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Space industry hit hard by military spending downturn

Jan. 24, 2018

Category: space business

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WASHINGTON — The defense spending downturn that started in 2010 was tough on the space sector, according to a new study by the Center for Strategic and International Studies. Pentagon contracts for space systems dropped from nearly $10 billion in 2009 to just over $6 billion in 2016. Especially steep were cutbacks in space research and development contracts — from $6 billion to about $3 billion.

When the Budget Control Act’s across-the-board spending cuts — known as sequestration — started take effect in 2013, Pentagon contract obligations plummeted by 15 percent compared to the prior year. And annual defense contracts fell on average 23 percent between 2013 and 2015.

Even though military spending collapsed between 2009 and 2016, it was not all bad news for the defense industry. Some segments of the business, like ship and aircraft manufacturing, saw fluctuations but came out OK. Others are in free fall, like ground combat vehicles.

In the space industry there were some unique circumstances. CSIS analysts pointed out that much of the Pentagon’s spending on space activities shifted from actual products — like rockets and satellites — to launch services. Over the post-Budget Control Act downturn, contracts for space products plummeted by 56 percent, R&D fell by 47 percent, but during that same period, annual average service contracts grew 258 percent. That happened because in 2013 the Air Force renegotiated its agreement with United Launch Alliance under the Evolved Expendable Launch Vehicle (EELV) program to acquire launch vehicle services.

“The re-categorization of EELV as a service in 2013 skews the space systems top line trends,” said the CSIS report. The EELV averaged over $2 billion in annual contracts at the start of the drawdown. Most of the military space work, about 70 percent, goes to the industry’s top five firms: Lockheed Martin, Boeing, Northrop Grumman, Raytheon and General Dynamics. That share was even larger (about 74 percent) before the downturn.

The reduced spending “negatively impacted vendors of all sizes,” CSIS said. Small businesses saw a modest increase in contract obligations but they only account for less than 1 percent of total space systems products contracts.

Up until the Budget Control Act cuts started, the number of space systems vendors had been growing — up 40 percent since 2005. The space vendor population fell from 750 to 525 during the drawdown. Overall, 17,000 vendors exited the defense business from 2009 to 2016.

The Trump administration does not seem to be overly alarmed by these numbers. Yes, the defense industry is shrinking, but there is booming technological innovation to be seized from the broader national economy, and that it especially true in the space sector, administration officials argue.

The Budget Control Act and sequestration have been damaging, but that is only part of the problem, said Eric Chewning, deputy assistant secretary of defense for manufacturing and industrial base policy.

In the National Security Strategy that President Trump unveiled Dec. 17, a new term was coined, the “national security innovation base.” That is “different than the defense industrial base,” Chewning said Monday at a CSIS panel discussion.

“This is an important reframing of how we’re thinking about the broader ecosystem,” Chewning said. There are large and small commercial technology providers, and universities. “The defense industrial base is a part of that,” he said. “We need to retool our broader defense apparatus for ‘great power competition.’”

Great power competition is the administration’s catchphrase for the geopolitical and military challenges posed by rivals China and Russia. “That requires us to rethink how we source technological advantage,” Chewning said.

Former Pentagon procurement chief Frank Kendall, who served in the Obama administration, pushed back on the assertion that commercial technology can make up for reduced government investment in defense research.

“The reality is that many defense products are unique, they take years to develop,” Kendall said. “It’s very different from the commercial world.” The military buys “small quantities, with long lead times, and systems are very expensive.” In many sectors of the defense business, he said, there is little or no economic incentive for the commercial industry to invest.

Original news: http://spacenews.com/space-industry-hit-hard-by-military-spending-downturn/