Profile: Challenges and Opportunities

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  Space News Business

Profile: Challenges and Opportunities

By WARREN FERSTER
Space News Editor
posted: 06 March 2009
08:47 am ET






David Melcher

President, ITT Defense Electronics and Services

Space is not the biggest revenue generator at ITT Defense Electronics and Services, accounting for some 16 percent of sales in 2007. But the technology can be applied across ITT’s other defense activities and also helps keep the company diversified through business with civil agencies like NASA.

ITT in 2004 purchased Kodak’s remote sensing business, a longtime provider of highly capable satellite imaging cameras and imagery processing systems. The acquisition doubled the size of ITT’s space business, which traditionally has included GPS payloads, space-based environmental sensors and support for infrastructure including the U.S. Air Force’s launch ranges and NASA’s Deep Space Network communications system.

David Melcher, a retired U.S. Army lieutenant general who took the reins of ITT’s defense sector in December, expects space revenue to be stable in the upcoming years. The company’s backlog includes the main sensor for the next generation of geostationary weather satellites and the payloads for the Air Force’s GPS 3 satellite navigation system.

ITT in October nabbed the $1.26 billion NASA space communications network services contract, but that award is under protest by the losing bidder and incumbent, Honeywell Technology Solutions. ITT is still awaiting a decision on the protest but hopes to begin work on the contract in the coming months.

Melcher also sees opportunity for growth in the emphasis being placed on Earth observation and climate research by U.S. President BarackObama and Congress. The $787 billion economic stimulus package recently signed into law includes some $400 million for NASA’s climate research activities, for example.

Melcher spoke recently with Space News Editor Warren Ferster.

Is there any one industry trend that you’re most concerned about?

The thing that I’m most concerned about is the health of the industrial base that supports our space efforts because we have many unique capabilities where companies and industries have sort of collapsed over time. Now we have in some cases very few providers of those capabilities.

Isn’t industry consolidation a healthy response to market reality?

It’s healthy to a point, but it is unhealthy when you get to the point where you have so few suppliers that if any one of them goes, you’re now at a single-source solution. We see that with our own supply chain, where in this time of economic crisis certain providers are experiencing difficulty because we alone cannot give them enough business to make sure that they remain self-sufficient.

How well positioned is ITT to weather a downturn in defense spending?

With respect to our space systems division, and the work that we’re doing in support of service contracts, supporting space efforts, I think that’s going to be a relatively stable environment here at least for 2009 and into 2010. And I’m hopeful that with the president’s new emphasis on Earth science programs and so forth that that will be a positive thing for some of the capabilities that we have here at ITT.

Have bid protests become too common in this industry?

Industry has a responsibility to submit responsible bids for contracts and to meet key performance parameters. Government has a responsibility to expeditiously try and deal with protests as they arise because if it becomes the norm – that the protest is the way to go – we’re going to not only clog the system with multiple protests, but we will inhibit the intent that the government has with respect to providing the right capabilities. I think you see across the Defense Department and other agencies that incidences of protests are on the rise. Our internal philosophy is we really would not intend to protest a contract unless we felt that there was in fact injury that needed to be remedied.

How do you view space strategically within your sector?

We’ve been looking for ways across ITT’s capabilities to leverage the best technical abilities out of our Space Systems division for other purposes. That has a dual benefit, in that when the work is slow on the platform side it gives us other outlets to keep our employees engaged because the preservation of the industrial base is a key issue for all of us in the years to come.

Is your space business growing, shrinking or flat relative to the rest of your company?

The space business appears to be relatively flat with potential for some growth based on what the new administration intends to do with respect to climate research.

I look at the overall budgets with respect to the Department of Defense and NASA and other agencies that we might deal with and the fact is there are going to be so many competing demands due to the economic crisis that it is going to be hard to see substantial growth in those areas of the budget over the next couple years.

Which of your space-related businesses is best positioned for future growth?

The imagery analysis and climate sensing areas are poised for growth. The court is still out on what will happen with respect to imagery in the future and the direction that might take. GPS is an area of some potential growth, given that there’s always going to be a need for that kind of capability.

Does the government’s lack of progress on a next-generation national imagery collection system concern you?

I think it certainly is an area that is going to receive some scrutiny over the next few months and years. I do believe that there are many constituencies who want to make sure that we have the national capabilities that are required to support all of our defense needs, the warfighters and others, and I think some decisions need to be made to allow that work to continue because not making a decision is in fact making a decision with respect to the industrial base.

How can the military and intelligence community come to terms on space system requirements?

One of the first steps is to make sure that both views are represented well and what people say they need is actually balanced against what they have typically asked for in the past. I think when you do that kind of an analysis you begin to see the patterns of what kind of things are actually needed, not only by our warfighters but also by our intelligence community. And you look for the areas of overlap and try and make sure that you are buying the capability that satisfies both needs in the most economical fashion, but not in a way that precludes either from being successful.

What is your prescription for fixing the Pentagon’s space acquisition system, which most agree is dysfunctional?

I think the first step is to get a handle on requirements and make sure that they’re real, and to look for the kinds of solutions that are technically feasible, instead of reaching for those solutions that are way beyond the current state of technology today. I think that will result in more control over costs and a better solution with respect to what we acquire. I think there will be a ratcheting back of acquisition attempts for big programs as a result of the cost factor alone in the coming years because the budgets won’t sustain them.

Where should export reform rank in terms of administration priorities?

We’ve made some inroads with respect to space-based capabilities in places like and but there’s a much wider market for those kinds of capabilities and our challenge is to be able to responsibly sell them without breaching our responsibility to preserve our technological advantages.

If there is not the level of work here at home to support maintaining our capabilities, which are unique and highly technical, then perhaps we should be given some dispensation to seek opportunities abroad.

Is ITT eying any acquisitions to strengthen its defense or space business?

Over the last six months to a year, the credit markets have been pretty tough, but I think the day will come when the door will open back up. We’re always looking for ways to bring on new capabilities and to increase our viability for the marketplace that we think will exist 18 to 24 months from now after the new administration’s priorities have had a chance to settle in.

We’re right in the middle of our strategy development process for this year which we’ll roll out to our leadership around June. And as a part of that our Space Systems division is looking at what they believe they need for the future and then we’re looking at the same thing in partnership as it relates to the whole defense portfolio.

Does vertical integration by the big prime contractors concern you as a supplier of payloads and services?

As defense budgets get tight and larger platforms begin to get peeled away from the procurement picture, some of the larger primes will be forced to look at how they are vertically integrated and what capabilities they want to try to keep in house. I think it also will mean that the large primes will potentially move into some other markets that they traditionally have not been a part of, which could end up squeezing companies like ITT that compete in those markets. Our challenge is to continue to try and be the best provider that we can possibly be so that we will be able to compete on an even basis even when primes begin to look at parts of the business we do.