Chuck Tabbert, vice president of sales and marketing at Ultra Communications, wanted to find out how export regulations on U.S.-made satellites affected his fellow semiconductor manufacturers. So he asked them three questions.
The first two questions asked companies how much of their regulated technology is available outside the U.S. The answer: most of it. The second question asked how much money they could make over the next five years if the government reformed export regulations.
The answer: $5 billion. And that’s for a component that accounts for just five to 10 percent of a complete satellite’s value.
American satellite manufacturers say they are losing their competitive edge because they face tougher export regulations than their European and Japanese competitors. The regulations are meant to keep countries like China from obtaining U.S. technology, but they also make it overly complicated to buy even the simplest satellite parts and components.
“What we’re basically doing is we’re handicapping the U.S. aerospace industry by putting some onerous reporting and licensing requirements on our products that are openly available throughout the world,” said Stanley Kennedy, a senior vice president and general manager at satellite maker Comtech AeroAstro.
At the same time, the Defense Department has slashed spending, reducing the industry’s most important revenue stream. Now, some parts and components companies are exiting the industry, putting the strength of the U.S. industry in jeopardy.
On May 17, the Armed Services Committee in the House of Representatives passed an amendment to the 2013 defense budget that gives the president authority to reform satellite exports.
The industry welcomed the news, but more than 10 years of tough export controls have taken a toll on satellite companies.
In 1995, American companies made 75 percent of all satellite sales, according to a recent report from the Aerospace Industry Association. By 2005, U.S. market share had plummeted to 25 percent. In a survey, AIA members said the regulations cost them $20.8 billion in revenue per year. Those losses prevent companies from creating about 27,000 jobs annually.
The U.S. regulations make European-made satellites, parts and components more attractive. Some foreign companies market their satellites and components as ITAR-free, a reference to the U.S. International Traffic in Arms Regulations.
The rules date back to a 1998 incident in which two American companies, Loral and Hughes, were accused of giving China sensitive information. A congressional commission concluded that the information could help China advance its ballistics missile program.
The commission responded by transferring jurisdiction over all satellites exports from the Commerce to State Department.
“The concerns out of that have actually held every transaction hostage to the detriment of the space industrial base, and ultimately the detriment of national security,” said Patricia Cooper, president of the Satellite Industry Association.
State’s policy is to classify every satellite part as munitions — even screws, bolts and brackets. When American companies sell munitions, they must make two assurances: they can track those munitions and they will only sell to 36 approved allies.
Here is an example. A British airplane manufacturer wants to buy U.S.-made screws, but the American company sells those screws to satellite manufacturers. Since the State Department considers the screws munitions, the regulations apply to them.
“As soon as that screw is in there, that entire plane becomes a box containing our screw. And we need to know where that box is going, who has access to it,” said Remy Nathan, vice president of the Aeronautic Industry Association.
That creates a problem for foreign companies that do not identify end-users. If a French company decides to sell a satellite containing American parts to an Italian telecoms company, the State Department must grant another license for those parts.
U.S. companies also face higher compliance costs than their European counterparts, which they pass on to customers, said Kennedy.
That creates a disincentive to buy American, and in turn, a disincentive for American manufacturers to provide parts for satellite makers. The loss of suppliers drives up costs because there is less competition.
“A number of very high tech third-tier suppliers are exiting and going into medical or other high quality manufacture,” said Kennedy. “Quite frankly, they have stopped selling just because of the onerous process.”
Ian Fichtenbaum, an associate at investment advisors Near Earth LLC, said blaming regulations is overly simplistic. He said uncertain growth prospects for the industry are a major factor.
“If the market were expanding in high single-digit or low double-digit growth for the year — as opposed to flat — I don’t think these companies would be exiting the market,” Fichtenbaum said.
Fichtenbaum also points to France’s willingness to guarantee loans for satellite exports. He sees that as a primary reason Iridium chose Cannes-based Thales Alenia over Lockheed Martin to build its next satellite network.
However, he said all of these issues are interrelated, and reforming export controls will be a boost to the market.
The House’s decision to give the president authority is the first step. The second step is part of a broader movement to reform high-tech goods, moving them from State to Commerce Department oversight.
At that point, hundreds of thousands of components could be traded more readily with 36 ally countries.
“That would allow our state manufacturers to re-enter with stronger competitiveness in the international market place,” said Cooper.
If that happens, the United States could have a stronger stake on the final frontier