Profile: Ted Gavrilis
Outgoing President, Lockheed Martin Commercial Space Systems
Ted Gavrilis became president of Lockheed Martin’s commercial satellite division in 2000, at end of the industry’s biggest-ever boom, and is leaving as it emerges from its biggest bust.
He would prefer to have been dealt a different set of cards. Instead, he was forced to consider his company’s possible exit from the business or a merger with one or more competitors.
Lockheed Martin ultimately decided to stay in the game after taking a 30-35 percent cut in its costs.
Throughout the difficult period, Gavrilis earned a reputation as one of the industry’s most good-natured realists. While others referred to a buyer’s market, Gavrilis bluntly labeled prevailing contract terms and conditions as “a belligerent buyers’ market.”
Even as he retires, Gavrilis is warning that the current market continues to feature imbalances between customer and supplier that make it unstable in the long term. He spoke with Space News staff writer Peter B. de Selding.
There has been a recovery in the market in terms of satellites ordered in the last couple of years. Is the industry returning to health?
This remains a flat market by the standards of the 1990s. You have ups and downs within a band that is between around 15 and 22 satellites. The industry as a whole is healthy, but not robust. Robust is when you have the major actors making a reasonable profit.
That is not yet the case with satellite manufacturers?
Put it this way. If you are asking: Should we be in this business if we are just in the commercial market? Any sane businessman would have to say ‘no.’ But there is a symbiotic relationship between the government and commercial businesses that justifies a continued presence. So we’re going to stay in the business, just as we have for the last 50 years.
Is overcapacity as much of a problem now that the market has recovered somewhat and some of the manufacturers have decided to specialize in market niches?
For me the numbers remain what they have been since the projections of the 1990s proved to be unrealistic. There should be no more than three commercial satellite manufacturers worldwide. But consolidation only makes sense if one plus one equals less than two. Otherwise, why do a merger?
You were close to a deal with Loral several years ago, and you had talks with others as well. What happened?
I can’t discuss specific negotiations. Suffice it to say that nothing seemed to make sense on that front and consolidation did not occur. The next best scenario would have been a merger of the two main Europeans into a single company. After that, perhaps the U.S. market would have resolved itself — we almost had that with bankruptcy filings [by Loral]. These things did not occur either.
So what happened?
Boeing said it would stay on the sidelines, bidding only when it made sound business sense. On our side, we reduced our cost structure by 30 to 35 percent. We consolidated our operations on the East Coast to remove the dual infrastructure we had created to prepare for a market of 60 commercial satellites per year, and that took 30 to 35 percent of the costs out of the equation. It’s a simple equation that says if you cannot get the prices you require in the market, you focus on credibly cutting infrastructure or you get out of the business.
How do you explain that some companies say they are profitable while winning lots of commercial business even as prices have remained relatively low?
Everyone has his own level of risk tolerance — both financial and technical. From a mission success point of view, I can tell you that at Lockheed Martin, whether we’re working on a program costing $100 million or $1 billion, the same bells ring the same way. So we are very careful to evaluate the technical and financial risk and if the market is purely price-driven, we’re going to be more selective.
Has the commodity aspect of the business affected even high-end satellites?
I think it has, and right now I don’t see any killer applications on the way that would change the picture.
Why not withdraw from the commercial side and concentrate on higher-margin government satellites?
I spent 31 of my 37 years in the business working on government satellites. We were constantly quizzed by our government customers: Why can’t we bring more of a commercial mindset to the work? They were thinking of reduced cycle times, quicker delivery and fixed pricing for the recurring phase of contracts. Being involved in the commercial business still brings value to the government work.
Do you have an example?
MUOS [Mobile User Objective System] represents a substantial reduction in production time compared to similar programs.
If you went back to the military satellite production side of the business, what would you propose after six years on the commercial side?
There ought to be ways to reduce the cycle times credibly. But it’s a two-way street. I am not saying industry should absorb the non-recurring risk of government systems with cutting-edge technology. But there is a way that allows for that kind of risk to be mitigated while bringing commercial practices into the picture.
The differences between government and commercial remain considerable, of course. Commercial products are typically 90 percent recurring costs, and 10 percent non-recurring, associated mostly with repackaging challenges.
The government side has a lot more non-recurring, driven by technology development.
Launch-service providers are able to command higher prices today, per kilogram into orbit, than a few years ago despite the continued overcapacity. What distinguishes launch from satellite production that has made that unfeasible for satellite builders?
The supply/demand disparity that exists on the satellite side has not existed in the same way on the launcher side. If you have a launcher that is down because of a failure, or delayed you quickly develop a pent-up demand, a kind of backlog that needs to be worked down. This does not exist on the satellite production side.
