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Satellite Manufacturing: The Competition Heats Up

By | June 10, 2001

      By Nick Mitsis

      Even though the global satellite manufacturing business continues to triumph throughout an increasingly competitive marketplace, industry executives remain focused on ways to defeat the impediments that stunt business growth.

      In fact, global satellite manufacturers are scrupulously analyzing the current market as competition heats up and orders begin to come in. Indeed, the increased client requests for better prices, higher-performance spacecraft and on-time delivery has manufacturers dissecting each industry move, in hopes that it will propel them into increased profits and numerous contracts.

      This accelerated momentum is the result of a resurgence within the global satellite manufacturing community that occurred in 2000, as European suppliers began chipping away at the American stronghold on this market segment. According to Via Satellite, announced orders for commercial GEO satellites in 2000 capped at 35, up from 22 in 1999. European manufacturers captured 55 percent of the announced orders for GEO commercial satellites in contrast to the 38 percent captured in 1999, according to the Satellite Industry Association. The Association’s survey of more than 900 global companies conducted jointly with the Futron Corp. showed that manufacturing (including payments to sub-contractors) pulled in revenues of $15.8 billion, and industry projections indicated that 2001 should yield an increase as several of the new Ka-band systems begin construction.

      Given the bright near-term outlook, many satellite manufacturers are expanding either their operations or market reach. The European manufacturer Alcatel Space announced its intention to expand its French production facilities in Cannes, Toulouse and Valence. The company’s goal: to increase its output from six to 10 satellites a year. Alcatel officials plan to invest around $62.7 million for the expansion. Alcatel’s rival, Astrium, also plans to increase its factory capacity to accommodate eight satellites from four, according to Chairman and CEO Armand Carlier. “The satellite manufacturing sector is not the easiest segment within our industry, and we plan to gain a larger market share with our facility expansion,” he says.

      While European manufacturers are increasing operations, U.S. manufacturer Space Systems/Loral (SS/L) is eyeing Europe for increased market growth as it prepares now to step up its European presence by bidding for contracts as a prime contractor. “We plan on getting in there big time and tackling each contract,” says Dan Collins, senior vice president for worldwide marketing and sales for SS/L. “We do expect to pay our dues, but our longstanding purchasing agreements with our European suppliers is pretty set and should help our process.” As European prime contractor marketing strategies solidify for the manufacturer, SS/L is looking for one-third of the European market. While SS/L finalizes its marketing plan, the manufacturer’s parent, Loral Space and Communications is saddled with legal disputes, solar array problems with 11 in-orbit satellites it built and financial challenges that might make executives in more stable industries wince.

      The latest problems, including a legal battle with its European partner, Alcatel Space, were identified in the company’s 10-K filed in April with the U.S. Securities and Exchange Commission (SEC). The woes in the financial filing add further insights about why Loral chose earlier this year to narrow its strategy by focusing on two core business lines that would provide fixed satellite services (FSS) and build geostationary satellites.

      Loral’s scaling back may have triggered Alcatel Space to file suit March 16, 2001, in the U.S. District Court for the Southern District of New York, alleging various breaches of their partnership. The suit seeks relief to enforce Alcatel’s rights and challenges a February 22, 2001, move by Loral to terminate their pact.

      Loral states in its 10-K that either side could end the agreement by giving one-year’s notice. The dispute directly involves SS/L, and hinges on an agreement with Alcatel Space Industries “generally” to operate as a team on satellite programs worldwide.

      On the technical side, SS/L is suffering “minor losses of power” from the solar arrays on 11 of the satellites it has built and launched since 1997, according to the 10-K. Four of those spacecraft are owned and operated by Loral subsidiaries or affiliates.

      None of the satellites has incurred “any degradation in performance,” according to the 10-K. However, there can be no assurance that one or more of the affected satellites will not experience additional power loss that could result in performance degradation, including loss of transponder capacity, the 10-K reports.

      “Until the cause of the failures can be identified or other adequate remedial measures can be taken, launches of satellites under construction and construction of new satellites may be delayed,” the 10-K notes. Delays in satellite production or launch may have a “material adverse effect” on SS/L’s business and cause a loss of orbital incentive payments, revenue and customers, the 10-K warns.

      Business Objectives Becoming Streamlined

      Regardless of plant expansions and refurbished market campaigns, the demands of the industry seem to be the only navigators to profitable success. In fact, some executives argue that better prices and higher performance are the future of satellite manufacturing. Better prices, though somewhat obvious, originate from the emerging trend that the satellite industry is moving toward a streamlined form of mass spacecraft production. “The major satellite manufacturers have established standard bus models with which they try to fit most of the missions they bid on,” says Marshall Kaplan, chairman of Satellite on Demand Inc.

      In addition to the best deal, the production of higher performance spacecraft is significant to manufacturers because it paves the way for more complex and flexible designs to materialize, according to industry executives.

      Likewise, stronger output will result from larger spacecraft due to the increased power and payload complexity. In fact, several trends could explain the move toward larger satellites, including the demand for greater onboard power to support high-speed data. Whatever the reason, once these satellites are orbiting, they will likely be delivering the next wave of satellite communication of data, multi-streaming and complex content.

      Bigger Does Not Mean Better

      Even so, building larger satellites may not necessarily spell larger profits for its manufacturers. “One size does not fit all, even though the trend is moving toward bigger spacecraft,” says Ali Atia, president of Orbital Communications International, Orbital Sciences Corp. There are certain applications where it pays to buy small.

      “Smaller satellites tend to cost less, carry smaller insurance rates and yield a faster production cycle,” adds Michael Topalov, executive vice chairman and COO for Inspace Group of Companies. “For us, smaller platforms work well because Russia has around 130 orbital slots and an excess of military missiles that can be refurbished into rockets that can deploy small-to medium-lift payloads.”

      Another phenomenon surrounding the rejuvenated interest in small satellites is coming from a surprising source: established satellite operators. “We never anticipated that big satellite operators would be purchasing small satellites,” adds Ron Maehl, senior vice president, business development for Boeing Satellite Systems Inc. “We always thought these would be entry satellites for new operators. They are turning out to be spacecraft that fill in the gaps for big operators as well.”

      Large spacecraft, however, are in demand and will continue to materialize on assembly lines as more complex systems come online. “There are slots where we will need to manufacture large spacecraft,” says John Klineberg, president of SS/L. “High definition television, streaming video and other emerging broadband applications will require larger satellites.”

      A Resurgence Of Government Contracts May Increase

      Regardless of which new satellite application comes to market first, the spacecraft manufacturing arena is still poised to fight a tough contract negotiation battle, forcing business executives to examine alternate pools in which to dip. One of those pools is the old juggernaut of government procurements. Some industry executives are eyeing government payloads as filler between commercial contracts.

      This “going back to the past” scenario, however, is being met with some criticism. “We as an industry should not depend on the government,” says Ted Gavrilis, president of Lockheed Martin Commercial Space Systems. “I don’t think that government procurement will be enough to sustain five players,” adds Kaplan. “The satellite manufacturing industry is facing over-capacity and I do not see this as a near-term solution to the problem.”

      Given the tight state of the industry, satellite manufacturers are not only trying to penetrate various markets–old and new–but are increasing their focus on the marketshare they currently command. One discriminator that continues to separate the winners from the losers in marketshare retention is on-time delivery. “On-time delivery is very important obviously,” says Pierre de Bayser, senior vice president of marketing and sales for Alcatel Space. “But it is not only our responsibility but also shared with the client. They need to make sure the expectations set forth are realistic for the established timeframe.”

      Carlier concurs with de Bayser, but adds, “Quality must always prevail through this competition with price and schedule. Reliability in-orbit is key.”

      Whatever happens with this industry sector, one thing is for certain: the satellite manufacturers will continue to serve a buyer’s market for now, striving to outbid each other with better prices, on-time delivery and high performance hardware. In doing so, however, more consolidation may be on the horizon as the winners are separated from the losers.

      Nick Mitsis is Via Satellite’s Associate Editor.

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