U.S. export controls, new foreign competition, limited access to foreign markets, low profit margins and a lack of adequate capital, are among a long list of warning signs outlined in a new study that concludes many subcontractors in the U.S. space industry are in trouble.

While prime contractors are generally healthy, the subcontractors they depend on will need a coordinated and concerted effort from government and industry to restore them to health, according to “The National Security Space Industrial Base: Understanding and Addressing Concerns at The Sub-prime Level,” a white paper prepared by the Colorado Springs, Colo.-based Space Foundation at the request of the Defense Department. DoD sought a separate assessment of the health of subcontractors after submitting a much rosier report to Congress in February on the health of the prime contractors that dominate the aerospace business.

“The space industry base used to be the star of the American economy. If that area [subcontractors] is hurting, as a nation, we risk losing a lot.” said Jay DeFrank, the Space Foundation’s director of research and analysis and the head of its Washington operations.

Michael Beason, chief executive officer of the Supplier Excellence Alliance, an Irvine, Calif.-based nonprofit made up of aerospace, defense and space contractors, subcontractors and suppliers, said a recent trend in the U.S. aerospace business that potentially benefits subcontractors is the shift of the primes away from manufacturing so they can focus on being lead system integrators. However, while that potentially moves more business to the subcontractors, many firms will have a hard time adapting to the increased business, Beason said.

“Small to midsize suppliers invest less money in improvements such as lean manufacturing practices and work-force training, because they’re smaller and don’t have the resources,” Beason said. This means, Beason said, that when they’re forced to adapt and improve their operations, they sometimes move slowly and lose business as a result.

Beason noted that the increasing globalization of the economy also is working against U.S. suppliers because their overseas competitors have much better access to capital. And by contrast, when U.S. firms try to expand overseas, they are handicapped by strict U.S. export control regulations.

DeFrank believes that because space is a highly risky business with relatively thin profit margins, the smaller-tier companies have little capital to make improvements. “Because the margins are slim, you don’t draw investors,” DeFrank said.

If the U.S. government reviewed its current export controls, they might find that some of the technologies on the list of those not permitted for export already are widely available internationally, which would give U.S. suppliers more opportunities to compete, the report says. It also advises that the Department of Defense and Congress work together to make the export licensing process less cumbersome.

DeFrank said that a “cost-benefit” analysis is needed when examining export controls to see how much the current restrictions aid national security, compared to how much they hurt U.S. industry.

The likely fallout from the suppliers’ struggle will be that only the strong survive, Beason said.

His own organization is working to see that the five states with the most industry suppliers in them — Texas, Florida, New York, California and Connecticut — devote funding towards helping their businesses. All but Texas already have committed funds, Beason said.

Comments: mfrederick@space.com