A recent Reuters article has the lay press reporting that new innovations such as 3-D additive manufacturing (or 3-D printing) and the use of simulation “avatars” could significantly reduce the cost of government space systems. The article goes on to point out that the latest version of one defense satellite cost around $1 billion per copy — a number far above the historical norm for complex government satellites, even considering inflation.
While such reports make for good fluff reading and “Oh, isn’t this cool?” discussions in college freshman engineering dorm rooms, they do not address the structural cost problems that continue to bedevil the space industry. In fact it is questionable whether 3-D printing can significantly reduce the cost of today’s satellites.
The cost of space hardware is actually quite simple. The formula is “[(Bodies x Time) + Material],” then add indirect overhead costs, general and administrative costs, and profit. Since labor costs in the United States are well-established, the only ways to really reduce cost are to:
- Reduce the number of bodies needed for the project.
- Reduce the time for the (mostly) engineering army to march.
- Reduce the material costs.
- Reduce the indirect overhead costs of supporting everybody on the project.
- Find somebody willing to work for lower profit.
Of course one can attack all five of these, but as we will see below, manufacturing labor and materials are not the problem. The cost of materials in a large government satellite today purchased from Big Aerospace is only about 20 percent of the final price. Even a stupendous 50 percent reduction in the cost of all materials in a satellite (which is not going to happen) might yield a 10 percent total price reduction. Given that machined assemblies in a satellite are already highly optimized for weight, it is hard to see how 3-D printing will produce more than a 1 percent cost savings in a modern satellite. I cannot remember, in my entire 36-year engineering career, ever hearing anybody explain that the high cost of the satellite was the “machining department” — and the high cost was discussed almost daily.
In reality all of this is a smoke screen for the real problem — the inefficiencies of Big Aerospace labor systems and high indirect costs piled on top of the bloated labor required due to the massive bureaucratic processes instilled at Big Aerospace over 40 years. These typically comprise 80 percent of the cost of a satellite today, and “touch labor” is a small part of actual costs. The problem is rooted in the nature of federal contracting that has built up since World War II, which makes most government contracting “cost-based.” It is often said: “The cost is … whatever the cost is.” Cost becomes a self-fulfilling prophecy.
As we are now, 70 years later, clearly at the end of the post-World War II era, it is time to re-examine this. During World War II, with no time to compete or delay, the cost-based system was codified into a massive set of volumes (now the Federal Acquisition Regulations, or FAR) designed to make sure that costs were “allowable” — not necessarily lowest or reasonable. The result was a system that virtually guarantees that a government contractor cannot lose money, regardless of how inefficient the labor, process or facility. It was a system designed to produce weapons by brute force, and it worked for the times. Production during World War II broke all records, a lot of contractors got rich, and we won the war. Shipbuilder Henry J. Kaiser came out of World War II as one of the wealthiest men in America, and the Curtiss-Wright Corp. (piston aircraft engines) was one of America’s largest corporations at the end of 1945.
By the late 1970s, when I was an engineering officer at the U.S. Space and Missile Systems Organization (SAMSO, precursor of today’s Space and Missile Systems Center), this archaic World War II accounting process had led to distortions where Big Aerospace contractors routinely charged indirect space factory overhead costs well over 200 percent of direct labor costs for some operations, with some as high as 300 percent and beyond. And this was before hefty “General & Administrative” and Profit charges were tacked on. This is where the costs for executive compensation, private jet travel and luxury hotel lodging are buried. Completely legal, hovered over by a phalanx of corporate accountants and lawyers, and audited by green eyeshades at the Defense Contract Audit Agency against voluminous FAR rules, these costs are never even seen by general officers and department secretaries.
At aircraft suppliers, this led to the now-infamous $600 toilet seats, $150 hammers and $5,000 aircraft coffee pots when procured through the Big Aerospace supply chains. Try as they might, Big Aerospace executives could not explain these indirect costs to the common man who understood exactly what he was getting for the price. Of course they couldn’t. The reason was obvious — they had lost control of indirect costs. But there was virtually no penalty for doing so.
Protected by the “allowable cost”-driven system, a Big Aerospace chief executive’s only worry (aside from which tux to wear to the next month’s government-industry gala) was capturing and keeping the long-term production contracts that serve as the pillars underlying the major aerospace companies. Once a long-term job was won, everything else fell back into the comfortable regulatory and formula-based cradle-to-grave aerospace corporate welfare system. Even repeated technical and programmatic failures and extreme cost overruns would be survived as long as one held onto the contract and there were “Lessons Learned.” Big Aerospace got very good at giving “Lessons Learned” presentations to finger-wagging generals and department secretaries — many of whom joined the boards of the same companies after retiring, riding the so-called revolving door.
This led to two gross distortions:
First was the effective “regulatory capture” of the entire government procurement process by Big Aerospace, who borrowed from the original World War II era “government entrepreneur,” Henry J. Kaiser, and his D.C. attorney, Thomas “Tommy the Cork” Corcoran, widely acknowledged as the first Washington superlawyer, and the real pioneer of big-time government lobbying. Supplied with government funds, Kaiser led the consortium that finished the Hoover Dam ahead of schedule and below budget, and he unleashed a wave of innovation in shipbuilding and strategic metals production during World War II, setting many production records that still stand today.
Big Aerospace used Corcoran’s lobbying model later to flood Washington with hundreds and even thousands of highly paid influencers and lobbyists, even setting up company political action committees, carefully skirting the rules against contractors making direct campaign contributions. Practically every firm on K Street — the center of lobbying influence in Washington — had Big Aerospace as a client on multiple accounts. Big Aerospace loves procurement complexity, as it creates a “barrier to entry” to more efficient but less lobbying-proficient upstarts that are successful in so many other U.S. industries.
The second gross distortion was the consolidation phase of Big Aerospace in the 1990s, which made matters worse. For example, this reduced the competitive space playing field from 13 capable prime contractors to only six by the mid-1990s. How better to maintain and increase procurement capture than to eliminate competitors? Several highly capable space hardware production facilities and the associated workforces were destroyed in the process, with RCA’s New Jersey satellite plant being one very memorable example. The promised consolidation cost savings never arrived, and with less competitive pressure, unit costs per satellite and per launch vehicle rose dramatically.
The 1990s consolidation was eventually halted by the defense undersecretary for acquisition, technology and logistics, Jack Gansler, who originally hailed from academia, who was not beholden to anyone, and who wisely thought more consolidation was not necessary, lest the U.S. industry start to look too much like Europe’s government-extension contractors. This may rank as one of the bravest and smartest decisions ever made by an AT&L undersecretary.
One of the few World War II industry players who refused to move to Washington was Howard Hughes. Gleefully labeled a crackpot by many lessor competitors, Hughes was the real innovator, ultimately forming Hughes Malibu Research Labs, Hughes Aircraft, Hughes Helicopters, Hughes Space and Communications, Hughes Electro-Optics and many other innovative companies. A Collier Trophy winner in 1938, Hughes was always the iconoclast, and his teams consistently out-innovated cumbersome competitors.
Often unhinged from the cumbersome traditional government process, Hughes engineers invented or improved the maser; built the first atomic clocks, which enabled GPS today; invented the first geosynchronous satellite; perfected synthetic aperture radar; and of course built the famous “Spruce Goose” flying boat. Deprived of aluminum during the war, Hughes built the entire plane out of birch. He laid the foundation for today’s Apache helicopter at his original Culver City, California, helicopter plant, and the recent $48 billion DirectTV deal with AT&T and DirectTV itself would not have been possible without its roots in Hughes Space and Communications.
The message is: Innovators march to a different drummer than hourly workers in government-regimented factories. Big Aerospace loves “process” as it sees this as the way to control everything, and once again to increase barriers to competition. It also costs a literal fortune with all of the layers of bureaucracy required to implement it — for example, the seven independent signatures that may be required to release a single mechanical drawing to the fabrication floor or a specification at a Big Aerospace company.
The Cold War era executives who consolidated the aerospace industry that we have remaining today must be stammering “Get off my lawn!” from their retirement as they watch small, private companies, created by entrepreneurial chief executives such as Elon Musk and Stan Dubyn, like a modern-day Hughes and Kaiser, running circles around plodding traditional companies in both launch vehicles and satellites. Taking a page right out of the playbook of Hughes himself, these and other entrepreneurs simply do not take “no” for an answer. Instead of hiding behind anti-competitive barriers and a tall stack of FAR volumes, they are innovating, hiring the best and brightest, holding teams accountable and getting top performance from their people. These new companies are building and buying locally while achieving lower costs and high performance. Maybe those younger companies can use 3-D to an advantage, but no company can achieve material advantage with 400 percent labor-to-material ratios in design and manufacturing, and then 200 percent indirect costs piled on top of that.
What I see in these younger companies is a lot of careful attention to detail by management, streamlined decision-making, lean staffing levels and modern, efficient facilities. For decades, Big Aerospace has touted one buzzword gimmick after another to make it seem more effective while prices spiraled higher: Perhaps some readers have forgotten TQM (Total Quality Management); CAIV (Cost as an Independent Variable); Six Sigma Black Belt training; ISO (International Organization for Standardization), the Europeanization of otherwise perfectly good American quality standards; and one of the worst, TSPR (Total System Performance Responsibility) — uh, right. Another good buzzword was IMP/IMS (Integrated Master Plan/Integrated Master Schedule). IMP/IMS was touted by Big Aerospace as the gold standard for program management and cost control on the F-22 fighter program. We all know how successful that was, with the program now canceled as one of the most expensive aircraft ever per unit cost, and with young pilots still wondering if the onboard oxygen system will work properly when they need it.
Those buzzword initiatives simply papered over the real problem — bloated “marching army” staffs driven by inefficient processes and slow decision-making and high overheads from indirect people who don’t provide enough productive output. All of these very expensive people happily charge away their days on “allowable cost” accounts — all perfectly legal and all very expensive, just not efficient. While the rest of the Fortune 500 has slimmed and trimmed those indirect cost inefficiencies, the coddled traditional aerospace and defense complex has much further to go.
Big Aerospace talks about saving a billion dollars by trimming its bloated processes. Instead, government should contract more with entrepreneurial space companies that are already lean. Give the entrepreneurs the next billion and watch them set the world on fire. That is pocket change for Big Aerospace — it will never miss the money. The entrepreneurs will create whole new exciting chapters for space.
W. David Thompson is the chief executive of Diversified Energy Corp. and a fellow of the American Astronautical Society.
