciplined approach when adding capacity to their fleets, leading to significant growth for small satellites. A decade ago, small satellites represented roughly 15 percent of the overall market. They now make up almost one-third.
“A small satellite is also a good choice when an operator wants to introduce a new service but isn’t sure of the total demand,” says Barry Beneski, a spokesman for Orbital Sciences, which offers the small Star 2 platform. “Operators can put a small spacecraft into orbit quickly, and if they need more capabilities they can order a second spacecraft.”

Assessing The Future

While the market for communications satellite orders has steadied itself, the number of expected orders per year still falls far below the industry’s manufacturing capacity. Satellite builders have experienced this pressure before when the slump in orders was at its worst and believe that the current order cycle can sustain the industry. Changes in the sector, such as the reduction in the number of component suppliers, have forced the manufacturers to improve their processes, says Lee. “The real difference is how you design your spacecraft,” he says. “These manufacturers have done a good job improving their processes, thereby reducing their costs.”

But other factors, such as new competitors, could upset this market balance. In November 2005, Japan’s Mitsubishi Electric Corp. received a contract to build the Superbird-7 satellite for Japanese satellite service provider Space Communications Corp., the first time a Japanese satellite maker won a contract to build a satellite for a domestic operator.  Previously, all 18 of Japan’s commercial communications satellites were built by U.S. manufacturers.

Another factor is that several countries, notably India and China, have invested heavily in national space programs and now are exporting their technology. China has launched a satellite for Nigeria, and Antrix, the commercial arm of the Indian Space Research Organisation, has teamed with EADS Astrium to build satellites in the 3,000-kilogram class that feature EADS Astrium payloads mated to an Indian satellite bus. Eutelsat has ordered the first satellite from this venture, with the W2M satellite scheduled for launch in early 2008.

This rise of new manufacturers could depress prices for satellites in much the same way the influx of state-owned satellites over Asia forced down transponder prices in the region. “With the entry of national space programs into the market, all of the players may not be out to make a profit,” says Jeremy Close, communications director for EADS Astrium in the United Kingdom. “For instance, from the Chinese point of view, they might be willing to offer satellite manufacturing capabilities to countries in exchange for something else besides currency; say, access to oil. This shouldn’t be discounted.”

Competitive technologies always could be potential market shapers, says Villain. “A disruptive technology may come along which could completely change the competitive landscape of satellite manufacturing,” she says. “IPTV is a potential example. It is very popular in Europe, and if it catches on in the United States it might challenge direct broadcast satellite for dominance.”

Conclusion

Through disciplined, incremental additions to their fleets and replacement orders, satellite operators are working to create a healthy balance between capacity and demand. This, in turn, should provide a sustainable market for satellite manufacturers, as the current uptake of new satellites is the highest in a decade and has manufacturers optimistic. The segment appears to be content filling 20 to 25 orders per year. If they are, look for the competitive landscape to remain the same.