Spring 2007 Industry Study Final Report The Space Industry The Industrial College of the Armed Forces National Defense University Fort McNair, Washington, D.C. 20319-5062 Report Documentation Page Form Approved OMB No. 0704-0188 Public reporting burden for the collection of information is estimated to average 1 hour per response, including the time for reviewing instructions, searching existing data sources, gathering and maintaining the data needed, and completing and reviewing the collection of information. Send comments regarding this burden estimate or any other aspect of this collection of information, including suggestions for reducing this burden, to Washington Headquarters Services, Directorate for Information Operations and Reports, 1215 Jefferson Davis Highway, Suite 1204, Arlington VA 22202-4302. Respondents should be aware that notwithstanding any other provision of law, no person shall be subject to a penalty for failing to comply with a collection of information if it does not display a currently valid OMB control number. 1. REPORT DATE 3. DATES COVERED 2007 2. REPORT TYPE 00-00-2007 to 00-00-2007 4. TITLE AND SUBTITLE 5a. CONTRACT NUMBER 2007 The Space Industry 5b. GRANT NUMBER 5c. PROGRAM ELEMENT NUMBER 6. AUTHOR(S) 5d. PROJECT NUMBER 5e. TASK NUMBER 5f. WORK UNIT NUMBER 7. PERFORMING ORGANIZATION NAME(S) AND ADDRESS(ES) 8. PERFORMING ORGANIZATION The Industrial College of the Armed Forces,National Defense REPORT NUMBER University,Fort McNair,Washington,DC,20319-5062 9. SPONSORING/MONITORING AGENCY NAME(S) AND ADDRESS(ES) 10. SPONSOR/MONITOR’S ACRONYM(S) 11. SPONSOR/MONITOR’S REPORT NUMBER(S) 12. DISTRIBUTION/AVAILABILITY STATEMENT Approved for public release; distribution unlimited 13. SUPPLEMENTARY NOTES 14. ABSTRACT 15. SUBJECT TERMS 16. SECURITY CLASSIFICATION OF: 17. LIMITATION OF 18. NUMBER 19a. NAME OF ABSTRACT OF PAGES RESPONSIBLE PERSON a. REPORT b. ABSTRACT c. THIS PAGE Same as 29 unclassified unclassified unclassified Report (SAR) Standard Form 298 (Rev. 8-98) Prescribed by ANSI Std Z39-18 SPACE INDUSTRY STUDY 2007 ABSTRACT: U.S. space domination is far from guaranteed as the number of space-faring nations increases. The U.S. space industry remains a critical element in providing capabilities essential to national security and economic prosperity. The ability to access space for communications, monitoring, research, and exploration is vital. To ensure these, U.S. policy should encourage more commercial activity in space, emphasize a more globally cooperative environment, change acquisition methods to emphasize cost control over performance at any cost, and focus government investments on technologies having the greatest impact on the space industry. LtCol Carmine Borrelli, U.S. Marine Corps Ms. Danielle Buckon, Dept. of the Navy Mr. Bruce Cogossi, Dept. of the Army Ms. Cynthia Davidson, Defense Intelligence Agency Ms. Cristie Ditzler-Smith, Dept. of the Air Force Mr. August Doddato Dept. of the Air Force COL Charles Gabrielson, U.S. Army LTC Kenneth Hubbard, U.S. Army COL Kent Jacocks, U.S. Army COL Valerie Jircitano, U.S. Army Mr. Mark Jones, U.S. Coast Guard Col Jeffrey Koch, U.S. Air Force CDR Brent Kyler, U.S. Navy Ms Lisa McCauley, Battelle Mr. Anthony Reardon, Dept. of the Air Force LtCol Peter Yeager, U.S. Marine Corps CAPT Ken Buell, U.S. Navy, Faculty Dr. Scott Loomer, National Geospatial Intelligence Agency, Faculty Mr. Tom Drake, National Security Agency, Faculty PLACES VISITED Domestic Office of Science and Technology Policy, Washington, DC Futron Corporation, Washington, DC Satellite Industry Association, Washington, DC National Security Space Office, Washington, DC Intelsat Corporation, Washington, DC National Aeronautics and Space Administration (NASA) Headquarters, Washington, DC Cape Canaveral Air Force Station, FL 45th Space Wing Delta IV Horizontal Integration Facility Naval Ordnance Test Unit, U.S. Navy 45th Weather Squadron, U.S. Air Force Range Operations Control Center National Aeronautics and Space Administration, Kennedy Space Center, FL Space Station Processing Facility Apollo Saturn V Center National Security Space Institute, Colorado Springs, CO Air Force Academy, Colorado Springs, CO Cheyenne Mountain Air Station, Colorado Springs, CO United States Northern Command (NORTHCOM), Colorado Springs, CO Deutsches Zentrum für Luft- und Raumfahrt (DLR), Washington, DC National Aeronautics and Space Administration Astronaut Jose Hernandez, Washington, DC XM Satellite Radio Corp., Washington, DC Sea Launch Corporation, Los Angeles, CA Space Exploration Technologies Corporation (SpaceX), Los Angeles, CA Space and Missile Systems Center (SMC), Los Angeles Air Force Base, CA The Aerospace Corporation, El Segundo, CA Boeing Satellite Systems, El Segundo, CA Northrop Grumman Space Technology, Redondo Beach, CA Jet Propulsion Laboratory, Pasadena, CA Orbital Sciences Corporation, Dulles, VA Embassy of India, Space Counselor, Washington, DC International European Aeronautic Defence and Space Company (EADS) - Astrium, Toulouse, France Centre National d'Études Spatiales (CNES), Toulouse, France Euroconsult, Pierrefonds, France European Space Agency (ESA) Headquarters, Paris, France European Aeronautic Defence and Space Company, Les Mureaux, France SNECMA, Vernon, France European Organisation for the Exploitation of Meteorological Satellites (EUMETSAT), Darmstadt, Germany European Space Operations Center, Darmstadt, Germany European Satellite Navigation Industries, Ottobrunn, Germany European Aeronautic Defence and Space Company, Ottobrunn, Germany Kayser-Threde, Munich, Germany Deutsches Zentrum für Luft- und Raumfahrt, Institute of Robotics and Mechatronics, Oberpfaffenhofen, Germany 1 Introduction In 1924, noted industrialist Bernard Baruch commented, “the military minded man who has to devise the machines of destruction should keep in touch with the man of industry” (Thompson, 2006, p. xi). No industry exemplifies this better than space, where industry and government are fused to a common goal of space leadership as a means to ensure the continuation of American prosperity and guarantee its strategic, political, scientific, and economic leadership. The U.S. space industry serves as the basis for American primacy in space and provides the foundation for a distinct technological advantage. But the solar winds of change are blowing. America’s dominance in this important domain can no longer be taken for granted. Space represents an asymmetrical advantage for those countries that have both the technological ability to pursue national interests in space and the financial power to overcome significant industry costs. The U.S. and other space-faring nations clearly understand the security advantages that accrue from the ability to exploit the space domain and, accordingly, have created national policies that emphasize the development and preservation of such abilities. As a result, national policies focus on developing indigenous assets to assure access to space, often independent of cost. At the strategic level, assured access to space describes the development of achievable national policies that foster the use and exploitation of space and the development of the requisite industrial and technological base to implement those polices. At the operational level, it translates into a need to develop and maintain a launch booster for reliable placement of high value, national assets in orbit, and the ability to control those assets once in place. A review of the industry illustrates that many developing nations see a need to build assured access to space through the use of national programs that will establish and preserve their ability to independently use and exploit the space domain. The requirement to maintain an organic space capability at a national level creates a symbiotic relationship between industry and government. Governments see the need to preserve robust and reliable capabilities within the industry to guarantee the ability to use space in ways that support national objectives. In return, industry depends heavily on government orders and subsidies to ensure their production capabilities remain intact. The space industry has matured greatly from its birth nearly fifty years ago. Today it is characterized by an emphasis on production efficiencies, upgrades to existing systems, and product maintenance, or retirement. In this phase, the process receives re-engineering attention while the product remains stagnant. Nowhere is this more obvious than in propulsion systems, where the Boeing/Rocketdyne RS-68 engine is the first new U.S. liquid-fueled rocket engine developed in the last 25 years (Boeing, 2007). Since then, only SpaceX developed and tested another new rocket engine. As a result, space policy and the space industry seem caught in a loop of repeating successes with current technologies and relying on small, iterative improvements, rather than fostering innovation and developing new technologies. This condition reflects an environment of risk intolerance. The Industry Defined The space industry is segmented into three distinct areas: space, control, and user. The space segment deals with launch and platform components, usually a satellite or scientific experiment. The control segment addresses infrastructure required to operate platforms, while the user segment enables the user to access the platform for the designed capability, such as television or telephone signals. To address these segments, the industry deals with two primary markets and one secondary market. 2 Satellite production/manufacturing and launch services, including booster development and infrastructure, represent the two primary markets. These markets are organized in terms of support for commercial, civil, and military (including intelligence) clients. A Cold War acquisition mentality, where schedule and cost are tradeoffs to performance, still permeates the space industry. Rapidly changing technology, coupled with a desire to produce decisively superior capability, has led to large cost overruns and unacceptable delays in system fielding. As payloads get larger, more capable, and significantly more expensive, launch vehicle performance has become paramount and economic aspects are ignored in favor of reliability. The primary markets for satellite production services are concentrated within a narrow range of companies producing a majority of the systems and services in these markets. Satellite production is centered on Lockheed Martin, Boeing, Northrop Grumman, Space Systems/Loral, Alcatel Alenia, and EADS Astrium Space Systems. Launch is likewise concentrated. Booster production is focused on United Launch Alliance (ULA), which combines the Boeing and Lockheed Martin Evolved Expendable Launch Vehicles (EELV) under a single management structure. Arianespace produces the Ariane 5 booster. Sea Launch is a joint venture between Boeing, Energia, Aker Kvaerner, and SDO Yuzhnoye/PO Yuzhmash. The Ukranian Zenit booster, a former ICBM and the Soyuz rocket are also strong competitors in launch, as well. SpaceX, a new entrant to the launch market, was founded as an alternative to higher cost launch. SpaceX is taking an innovative approach to the design and production of an entirely new booster vehicle. The secondary market for ground services and infrastructure is more difficult to define. Aspects of this market, such as launch facilities and range control represent a direct tie to the use of space. Major launch control and ranges in the U.S. are Kennedy Space Center and the Cape Canaveral Air Force Station in Florida, along with Vandenberg Air Force Base (AFB) in California. Arianespace, the marketing commercial launch component of the European Ariane rocket, is located in French Guiana, South America. The Russian component launches from the aging Baikonur Cosmodrome in Kazakhstan. Sea Launch, an international consortium, modified a mobile oil platform to launch rockets from an equatorial location in the Central Pacific. The ground control segment is fairly robust, with major facilities for communications at Intelsat in the U.S. and the European Space Operations Center at Darmstadt. Governments with robust space programs generally provide control for their own assets on orbit. The United States controls its military and intelligence assets through the U.S. Air Force Satellite Control Network, located at the 50th Space Wing at Shriever AFB, and in Cheyenne Mountain. U.S. Civil spacecraft are controlled through a number of different facilities across the country, including the Johnson Space Center which controls the space shuttle and the International Space Station. Conditions in the Industry Characterized as mature within the industry life cycle, the space industry experiences few emerging markets and little opportunity for growth. High barriers to entry include: (a) a significant capital investment to support land, plant, technology, and labor; (b) a highly skilled workforce that can provide both for current needs and also adapt to evolving technologies; (c) a reliance on government contracts and acquisition systems for the majority of industry revenues; (d) the use of governmental grants and subsidies, which provides an unfair advantage to incumbent producers; and (e) stringent regulations, such as the International Traffic in Arms Regulations (ITAR), which limit the ability of industry to compete in the global market. These barriers support the large scale, vertical integration that characterizes the industry. Boeing’s mergers with North American Rockwell, McDonnell Douglas, and Hughes Electronics, 3 are representative of the consolidation throughout the industry. Similar industry consolidation took place on the other side of the Atlantic, resulting in the creation of European Aeronautic Defense and Space Corporation (EADS) from the merger of a number of European aerospace giants including Dassault, Aerospatiale, Fokker, Vereinigte Flugtechnische Werke, Messerschmitt Bölkow-Blohm, Construcciones Aeronauticas Sociedad Aónima, and Aeronautica Industrial SA. This merger was significant because it crossed a number of national borders to create a dominant regional company capable of competing with similarly realigned Lockheed Martin and Boeing. The industry’s heavy reliance on government contracts and support comes with some concern. When access to space is characterized as a national security issue, the industry becomes a fertile ground for governmental regulations. Barriers to trade, such as the ITAR, significantly reduce free and open exchanges of information, leading to diminished innovation and competition in the market. Heavy use of grants and subsidies distorts market conditions, increases government costs, and lowers competition by raising barriers for would-be entrants. This phenomenon exists both in the U.S. and abroad. For example, the U.S. provides government launch infrastructure to ULA for commercial launches. Similarly, the European Union taxed its members 960 million Euros to subsidize the Ariane 5 (de Selding, 2003). The Global Industry Currently, globalization within the space industry is low, but the projections for increased globalization are favorable (IBISWorld, p. 22). As more countries enter the market and costs of production decrease, the dominant role of government may give way to commercial enterprise, suggesting the likelihood of freer markets for suppliers throughout the world. India and Japan have joined Russia, China, the U.S. and Europe in gaining an independent means to access space (Defense Industry Daily, 2005). With the success of these programs, Brazil, North Korea, and Iran are emerging as next generation space-faring nations. While it is true that governments show a distinct predilection to purchase equipment from their own domestic sources, fewer new programs and higher budget deficits coupled with favorable incentives from foreign governments are driving space ventures abroad. Examples include U.S. satellite manufacturers using Ariane 5 boosters to orbit payloads for U.S. customers, and the use of the Russian Energia RD-180 engine in Lockheed Martin’s Atlas V booster. The Nature of the Market The space industry as a whole is an oligopoly in which the top four producers in guided missile and space vehicle production hold a combined market share of 95% (Defense Industry Daily, 2005). The market is expected to include 118 establishments and 81 enterprises by the end of 2007. The average revenue per supplier in 2006 was $187 million. Projections for the next fiscal year include a decrease in revenue of 2.1% (IBISWorld, 2007, p. 11). Key players in satellite production are Lockheed Martin, Boeing Satellite Systems, Northrop Grumman, Space Systems/Loral, Alcatel Alenia and EADS Astrium. The Herfindahl-Hirschman Index, a measure of industry competitiveness, is 2,393 out of 10,000 for the space industry, indicating a high level of industry concentration. Markets within the Sector The two major markets within the space industry are satellite development/production and booster manufacturing/launch services. The North American Industry Classification System, or NAICS, defines these two sectors as 336414, Guided Missile and Space Vehicle Manufacturing and 334220, Radio and Television Broadcasting and Wireless Communications Equipment Manufacturing. While these two sectors include the majority of the space industry, 4 they do not include all of it. For example, booster propulsion falls under NAICS code 336415 and portions of the launch and manufacturing infrastructure falls under 336416. While a good deal of the space industry falls outside the two primary codes, several elements within these two codes are not related to space. As a consequence, accurate data relating specifically to the space industry is obfuscated, resulting in a chronic degree of uncertainty as to the industry’s fiscal condition and developments. Since reliable economic data is required for complex budgeting processes, to provide valid cost estimates, to accurately account for research and development spending, and to better understand the role of government within the market, there is a need to improve the economic data analysis of the industry (Hertzfeld, 2002, p. 21). Market Conditions The satellite development and production market. The satellite manufacturing market is an oligopoly and oligopsony, with a limited number of suppliers and buyers. High barriers to entry such as the need for government contracts to survive, keep the number of suppliers low. The governmental market dominates with approximately 70% of total revenues. The commercial market represents the remaining 30% of total demand. Governmental orders are typically restricted to suppliers within the using nation, creating a market distortion. While customers may generally desire faster production rates with higher degrees of reliability, satellite manufacturing is cyclical. Few satellite production runs comprise large numbers of satellites, so production times for most manufacturers vary significantly. The industry standard ranges from a low of 15 months with the Boeing Astra 3A to a high of 59 months with the Alcatel Astra 1K (Futron, 2004). Worldwide satellite manufacturing revenue growth was 7.4% from 2004 to 2005, higher than the average growth from 2000 to 2005. In 2004, 55 satellites were launched, showing a slight increase from the downturn of 2002-2005, which experienced a significant decline in satellite orders (Caceres, 2005). Commercial efforts, such as Direct to Home (DTH) television have shown strong growth. 2005 revenues were $52.8 billion, and represented 11.7% growth in subscriber levels over 2004. Current subscriber levels are approximately 80 million worldwide (SIA, 2006, p. 11). Similarly, North American satellite radio, specifically XM and Sirius, also shows growing subscriber levels, totaling over 14 million in 2005, an increase of 29% from 2004 (Ellis and LaMonica, 2007). The space launch market. This market is also an oligopoly and an oligopsony, characterized by policy directives and government subsidies that make portions of the market appear monopolistic. The market has some odd traits. For example, the market for light- and medium-lift (less than 20 metric tons) exhibits elasticity, while the heavy-lift market (25 metric tons) is inelastic (Hertzfeld, 2005, p. 23). There are many global providers of light and medium lift, while there are only two commercial providers of heavy lift today, ULA and Arianespace. The market presents a challenge for competition given the widespread government subsidies or national ownership in each launch-capable country. In the U.S., government launches are projected to account for 50% of the world launch demand through 2020, with the Department of Defense (DoD) responsible for 63% of those launches (Congressional Budget Office [CBO], 2006, p.4). In terms of heavy lifting for geosynchronous orbits (GEO) or geosynchronous transfer orbits (GTO), 81% of all launches use one of three government- sponsored boosters: Ariane, Atlas, and Delta (Futron, 2002, p. 5). Hardly by coincidence, both the Ariane under ESA in Europe and the Atlas/Delta team under ULA in the U.S., enjoy substantial government subsidies and national policy protection. 5 This highlights the need for a commercially developed heavy-lift booster that can compete against the government sponsored programs, but high barriers to entry, such as government certification, research and development costs, capital outlays well in advance of launch, and the requirement to provide alternatives for launch failures, provide a strong disincentive to new launch programs (CBO, 2006, p. 4). Thus the launch market is not driven by cost, but rather by reliability and schedule, and risk aversion becomes another barrier to entry. Since the government is the principal consumer of launch and since it is performance-oriented rather than cost-oriented, it tends to avoid alternatives like SpaceX in favor of providers with a demonstrated track record. Market Segments Segments define the market across three dimensions: Commercial, Civil Government and Military. Each segment is interdependent with substantial overlap in function and technology. Commercial. The commercial segment is characterized by a rising demand in communications and satellite to home television services. Commercial insurance is included in our study of the commercial segment. Key players include Intelsat, Eutelsat, Echostar, DirecTV, Sirius, and XM satellite radio. Civil Government. The civil segment principally includes science, exploration, and remote sensing. While the United States dominates the civil government segment, the French, German, Indian, Italian, Japanese, and Russian space agencies are also key players. Military. Satellites are a cornerstone of the U.S. plan to ensure battlefield dominance and unparalleled communications reach-back from the battlefield to the U.S. The military space mission is central to battlefield success and includes such fundamental capabilities as surveillance, early warning, communications, and navigation. French, British, Russian, and Chinese activity in this segment is important, though small relative to the U.S. Industry Outlook U.S. national security is dependent upon space, and thus must be able to assure access to it as well as operate critical assets within it. Key space industry elements supporting these national security requirements are shown in the table below. Assured access to space (cid:131) Satellite/spacecraft manufacturing (cid:131) Launch vehicle production and launch services (cid:131) Infrastructure – ranges (aging systems, single point of failure), launch control centers, ground stations world-wide (availability, physical security, redundancy) Assured operation of (cid:131) Satellite/spacecraft design and quality of manufacturing space assets (cid:131) Infrastructure – ranges (aging systems, single point of failure), space ops control centers, ground stations world-wide (availability, physical security, redundancy) (cid:131) (Future) defensive systems It has been widely reported that U.S. aerospace and defense companies underperform when compared with other high-tech industries. Overall, U.S. aerospace and defense companies showed profit margins of 4.2% and 5.2% in 2004 and 2005. The space prime contractors such as Boeing and Lockheed Martin performed worse, and space suppliers worse still. A number of factors are responsible for this performance, including limited government demand for large and technologically complex satellites, industry consolidation and divestiture of redundant business units, customers’ push for lower prices, global competition, and the communication satellite