For roughly a decade, the global satellite and space industries have been humming along, with annual revenues and profits for most major companies up sharply year after year. The financial success has been fed in no small part by government space spending. This is particularly true in the United States, with its Department of Defense engaged in major procurements for both proprietary satellites and commercial satellite capacity to support military communications and reconnaissance in the Middle East and Southwest Asia.
If 2010 was a record in worldwide government spending for space (at $71.5 billion), the growth from the previous year was a bare 2 percent — down sharply from an average growth rate of 9 percent between 2004 and 2009. Why the dramatic change? The reasons are diverse.
The U.S. dominance in military space expenditures and the cyclical nature of public investment in space systems explain most of this slowdown. The Department of Defense (DoD) has been investing heavily to renew and expand its systems in almost every area (communications, navigation, meteorology, imagery intelligence, electronics intelligence, signals intelligence, etc.) where satellites provide unique capabilities. This investment cycle is now completed and should drive the DoD to cut its space budget.
The economic crisis that affected the world economy in 2008 has also finally caught up to the government space sector. While the effect was delayed, those who claimed that space was immune from the crisis were ultimately wrong. Most governments have had to face tough economic conditions. Financial markets have questioned the solvency of certain national governments, creating exceptional pressure on those countries to manage their debt and discretionary spending. In addition, the extraordinary additional funding that several governments allocated to space projects to stimulate both innovation and their national economies has mostly come to an end (France is a notable exception). Most of these countries have returned to even more stringent spending. This has already led to cutting nonpriority budget items and could potentially lead to cutting space programs.
So, after years of continuous growth in government spending, the space industry has to deal with budget cuts. The situation is not entirely new. Between 1989 and 1995, the U.S. space industry faced a similar situation when the DoD endured a 40 percent budget cut and NASA funding stagnated at $14 billion. At that time, U.S. satellite manufacturers successfully focused on the booming commercial market, with their commercial space revenues climbing to become dominant over their government business. The European space program has been living with tough budget constraints for two decades due to limited spending availability from European governments. This led European companies to develop new contractual and funding mechanisms for government projects, which ultimately shaped their business strategies through public-private partnerships (PPP) and private finance initiative (PFI) contracts. While U.S. firms focused on domestic government business, European space companies became more competitive in the commercial marketplace through moves to become more cost effective and responsive to commercial customers.
Now governments and industry need to find inspiration from the past and look for new ways of facing these leaner times. Some governments may try to limit cuts to space programs by using national pride-type arguments. But governments and companies operating in the space sector are going to need to find more creative ways to overcome what are expected to be significant government funding limitations. These new ways of doing business could include:
- Tapping into dynamic growth from emerging countries. The international landscape for space has changed radically, with 50 countries investing in space technologies today compared with only a dozen 20 years ago. With at least 20 emerging space countries planning to acquire domestic communications satellite systems and 14 planning to launch 35 Earth observation civil systems in the next decade, significant opportunities exist for the industry. The recent $1 billion contract Boeing received from the Mexican government for the Mexsat system is an example.
- Finding more cost-effective solutions for program development and implementation. The industry has developed a wide range of alternative contract mechanisms for government procurement, including PPPs, PFIs, service contracts, hosted payloads and Commercial Orbital Transportation Services (COTS). Not all of these models have yet demonstrated a clear benefit to the public-sector customer, but their use in an ever-wider range of applications, from satcom to manned spaceflight, show the growing interest from government organizations to test and implement alternative procurement solutions for systems and/or services.
- Using international partnerships to share cost and stimulate innovation. Spending constraints will continue to push governments to join forces to implement programs that may not be affordable alone. While the international space station is a prime example and brought together major international cooperation efforts, smaller-scale cooperation programs also have been successful, such as the Disaster Monitoring Constellation, which combined the efforts of three emerging space countries. Space exploration should be the next big area for intergovernmental cooperation. Many other opportunities to share cost and benefits exist and are under consideration, including the Canadian PolarComWeather satellite program, which may include foreign contributions; dual-use satcom systems for multiple European nations; and multinational space security/space situational awareness.
- Using private-sector partnerships to demonstrate and test technologies. While governments are accustomed to sponsoring demonstration missions with their national industries, examples have emerged of the private sector leading initiatives to demonstrate solutions before selling to the governments. The agreement recently signed between MDA Corp. and is a good example, with Intelsat agreeing to be the anchor tenant of MDA’s Space Infrastructure Servicing (SIS) vehicle. SIS will demonstrate the technical feasibility and economic viability of refueling and servicing geostationary satellites, with the ultimate objective to market the solution to the U.S. government. In the coming years we could see more of this as industry agrees to bear costs or provide funds to prove new business concepts and/or technologies.
The government spending spree on space is over for most leading space nations, and this could be good news for public finances, taxpayers and even program efficiency. Scarcity calls for tighter control and smart ideas, which ultimately should benefit both the public and the private sectors. The smartest innovations always come when facing a challenge, and the space industry is now facing a big one.
Steve Bochinger is president of Euroconsult North America.