The US space industry, though relatively healthy at the moment, is perched on the edge of what could turn into a drastic decline unless the nation takes steps to revitalize it, change its course, and improve its profitability, warned Gen. Thomas S. Moorman Jr., the retired former vice chief of staff of the Air Force and commander of Air Force Space Command.
Moorman gave his assessment in remarks to a Dec. 1 Eaker Institute Colloquy on the future of the US space industrial base. The institute is the policy and research arm of the Air Force Association's Aerospace Education Foundation.
Moorman said that, currently, the US space industry boasts plenty of competition and an overabundance of capacity. However, the industry will rapidly shrink as some anticipated markets fail to materialize and profitability of working in the field drops to a level comparable to simply buying Treasury bonds.
Moreover, the space industry is failing to attract young talent in numbers sufficient to offset an overall graying of its engineering ranks. This trend will further hamper its ability to innovate and compete in the global market, Moorman said.
Moorman's remarks drew on a broader study, conducted by Booz Allen & Hamilton, surveying the health of the entire defense industrial base. Moorman was a lead author in that study, titled "US Defense Industry Under Siege-An Agenda for Change." It was performed on behalf of Jacques Gansler, then undersecretary of defense for acquisition, technology, and logistics.
Dirge for the Surge
Today, "there is more than adequate capacity" in everything from launch vehicles to spacecraft bus construction and integration to sensors and beyond, Moorman noted. In fact, there is still "overcapacity" in the field, as companies maintain more production capability than the level of work will justify. Many of those companies anticipated a huge surge in satellite construction and launch in the late 1990s and early 2000s, primarily to service a burgeoning telecommunications industry.
"I was one" of those predicting the surge, Moorman said, but "the projected launch demand is not likely to occur."
One reason: the emergence of cheap, plentiful, terrestrial, fiber-optic communications. This fact, coupled with a far greater demand for data communication (relative to voice communication), has dampened the market prospects for the commercial telephone satellites planned for the 2000s, Moorman noted.
Industrial overcapacity in the field of small communications satellites runs to only about 20 percent. However, the figure rises to 52 percent for medium-size satellites and 64 percent for large satellites.
Moorman acknowledged that the US military will need to "recapitalize all of its satellites" in the coming decade or so, as old ones wear out or become obsolete. Everything from intelligence to weather satellites will have to be replaced by an industry increasingly dubious of doing the work.
However, said Moorman, "There is a lack of innovation incentives" for industry. Part of the problem is that years of stiff competition forced companies to lower their profit margins in order to obtain "must-win" contracts that sometimes determined which companies in a given field would survive. At the same time, government customers demanded greater confidence in the hardware being purchased.
Independent research and development funds, which traditionally have been used to develop technologies of the future, are increasingly being used simply for "buying down risk" on existing programs, Moorman said.
Companies doing business in the space industry can expect a return on investment scarcely higher than that of government bonds, but at far greater risk and cost than T-bonds, he noted. The industry's annual return on sales dropped from about 8.5 percent in the 1980s to 7 percent in the late 1990s, and the trends suggest the figure is headed even lower, to perhaps 3 percent per year.
Staying in the defense industry has meant consolidation in the last decade, Moorman noted, which forced many companies to take on enormous debt as they either bought or merged with other space companies. Some took on so much debt that their credit ratings declined to a level "just above junk bonds," Moorman asserted. Stock valuations consequently plummeted among the industry players. This in turn has helped drive companies to refrain from investing in their facilities and talent pools to the degree they did in the 1980s or even early 1990s.
Even Martha Stewart ...
Former Deputy Defense Secretary John Hamre told a defense audience in 1999 that a danger signal could be found in the fact that the stocks of many proud names in the defense business were valued at less than the initial stock offering for the home product company, Martha Stewart Living Omnimedia.
While some defense stocks have recently rebounded, "the systemic issues [facing the industry] are still there," Moorman reported. He added that the stocks that have gone back up have benefitted from the recent "flight from NASDAQ" technology stocks, which took a beating in the last quarter.
Industry is also looking with mixed feelings at the 10-to-12-year process of replacing today's fleet of national security satellites, said Moorman. While lots of work will be available in the near term, a long procurement hiatus will follow. The satellites built will be more reliable, perform more types of missions, and last longer, meaning they will not need to be replaced again as often or in as great numbers as in the past.
A move to expand the export market for both satellites and launch services has been somewhat stymied by the US government, which has shown reluctance to possibly risk exposing its trade secrets to other countries. The Booz Allen study described this as "cutting off your nose to spite your face," since the loss of revenues allowed foreign space ventures to thrive while the US industry, short of funds, headed for stagnation. The government's tendency to become involved in such transactions has reduced the US chances of winning such contracts.
Government doesn't "tend to understand industry's viewpoint" of the market, Moorman said, but it "should."
The health of the industry should be taken into account whenever program plans are reviewed, and industry's viewpoint-with its focus on return to the shareholder, profitability, and the long-term value of investment in facilities-should be part of the curriculum of procurement officer training programs, he maintained.
Furthermore, the procurement system needs to be changed to make the government a more attractive customer.
The Defense Department is "not a particularly reliable buyer," Moorman said. It is given to canceling, stretching out, or otherwise restructuring programs on a regular basis. While much of the turbulence stems from Congressional tinkering, the result is that industry becomes skittish of investing too much of its talent or facilities in projects that may never get off the ground.
The space industry's brain drain poses another enormous problem. Work in defense has acquired "a battered image," Moorman said, as technologically adept workers steer clear of defense firms whose stock prices were down and that offered few new and exciting programs.
NASA, he said, dedicates much of its budget to innovative, "spiffy" research programs and, for that reason, is far more successful at attracting young engineers. They are looking for a place where they can make a difference, and defense houses just are not embarking on any bold new initiatives.
"Innovative stuff is what gets young people in the door," Moorman said. Moreover, the allure of getting in on the ground floor of a wildly profitable new venture has drawn many industry workers to the "dot.com" operations.
The former space commander pointed out that fewer young Americans are even seeking to enter the science and engineering career fields. He noted that fully 40 percent of the students in American universities pursuing degrees in science and technology are foreign nationals.
Moorman said he wasn't seeking to make any kind of a "xenophobic" point about the statistic but only wished to note that the talent pool is dwindling. Foreign nationals often cannot work on the most sensitive military projects. In addition, Moorman said that many of them "go back to their country," where developing aerospace industries and national projects are held in high esteem.
Human resources specialists "have to be part of the strategic team" in setting a new course for the defense industrial base, Moorman said. He added, human resource people have "to give us data to tell us what the status of our workforce is and the quality of our workforce-very tough to do quality metrics."
Moorman's prescription for the industry is that companies should offer "unique" services and tie these together in what he calls "strategic alliances" with other companies. Eliminating unnecessary overhead will reduce costs to the customer and increase profits. Industry must also be more innovative in their way of doing business, finding less costly solutions through new processes or products.
Companies also need to do a far better job at streamlining themselves after mergers and adopt lean design and manufacturing techniques to speed and reduce the cost of new products.
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