Denial Clips Hughes’ Satellite Ambitions

The Clinton administration’s rejection of a proposed $450-million sale of satellites to China could hardly have come at a worse time for U.S. satellite makers, whose market was already set to slip worldwide, analysts said Wednesday.

The decision to deny licenses needed by Hughes Electronics Corp. to export two satellites to China was a one-time choice, U.S. officials said, not a policy shift. But commercial satellite manufacturers--all based in California--now fear the Pacific Rim marketplace will turn a cold shoulder to them just as a historic boom in worldwide demand appears to be ebbing.

“It doesn’t bode well,” said Clayton Mowry, executive director of the Satellite Industry Assn. “You hope . . . that this denial isn’t setting up a long-term pattern. If it is, we’re in deep trouble.”

Hughes officials have warned over the past year that any federal intervention between U.S. satellite manufacturers and their Chinese customers would inflict lasting damage and encourage European rivals to leap into the gap.

The company was informed Tuesday of the administration’s denial.

Commercial satellite manufacturing is one of the few still-healthy sectors of the California aerospace industry, employing more than 10,000. Hughes officials said Wednesday they were evaluating what impact the loss of the China contract would have on staffing.

At stake for the U.S. satellite industry is access to one of the most potentially lucrative markets on Earth. With the world’s largest population, China offers an increasingly sophisticated economy but is limited by a primitive telecommunications infrastructure. And with more than 1.2 billion people spread from remote mountains to dense cities, China is expected to be better served by satellites than wired communications.

What’s more, U.S. manufacturers risk losing other Pacific Rim customers who want to launch their satellites on rockets from China, analysts said. Such customers could turn to European manufacturers and not have to worry whether their U.S. supplier can win licenses from the Clinton administration.

At least 17 launches of Western-made satellites are planned on Chinese Long March rockets in the next five years, industry officials said.

The U.S. decision comes amid Justice Department and congressional investigations into whether Hughes and Loral’s space and communications division improperly leaked sensitive technology to China in connection with an earlier sale.

Hughes has 20 days to appeal the rejection.

Merrill Lynch analysts said Wednesday that they lowered their revenue projections for Hughes by $100 million to $200 million for 1999. El Segundo-based Hughes, a unit of General Motors Corp., said the unit would take a charge of 15 cents per share in the first half of 1999.

Hughes’ space and communications division alone has raked in $615 million in commercial satellite sales to China and Chinese-affiliated companies in the last five years, company officials said.

Even those sales, however, came at a time when the Pacific Rim economy was still heating up and paled in comparison to what the Asian market was expected to yield in the next decade, Mowry said.

Marco Caceres, senior analyst for Fairfax, Va.-based Teal Group, said Pacific Rim customers were expected to launch 73 commercial communications satellites worth $9.5 billion in the next nine years.

But embedded in the rejection of Hughes’ proposed sale to the Asia Pacific Mobile Telecommunications consortium is the prospect that any American manufacturer will face an uphill battle to win permission to sell to or launch from China.

“The sale on APMT really was . . . the opening of the door for satellite sales to China,” said Donald O’Neal, a spokesman for Hughes. “This policy that the government has to punish the Chinese is really creating an opportunity for the Europeans to come in.”

Other Hughes executives have said that not only does Hughes potentially lose the China business, but European firms will be able to leverage their profits to make further inroads in South America and Europe, as well as the U.S.

U.S. manufacturers will have an additional reason to worry next month. Control of the satellite export license process will shift from the Commerce Department--which traditionally has backed such sales and supported the APMT deal--to the State Department.

A senior Commerce official said, “This was a fairly garden-variety project. If it doesn’t meet the standards, it’s hard to imagine what would.”

The official, who spoke on condition of anonymity, also expressed fear that overseas customers would turn away from U.S. satellite makers in favor of European competitors.

“People are committing $500 million here. They want as much certainty of a license as they can get,” he said.

Beijing also broke its silence on the issue late Wednesday, when a Foreign Ministry spokeswoman said the nation’s leadership “strongly resents” the Clinton administration’s decision to block the satellite sale.

U.S. officials on Wednesday said “a key factor” in the rejection of the license was the fact that the consortium included a firm linked to the People’s Liberation Army, China’s armed forces. Critics of this sale and other so-called technology transfers worry that China would use the satellites and launch methods to increase its intercontinental ballistic missile capabilities.

But analysts said the administration would be mistaken to think that keeping U.S. manufacturers out of China would stop Beijing from improving its technological prowess. China could merely buy advanced products from French satellite maker Alcatel Alsthom or Germany’s Dasa.

Denying licenses to U.S. manufacturers “does not seem to have a particular impact on whether the Chinese get better” at launching rockets, said Lehman Bros. aerospace analyst Joe Campbell. “What do we think we’re going to do? Deny the Chinese TV?”

Industry experts also raised concerns about the potential loss of access to China’s launch pads. The world’s launch pads are booked for the next year, and with berths already at a premium, satellite buyers would run into a traffic jam if administration officials make China’s off-limits.

“If you’ve got a license in hand, I don’t think you’re threatened,” said Mowry of the Satellite Industry Assn. “But it comes at a time when we need to have capacity. . . . It’s clearly bad timing.”

Times staff writers Bob Drogin and Tyler Marshall contributed to this report. Times wire services were used in compiling this report.