Commercial Satellite Boom Boosts Firms to New Heights
Inside a windowless Hughes Electronics plant in El Segundo--renowned in aerospace circles as a ferocious engine of technology--workers are preparing for an unprecedented 16 spacecraft launches this year.
The activity is nearly as frenetic at the two other major U.S. producers of big communications satellites: Lockheed Martin in Sunnyvale and Space Systems Loral in Palo Alto.
Over the past 40 years, since the dawn of the space age, the satellite industry has never quite succeeded in becoming a fast-growing and vital enterprise. As a result, it has remained a bit player in the high-technology revolution.
But an unmistakable boom in the production and operation of commercial satellites has begun, underpinned by commercial growth rather than the federal government’s erratic spending habits that fed the industry in the past.
With California accounting for 100% of the American output of big communications satellites, the growth is bringing an important counterbalance to the loss of high- paying jobs in the defense and aircraft industries. Indeed, a report issued today by consulting firm A.T. Kearney predicts that aerospace jobs in Southern California will grow by 64% over the next 20 years--mainly because of the space industry.
Among the few blemishes on the outlook is the high-profile China scandal, involving allegations that Hughes and Loral illegally exported technology that China could transfer to its nuclear missiles. The political backwash poses serious economic risks to an industry that has never had a brighter future.
U.S. satellite makers will build and launch about 1,700 satellites over the next decade, worth $121 billion, according to the Teal Group, a market research firm in suburban Washington. A new Merrill Lynch report estimates that by 2007 the satellite industry will generate manufacturing and service revenues of $171 billion annually.
The rate of investment over the next decade will approach the level of federal highway spending--a measure of how significantly the U.S. economy is reallocating its infrastructure investments in the information age.
Space industry growth is being fueled by the convergence of several trends, including vast strides in satellite power, reliability and processing capability, as well as falling prices for space launches and voracious demand for communications services by U.S. and international business.
As capability increases and costs drop, satellites will be able to compete against an ever growing number of communications services now dominated by ground--or terrestrial--networks. Much of the new business is being generated by a proliferation of systems using small, low-cost satellites. At one time, these satellites were expected to steal the market from the big spacecraft produced by Hughes, Lockheed and Loral. Instead, everybody has prospered so far.
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The most optimistic projections foresee a point within 10 years that satellites could undercut wired systems for video, data and voice transmissions. Satellites already are making huge inroads in the telecommunications industry.
“We are really at the very beginning of a boom that will last for the foreseeable future,” said Marco Caceres, senior space analyst at the Teal Group . “Land lines are eventually going to be a thing of the past.”
Cable and telephone companies are figuring out ways to improve the capabilities of fiber-optic cable and copper wires, along with land-based broadcasting systems, but satellites appear to be improving at a faster pace. Satellites are expected soon to pack the processing power of a supercomputer, while new antenna designs are able to aim hundreds of precise beams to users on Earth.
Much of the future growth anticipated by the satellite firms will come not from manufacturing, but rather from operating large fleets of their own satellites and selling services. Hughes’ DirecTV, for example, is still losing money, but Hughes Chairman Michael T. Smith expects the company to break even early next year. DirecTV delivers television programming from satellites into 3.5 million homes.
Although manufacturing is becoming a smaller part of the revenue stream, technological supremacy is still critical. Hughes, Lockheed and Loral are in a battle to design more powerful and capable satellites for their lucrative services operations.
“It is the wellspring of new business,” said Hughes Chairman Michael T. Smith.
The commercial space race is leaving the government in a sometimes subordinate role. Moreover, the federal government no longer sets the technological agenda of the industry, said Mike Gianelli, Hughes Electronics vice president for government programs.
“I think they accept that,” Gianelli said. “Our story to the government is that they have to understand what is happening with this technological wave.”
Nonetheless, federal investigators are bearing down hard over allegations that China received unauthorized help with an investigation into why one of its Long March rockets blew up during a launch that carried Hughes and Loral satellites. The issue took on overtly political overtones last month when the House of Representatives rushed to impose limitations on satellite deals with China.
“China has 25% of the world’s population with an enormous need for communications,” said Joel Johnson, vice president for international affairs at Aerospace Industries Assn., a trade group. “Blocking off one-fourth of mankind is not a very bright thing to do. Congress ought to hold hearings before they change policy. This is a classic case of ready, fire, aim.”
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If U.S. suppliers are blocked from doing business with China, European competitors would step into the void. The profits earned by European firms from the China trade would enable them to cut their prices elsewhere, Johnson predicted. The issue is a reflection of inconsistent policy and bureaucratic turf battles between the state, defense, justice and commerce departments, he added.
So far, the investigation hasn’t hurt the industry. Over the past year, the satellite industry has paid off investors with a 52% return, according to Merrill Lynch. Not surprisingly, satellite firms are racing ahead to invest in new systems and increase production capacity.
Hughes completed a major expansion at its El Segundo complex that added a second thermal vacuum chamber, which can test satellites in space-like conditions on the ground.
Activity at the plant has never been faster paced, as evidenced in the scheduled 16 launches this year. That is more launches than planned by the National Aeronautics and Space Administration, with five shuttle missions and nine unmanned launches this year.
“A couple of years ago, we couldn’t have done 16 launches,” said Donald L. Cromer, president of the Hughes satellite manufacturing subsidiary and a retired Air Force general.
Hughes, which is owned by General Motors, has dominated the industry since the 1960s and continues to win 50% of the open competitions for commercial satellites. Hughes is running three shifts at its El Segundo plants, which employ 7,500 workers.
With the recent sale of its defense business to Raytheon Corp., Hughes now can concentrate on the fast-growing communications market, said Hughes Chairman Smith.
“We are a smaller, more focused company,” Smith said.
Hughes has orders for 41 satellites, including its first sales of its new 702 spacecraft that has double the transmission power of its earlier system. The giant satellite carries a $250-million price tag, including the launch, not much less than a skyscraper. The satellite boasts a new ion propulsion system, pioneered by Hughes, that can position satellites without firing chemical rockets.
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Hughes’ reliance on government business is dropping sharply. A decade ago, about 75% of Hughes’ satellite sales went to the government, but federal orders will account for just 35% of sales this year, Gianelli said. Even so, Hughes won a key government contract this year to build a fleet of weather satellites for the National Oceanic and Atmospherics Administration.
But the competition facing Hughes is getting tougher. Lockheed Martin completed a satellite assembly plant last year at its Sunnyvale complex and a new communications payload plant in Newtown, Pa. The company has about 2,000 employees on commercial programs, a thousand of which are in Sunnyvale.
“We are closing the gap on Hughes,” said Dan Brophy, director of business development for commercial space programs at Lockheed’s Sunnyvale plant.
With a much larger military space business than Hughes, Lockheed Martin has a backlog of 39 government and 19 commercial satellites, said Mel R. Brashears, president of Lockheed’s space and strategic missile sector. The firm anticipates additional orders for the small Iridium communications system spacecraft that it builds for Motorola Corp.
Brashears said he expects satellite transmission costs to drop fivefold by 2002, enabling the industry to target virtually any market that is now controlled by terrestrial systems. Lockheed has one of the most bullish outlooks on the future of commercial space.
Meanwhile, Bernard L. Schwartz, chairman of Loral Space and Communications, says his commercial space operations are making significant progress in catching up with Hughes. The company has a backlog of nine commercial satellites worth $1.5 billion and is developing the Globalstar mobile telephone network with small satellites.
Schwartz said satellite industry growth will continue to defy expectations, noting that only five years ago nobody had anticipated the demand for satellite capacity from Internet transmissions.
“The satellite industry will continue to grow,” Schwartz said, “as information and communications continue to incorporate new technologies and create new applications.”
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