Alcatel Space has been in the thick of it in recent weeks. It has announced another restructuring, which involves 400 job cuts, and a contract to build a satellite for the Chinese Aerospace and Science Corp. (CASC). In addition, rumours of a merger with European satellite manufacturing rival Astrium refuse to go away. In an interview with Interspace Senior Editor Mark Holmes, Alcatel Space CEO Pascale Sourisse talks about the latest developments at Alcatel Space and assesses the future of satellite manufacturing.

Interspace: Could you tell us the significance of your recent contract award in China? How do you view the opportunities for Alcatel in the Asia Pacific region?

Sourisse: This contract that we signed with the CASC is a very important contract to us. Certainly, we view Asia Pacific as the most promising region in terms of markets for satellite communications and satellites in general. We have been present in China for quite some time. The first satellite we delivered to China was in the mid-1990s. The satellite [Sinosat 1] was launched in mid-1998. We signed another contract with a Chinese operator APT in December 2001. This is now our third contract in China. We see this relationship with Chinese partners developing substantially. Obviously, the Chinese market is a very interesting one for satellite communications. It is a huge market, a very vast territory. It has a very disperse population. There are a lot of needs for satellite communications in China combining both broadcasting and telecoms services.

Interspace: Could you tell us about the restructuring taking place at Alcatel Space? What levels of cost savings do you hope to make through these initiatives?

Sourisse: Certainly 2002 is not a good year for commercial satellites. We have two orders for complete satellites plus this Chinese contract, which is a very substantial one. But, that is only three. It is less than we had anticipated previously. We are expecting a few more satellite contracts before the end of the year. We think there is a good probability that we can get those contracts. Even with all that, the market is a bit depressed in 2002 and we still see this downturn in the satellite industry continuing for the commercial market in 2003. At the same time, we are not seeing growth in the institutional market. The agencies budgets for civilian or military satellites are not going up. We have had good news in France with the increase in the military budget. This has a positive impact on us, but all together, when we add up everything, the institutional market is not growing.

The revenues of the company are pretty much stable, but they are below what we anticipated a year ago because we were foreseeing some growth in 2002. What we see instead is stable activity. We see more pressure in the market in terms of prices. We still want to maintain our profitability. Recently, we announced an additional [reduction] of 400 jobs. That is taking place in an overall [cost cutting] effort that we started in spring of 2001.

Interspace: How many orders are you hoping to pick up for the rest of this year?

Sourisse: Realistically, we expect to pick up another two orders this year. I think the question that we have [to ask] concerns requests for proposals that have been [put out] by certain customers. There is always a risk that the schedule they have announced for a decision will be delayed. The two programmes that we are thinking of for this year – that should generate contracts for this year – are contracts in which it is not a question of Alcatel being selected – Alcatel has been selected. The question is closing of the contracts.

Interspace: How many commercial satellite orders do you expect next year?

Sourisse: It is difficult to tell what the number of contracts are going to be for 2003. We expect that the number of [industry-wide] satellite contracts awarded in 2002 to be pretty low. We expect it to be between 10 and 15 depending on whether you are optimistic or pessimistic. Next year, [the number] should be a bit [higher], but it is difficult to tell. Certain programmes have a tendency to slip a bit, so it is difficult to predict.

Interspace: In a recent interview in this publication, Astrium CEO Antoine Bouvier said that “consolidation was inevitable.” What are your views on consolidation in the satellite manufacturing industry?

Sourisse: I share the view that consolidation among satellite players is not finished. This consolidation movement concerning Alcatel started a long time ago. We consolidated with Aerospaziale in 1998. But, we don’t think we are at the end of the story. How consolidation is going to take place is less clear. If you look at our business from a market standpoint, there are clearly two types of segments, which are quite different. One is telecoms, which is clearly a global market. The second is the institutional [government] market, and clearly for European suppliers, the market is European, whereas for U.S. suppliers, the market is essentially American. So, if you want to focus on one segment rather than the other, you might [reach] different types of conclusions in term of what kind of consolidation would be best. What I can tell you is that Alcatel is considering satellite as part of its core business. We are really seeing an advantage of being able to offer end-to-end solutions including terrestrial and satellite segments. There are a number of projects where we see an increasing combination between satellite and ground segment.

Interspace: What opportunities do you see for Alcatel Space in the military satcoms and earth observation area? Do you view this as a growing market opportunity?

Sourisse: The military is an important part of our activities. We are the prime contractor of the French military communications system – Syracuse. We have a program ongoing with the French Ministry of Defence and we are preparing in combination with the British and the Italians an offer to NATO …. a system that would combine the use of Syracuse, the British Skynet system and the Italian Sicral system. In terms of Earth observation, we also have a very substantial role. We are supplying the high-resolution optical instrument for the Helios 2 programme.

We have not disclosed the percentage of revenues coming from the military sector but it is a very significant activity for us and it is growing. We can certainly say that the investment in Europe in military systems is much, much smaller than the U.S. investment level is. So, there should be more investment opportunities in Europe. That would require that Europe put a structure in place to handle at the European level military investment in the field of satellites. For the time being, the investments are carried out by national entities and sometime bilateral programmes. There should be an evolution from national programmes [to European wide programmes] in the future.

Interspace: Could you tell us about your collaboration with WorldSpace and TowerCast? What are your views on the potential for satellite radio in Europe? How do you see your plans developing in this area?

Sourisse: The liquidity issues that [satellite radio] service providers are facing in the United States are related to the fact that these are startup companies. In the current environment, it is difficult for new companies to find the necessary funding to fund all the solutions. We see a lot of potential for these services in Europe. In terms of services, if you look at XM Satellite Radio in the United States, [it is] doing well. The number of subscribers is increasing rapidly. We believe they have a good business case. In Europe, there is a lot of potential as well. What we intend to do is take a progressive approach and look for ways to start deploying services without having to fund heavy investment up front. That would [offer] the possibility of starting the business and reducing the risk very substantially … We have not started significant investment at the moment. But we [demonstrated] in September a satellite-based [radio] service with WorldSpace and Towercast. A growing number of potential partners – broadcasters, service providers, car manufacturers, etc. – are expressing a very strong interest. It would take us about two years to put in place [satellite radio] service in Europe.