Column:: Elon Musk’s SpaceX clashes with the Pentagon, its key client

Last December, Elon Musk, the founder of SpaceX, spent an hour closeted with then-Deputy Defense Secretary Patrick Shanahan.

Among the topics on the table was SpaceX’s failure to win an important contract from the Air Force the previous October. As the Defense Department’s inspector general subsequently reported, Musk acknowledged that the loss was SpaceX’s fault: The company had “written a poor proposal,” the report said, quoting Musk as admitting that it “missed the mark.”

As a result, development-stage contracts totaling more than $2.2 billion for a series of military rocket launches starting as early as 2022 went to SpaceX’s three rivals in the burgeoning field of private launches — United Launch Alliance (ULA, a joint venture of Boeing and Lockheed Martin), Northrop Grumman and Blue Origin, a spaceflight company founded by Amazon founder Jeff Bezos.

Since that Pentagon meeting, however, Musk and SpaceX have changed their tune. According to a lawsuit the company filed in May in the Court of Federal Claims, the fault is all the government’s.

The awards were the product of “prejudicial unequal treatment” of SpaceX by the Air Force, the lawsuit alleges, including the application of criteria that were not part of the original contract plan and on which SpaceX was marked down. SpaceX alleges it was penalized for its approach to missions not even scheduled until late 2025, despite its claimed superiority in capability and cost over its rivals for the more frequent space flights scheduled for the near term.

The company is asking the court to block the awards to ULA, Northrop Grumman and Blue Origin and to reevaluate the bids. By its very existence, the lawsuit places pressure on the Pentagon to settle with SpaceX. Reevaluating bids could take months, and allowing the lawsuit to proceed could delay the contract for even longer. That might also delay the Phase 2 contract for military launches scheduled to be issued next year, in which two final contractors will be chosen and for which SpaceX will be an important bidder.

SpaceX’s legal strategy is not new. In 2014, the company also sued the Pentagon when it felt an earlier contract had been structured to its disadvantage (the sole-source contract went to ULA). Even though the Pentagon responded that SpaceX had missed the deadline to file a protest, it settled the case in 2015 by revising the contract to give new companies such as SpaceX a better shot in subsequent bidding.

“It’s the same old, same old,” Michael Listner of Space Law & Policy Solutions, a New Hampshire-based think tank, said of the latest lawsuit. “The Air Force could have won in 2015, but they settled and threw SpaceX a bone. The same thing could happen here. Until this gets resolved, this money can’t be awarded and the launchers can’t be developed.”

One question raised by this recurrent conflict is: Does the Pentagon have a secret beef with SpaceX? The Hawthorne-based company is a key player in the growing spaceflight industry and a rising force in defense contracting, where it may be the only significant competitor with ULA in the short and medium term.

Yet its relationship with defense officials seems to lack the chumminess of other major contractors. The Defense Department rejected SpaceX’s administrative appeal of the launch award out of hand, refusing to submit the dispute to a neutral arbitrator and “rejecting all of SpaceX’s arguments in summary fashion” via a six-page letter, according to the lawsuit.

Perhaps there’s a personality clash. Judging from the record, if SpaceX were a human being its behavioral type would be diagnosed as passive-aggressive. In the bid process, the company tends to blame others (or the system) for its losses, poses as the victim of vaguely defined hostility, and asserts that its proposals are so manifestly superior to its competitors’ that on a level playing field it would win in a walk.

SpaceX also has pulled political strings. The company made more than $500,000 in political contributions last year, with Sen. Dianne Feinstein (D-Calif.) and Rep. Adam Smith (D-Wash.), chairman of the House Armed Services Committee, the top recipients. By comparison, Blue Origin made $68,000 in contributions to federal candidates and United Launch $97,000.

SpaceX doesn’t have a monopoly on political influence, of course — elected officials and lobbyists deploy sharp elbows for Boeing, Lockheed, Northrop Grumman and Bezos on Capitol Hill. But SpaceX’s lobbying expenditures lead the field. These have come to nearly $10 million since 2013, compared with $8.8 million for United Launch and $3.7 million for Blue Origin. (Figures for Northrop Grumman, a bigger player generally in defense contracting, couldn’t be narrowed to its spaceflight business.)

Feinstein, in a letter to Air Force Secretary Heather Wilson in February, essentially articulated SpaceX’s objections to the launch development awards. The letter didn’t mention SpaceX specifically but stated that the bid process “unfairly disadvantages” certain bidders by forcing them to “bear the brunt” of development costs without a government subsidy. Feinstein’s office refused to make the letter available, but a copy was obtained by SpaceNews.

Rep. Smith, meanwhile, inserted a $500-million appropriation into the 2020 National Defense Authorization bill approved by his committee on June 13, reserved for any launch services bidder that wins the Phase 2 bidding but missed out on the developmental contract.

“SpaceX’s fingerprints are all over this,” Listner told me. Although the money wouldn’t be appropriated until and unless SpaceX wins in the Phase 2 bidding, the prospect of collecting what in effect would be a retroactive subsidy could ease its financial burden.

SpaceX declined to comment for the record on the dispute, referring me instead to its redacted complaint.

It’s hard to assess SpaceX’s financial situation, because unlike Tesla, Musk’s high-profile public electric car company, it’s privately held. The company’s highly respected president and chief operating officer, Gwynne Shotwell, told CNBC in 2018 that the company had had “many years of profitability,” if not consistently. The company, which was founded in 2002, raised $250 million via a high-yield bond in November, but the issue was pared back from $750 million because of investor resistance. Private valuations indicate it’s worth between $20 billion and $30 billion, but those always need to be taken with a grain of salt.

Many details underlying the latest bid dispute are murky. SpaceX initially filed its lawsuit under seal, though it filed a redacted version for public review a few days later. The government’s motion to dismiss the lawsuit was filed June 13, but remains entirely under seal.

The available documents and interviews, however, open a window into the intricate world of defense procurement and SpaceX’s ability to find its way in that world despite the presence of larger, more experienced players.

SpaceX maintains that its technology is superior to and more modern than that of its competitors. As the company observes in its lawsuit, ULA is reliant on vehicles powered by Russian-made engines, which will have to be phased out under a congressional mandate by 2022. By contrast, SpaceX says its technology is entirely homegrown.

Awarding a contract to SpaceX, the company says in its lawsuit, “would have ensured the quickest end to the United States’ reliance on Russian engines.” Instead, the award “guarantees such reliance will continue” for years beyond 2022. (The competing companies say they’re developing non-Russian alternatives.)

The principal asset of SpaceX in the contract competition may be Musk. Although credit for its operational success is often attributed to Shotwell, Musk’s brash self-confidence and technological vision have helped make the company a credible participant in the private-sector space race.

Those qualities are well known in the auto market, where Musk’s leadership of Tesla, notwithstanding his volatile behavior as CEO, helped give credibility to electric vehicles as consumer products. That may be even more important in the government procurement game.

The freezing out of SpaceX raises the possibility that it will be disadvantaged when the Pentagon narrows its ultimate launch contract to two winners sometime next year. Because of the loss, SpaceX will have to fund its spacecraft development efforts itself, rather than leaning on the government subsidies enjoyed by its competitors. But it won’t be driven from the race.

“They’re not going anywhere,” says Chris Quilty, a satellite and space industry consultant. “We know who the two winners will be — United Launch and SpaceX. They’re the only two with a qualified launch vehicle.”

Musk’s personal magnetism was on display in connection with that meeting with Shanahan. (Having served as acting defense secretary since Jan. 1, Shanahan withdrew his candidacy for the Cabinet post recently following disclosure of domestic violence incidents involving his ex-wife and son.)

Air Force Secretary Wilson had asked Shanahan to cancel the meeting, since SpaceX had competed for the launch development contract with Boeing, where Shanahan had been a senior executive before joining the government — and since SpaceX and Boeing’s ULA would continue to compete with each other for Pentagon contracts.

Shanahan dismissed her concerns, according to the inspector general’s report, apparently because he could not resist Musk’s allure. He told the inspector general’s investigators that he proceeded with the meeting because he “thought it would be interesting to talk to him about his views of the future.”

During their encounter, Musk shared his views on “electrification and autonomy,” and the evolution of space flight. Shanahan had told Wilson they would not discuss procurement issues, but apparently Musk volunteered his lament about the outcome. According to a memo for the record prepared by a Pentagon staffer, Shanahan didn’t voice a response.

How SpaceX and the Pentagon will resolve their differences is anyone’s guess. “We only have one side of the story,” Listner says. Until the government makes its defense to the lawsuit public, we’re left to wonder: Can’t these two partners find a way to get along?

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