Profile: A Subprime on the Rise

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  Space News Business

Profile: A Subprime on the Rise

By WARREN FERSTER
Space News Deputy Editor
posted: 16 August 2007
11:07 am ET





David Smith, Vice President and General Manager,

Michael Fatig, Vice President, Business Development

EMS Defense & Space Systems









EMS Defense & Space Systems is not the biggest unit of Atlanta-based EMS Technologies, but during the second quarter of 2007 it was the fastest growing. For the three months ending June 30, Defense & Space Systems, which builds satellite antennas and subsystems for government and commercial customers, saw a 28 percent sales increase over the same period last year, from $11.5 million




to $14.7 million.



David Smith, the division’s vice president and general manager, expects that growth to continue, driven primarily by defense sales, which account for about 75 percent of his business. The company recently delivered anti-jamming gear to Northrop Grumman Space Technology for the U.S. Air Force’s Advanced Extremely High Frequency (EHF) system of secure communications satellites and also is angling for a role in the follow on Transformational Satellite Communications (T-Sat) program.

On the commercial side, Defense & Space Systems supplies components for XM Satellite Radio’s satellites as well as antennas that enable commercial airlines to receive live television. The company also is marketing a commercial version of its anti-jamming, or nulling, antenna system and is negotiating its first sale of that technology with




the Middle Eastern Yahsat venture.

Smith, along with Michael Fatig, EMS Defense & Space Systems vice president of business development, spoke recently with Space News Deputy Editor Warren Ferster.










How much interest is the commercial satellite market showing in your nulling antennas?





Smith:

Obviously there’s not a lot of companies buying a lot of systems. The traction we’re getting is that they’re setting themselves up in the event that current events dictate that they need to do something. They’re educating themselves; they’re making




requests for information, for costing – what the system actually would entail, footprints, power utilizations, frequencies. We’re




having technical discussions with them.





Fatig

:





We’ve had the operators call us …




and we also see the builders coming to us.








They’re not going to spend the money and add that cost to the satellite until their users demand it. And their users are going to demand it when the frequency of events affects the quality of service.




Given how much the Defense Department relies on commercial satellites, should the government help operators pay for nulling systems?




Fatig:

My




contention is that they have. What we offer is a government-funded and




flight-heritage-proven system.











What percentage of commercial satellites are candidates for your nulling antennas?





Fatig

:

We think about 25 percent




of the commercial satellites




will be in regions where they fear threats and want anti-jam and/or have the onboard multi-beam function.






So it’s a geographical and a technical question?




Fatig:

It’s a combination of the two. If you’re over North America,




there’s less chance of a threat so they may not fund the mitigation of the threat.




We




think




regions like the Middle East, Africa, maybe Sri Lanka,




are likely to be early adopters of this technology. Only




the onboard multi-beam antenna systems are candidates for our nuller. Others can use ground mitigation




techniques.




























You recently announced your membership on the Space Supplier Council, which is advising the Defense Department on ways to maintain the industrial base below the prime contractor level. What are some of the issues companies like yours are facing?








Smith:

Everybody goes and talks to the primes, but if you begin to really




peel the onion on issues that have been found on satellite programs, failures that have happened in flight,




typically those failures are from a second- or third-tier subcontractor.




We’re trying to do our part to mitigate some of the issues or at least initially make the industry aware of the difficulties that the industrial base at the subprime level is dealing with.







Up until




T-Sat,




there were a




lot of fixed-price contracts where




the risk would certainly dictate that a contract be cost plus. It’s a very simple issue




that the primes just have not been very yielding on at all. And it’s starting to have an adverse affect on the industrial base.






Can you be more specific?




Smith:

The primes are identifying risk and they’re pushing the risk down to the subprime level instead of trying to mitigate the risk at their level and they’re doing it under fixed-price contracts. They’re doing it with companies that are in a position where they really can’t afford to walk away from the work strictly because it’s a fixed-price contract instead of the cost plus.





Fatig

:

I call it the pinch effect. Bottom line is our customers, the consolidated tier-one




primes, have an incredible amount of buying power. A program of the magnitude of T-Sat




comes along once every four or five years. If I don’t play on T-Sat, I’m out for another four of five years and my competitor is enabled.




They know that.




Alternatively, we don’t have a lot of buying power over our supply chain because we buy a lot of diodes and resistors and stuff




from guys that serve commercial markets where we come in with a special space requirement at low volume and they say, “you’re a pain in the back.”




One strategy if you’re a prime is




– and 50-70 percent of the hardware comes from suppliers – “let me put all that under fixed price and guess what, the cost doesn’t grow.” When




there’s a cost overrun, guess where it comes out of? It doesn’t come out of their budget anymore, it comes out of our




margin.









Are

the International Traffic in Arms Regulations (ITAR) exacerbating the problems you’re having at the subprime level?








Fatig

:

It’s




well known




that ITAR




has restricted U.S. firms’ access to the international market. Any time you shrink a market, there’s less profit, less opportunity in that market. Space already doesn’t have enough volume so any time you shrink the volume, there’s a less business case.











What’s different about T-Sat in terms of how risk is being managed?






Smith:

With




T-Sat the Air Force has




come to




industry and said, “we have this much money and we need to fit the technology to meet the requirements




into this much money.” Instead




of just putting the requirements out




they’ve kicked programs off strictly from a risk-reduction point of view. We’ve actually received millions of dollars to support doing only risk-reduction analysis and mitigation.







Back in the 1990s,




they had pushed risk down to the contractors. Now they’re saying “we’re going to immediately share in the identification of risk and the mitigation and we will pay you to do the analysis to tell us what the risks are in these specific requirement areas.”





Fatig

:





In the past, it was,








“compete and I’ll hire




the lowest-price guy and then go do it.” Now the government’s saying “here’s some money to do risk reduction then come back and prove to me that the risk is retired.”











You mentioned your T-Sat risk-reduction work for Boeing. What about the










Lockheed




Martin-Northrop Grumman team?










Fatig

:





They paid us to do some work as well, but we have a smaller role because they’re doing more in house.




Boeing seems to have one of the more sophisticated, modern supply-chain strategies. They’re really trying to partner and co-engineer and risk-reduce with suppliers like us.









Who are your main competitors, and does Com Dev’s decision to open a plant in California to capture Defense Department contracts concern you?






Fatig

:

The




main competitors are the in-house capabilities of the primes and some direct competitors, Com Dev being the most prominent. And Com Dev USA’s




move was a significant, fairly offensive move that we’re watching.





EMS is providing an antenna for NASA’s Mars Science Laboratory rover. Where does civil space fit into your business plans?









Smith:

It’s good work,




interesting work, but the quantities obviously are very low. But that’s




indicative of the level of technology that we have. Our




best reputation is when you have a very specialized issue that you can’t seem to find a solution for, people come to EMS.




The




Mars




application was something very specialized – it was sort of a whimsical idea and they came to us and said, “hey do you guys think you could do this and give us that,”




and our guys sat around the table for like 35 minutes and said “sure we can” and basically sketched out a system




that in essence came to life.





Fatig

:



We




don’t really aggressively market to NASA.




I think the exploration initiative longer term has promise




for EMS




, but right now it’s about building the launch vehicle




and the crew capsule to get there and




there’s less money going into science.




But I think as the exploration initiative takes off and you’ve got lunar bases, you’ve got to have communications on the Moon.




Who’s




one of the better companies to do that than EMS?