It was a grim-faced panel of satellite manufacturing executives that faced delegates during the “Satellite Manufacturing: Building Confidence with ‘Basics” session during the SATELLITE 2005 conference and exhibition.
“I have heard talk that everyone here is making money,” quipped Ted Gavrilis, president of Lockheed Martin Commercial Space Systems (LMCSS). “If anyone on this panel is making money, they must be printing money!” added Com Dev CEO John Keating. “It is said that the Chinese expression, ‘May you live in interesting times,’ is a curse. Well, we live in interesting times.”
The impact of private equity ownership of Fixed Satellite Services (FSS) companies piqued Gavrilis’ attention in particular. He expects these money-minded newcomers to look at the unused 1,300 C- and 1,200 Ku-band transponders currently in orbit and “rationalize” them, find ways to assign new clients to these unused channels before spending money on new spacecraft to offset future growth.
Gavrilis was not alone in this belief: other speakers during the conference–such as Gregory Clark, principal of Clark Capital Partners of New York–are expecting private equity (PE)-owned FSS companies to cut costs wherever possible, by only purchasing replacement satellites as needed and eliminating research and development budgets. “There will be no risk money available from the PE firms to invest in new projects,” Clark said. As a result, “The brightest people will not go into the satellite manufacturing industry. Maybe they will go into private equity.”
Despite these depressing words, the seven manufacturing executives on the panel–representing Alcatel Space, Boeing Satellite Systems, Com Dev, EADS Astrium, LMCSS, Orbital Communications International and Space Systems/Loral–displayed their best “game faces” as they discussed the market for 2005 and beyond.
“I think we share some cautious optimism about the year ahead,” said Antoine Bouvier, chairman and CEO of EADS Astrium.
“Our view at the start of 2005 is a bit more optimistic than it was last year,” added Alcatel Space CEO Pascale Sourisse. “Our overall prediction for 2005 [is that the number of satellites to be ordered should be] around 15. But the market in the first quarter of this year is more active than last year. I expect the number of satellites to be awarded by the end of June 2005 to be substantially more than it was at the end of June 2004.”
Continuing to look at the bright side, the panelists focused on potential areas of growth in the satellite manufacturing industry. For instance, despite the delays and disappointments that have plagued its deployment, “We still believe that [satellite] broadband is on the horizon,” said Patrick DeWitt, president of Space Systems/Loral.
Sourisse shared that sentiment shared. “High-definition (HD) TV looks like a great area for growth,” she added. “We also believe that the government market is growing. Governments around the world have needs that exceed what can be delivered on their own dedicated systems.”
Funding New R&D
With private equity FSS owners expected to stop funding research and development, one delegate asked the panel who would be underwriting new product development in the future. David Ryan, president of Boeing Satellites Systems responded to the question by saying the money will still have to come from everyone because satellite manufacturers cannot afford to carry this ball alone.
“The Big ‘R’ [research] is usually done by the government,” Gavrilis added. However, there is an opportunity for operators and manufacturers collectively to fund research and development–thus keeping costs down for everyone concerned–but only if the application being addressed is clearly defined and obvious to everyone, he said. To this end, Lockheed Martin is “investing $56 million in direct support of some of the visions laid out by our customers for flexible, agile payloads,” Gavrilis said, specifically reconfigurable satellites whose missions can be changed as the market dictates. This same point was taken up by Ryan, who cited the repurposing of the first two Spaceway satellites from broadband to video as proving the value of smart, reprogrammable satellites.
However, satellite manufacturers must convince clients to pay extra for such flexibility, said DeWitt. This is no easy task when they can buy cheaper, simpler “bent pipe” satellites instead.
Sourisse said that one way to address this issue is to provide customers with a range of options combining a cost-effective blend of configurable and bent pipe architecture. But to make such options available, satellite manufacturers must be willing to look ahead and investigate new technologies, said Bouvier. Ryan added that the quality of hardware in space “must be bulletproof.”
Increased Competition
As if the challenges highlighted by the panelists that are facing the satellite manufacturing industry are not enough, the established satellite manufacturers also must contend with competition from companies in Russia, China and India.
But Sourisse does not see these new entrants as a threat. “We consider this more as an opportunity than a threat,” she said. She explained that the increase in the number of satellite manufacturers indicates rising demand for satellites in the global market. Sourisse added that the existing manufacturers’ “heritage” gives them an edge over newcomers because established companies have proven records of building reliable satellites. This is a factor that matters to purchasers, who are spending hundreds of millions of dollars per satellite.
But what happens when these newcomers’ governments give preference and financing to these new players, allowing these companies to leverage this support in order to underbid Western manufacturers on satellite contracts elsewhere in the world? There is no doubt that this could be a very real problem, replied Ali Atia, president of Orbital Communications International. “The competitive pressures from these players is there and is real,” he said. “You may need to increase the number of chairs on this panel to eleven next year, to accommodate them as well.”
Other problems and potential solutions were also fielded by the panel, such as the State Department‘s limits on exporting certain technologies to countries like China. In order to supply this country with the Apstar 6 satellite, Alcatel took care to replace any restricted U.S. parts with similar non-U.S. components that had “proven flight heritage,” Sourisse said. This did the job for the client and stayed within the rules. Meanwhile, DeWitt admitted that being in Chapter 11 bankruptcy has scared off some potential clients, but that other have stood by the company; as has its employees and suppliers.
If there is a silver lining to the cloud hanging over satellite manufacturing, it is that “everybody’s here that was here five years ago,” observed Gavrilis. By controlling manufacturing costs wherever possible, the industry’s satellite manufacturers have weathered some lean years. One suggestion to help satellite manufacturers survive is for them to share research and development with universities and governments to cut costs, said Keating. He then advised, tongue in cheek, that the manufacturers should not spend their scarce research and development dollars developing components “that they could be buying from me.”
–James Careless
