The Lower Tiers of the Space

Transportation Industrial Base

August 1995

OTA-BP-ISS-161

GPO stock #052-003-01425-4
Recommended Citation: U.S. Congress, Office of Technology Assessment, The Lower

Tiers of the Space Transportation Industrial Base, OTA-BP-ISS-161 (Washington, DC:

U.S. Government Printing Office, August 1995).
iii

oreword

urrent national space transportation policy, when it considers industry-related questions, is principally directed at, and influenced by, the industry’s

large prime contractors. Yet the industry is comprised of a much wider variety of firms. The U.S. space transportation industry includes large and

small providers of subsystems, components, and materials in areas such as propulsion, avionics, guidance, and structures. For each dollar spent on the procurement

of space transportation systems and services, roughly half flows down to secondand lower-tier supplier firms.

This background paper, prepared by the Office of Technology Assessment

(OTA) for the House Committee on Science, examines the current status and future

prospects of these critical, but often ignored, lower tiers. It is the second product of

OTA’s assessment of the U.S. space transportation technology and industrial base.

It also represents the final OTA report on space technology policy. OTA will close

its doors on September 29, 1995.

This background paper was prompted by a workshop held at OTA in early

March 1995, at which a small group, representing a broad cross-section of lowertier firms, discussed their views of the space transportation industry. Participants at

the workshop, and other members of the lower tiers contacted subsequently, conveyed profound pessimism about the future. Most participants saw little hope for

future expansion in the space transportation business; there was almost uniform

skepticism about the government’s commitment to build new space transportation

systems; and most expressed deep concern about the continuing erosion of human

capital and know-how throughout the lower tiers.

The views expressed by the lower-tier firms, however, are not universal. Some

prime contractors are more optimistic about the continuing availability of lowertier capabilities to fill their needs, or of being able to produce needed items in house.

One important Department of Defense (DOD) study concluded that the current industrial environment among the lower tiers can be managed by its prime contractors in a manner that will preserve the capabilities of the lower tiers without incurring undue costs or schedule delays. OTA’s analysis, both past and present,

suggests that this is a valid argument in most cases, but some critical subsystems,

components, and materials will require close monitoring. The risk of disrupting

government and commercial space missions as a result of interruptions in the supply of critical lower-tier products is real.

In undertaking this effort, OTA sought the contributions of a wide spectrum of

knowledgeable individuals and organizations. OTA gratefully acknowledges their

contributions of time and intellectual effort. OTA also appreciates the help of both

DOD and the National Aeronautics and Space Administration. As with all OTA reports, the content of this background paper is the sole responsibility of OTA and

does not necessarily represent the views of our advisors or reviewers.

ROGER C. HERDMAN

Director
iv

dvisory Panel

Ronald Brunner, Chairman

Director

Center for Public Policy Research

University of Colorado

Edward C. Aldridge, Jr.

President and CEO

The Aerospace Corporation

Buzz Aldrin

Apollo 11 Astronaut and Consultant

Radford Byerly, Jr.

Consultant

Thomas Burson

Vice President and General

Manager, Space Transportation

McDonnell Douglas Aerospace

Paul J. Coleman, Jr.

Director

National Institute for Global

Environmental Change

University of California at

Los Angeles

Lt. Gen. Donald L. Cromer, USAF

(retired)

President

Hughes Space and Communications

Co.

Henry J. Dinenno

Vice President, Advanced

Programs & Business Development

Space Systems Division

Rockwell International Corp.

Isaac T. Gillam, IV

Senior Vice President

OAO Corporation

Michael D. Griffin

Senior Vice President and Chief

Technical Officer

Orbital Sciences Corporation

President, American Spacelines

Frederick H. Hauck

President and CEO

INTEC

Clark W. Hawk

Director

Propulsion Research Center

University of Alabama at Huntsville

Douglas A. Heydon

President

Arianespace, Inc.

Joan Johnson-Freese

Associate Professor

Department of National Security

Studies

Air War College

Jon B. Kutler

President

Quarterdeck Investment Partners,

Inc.

Ronald G. Peterson

(until May 1995)

Vice President and General

Manager, Space/Strategic

Propulsion

Hercules Aerospace Co.

James D. Phillips

Director of Engineering

Development (Retired)

Kennedy Space Center

Thomas F. Rogers

President

Sophron Foundation

Mr. Paul A. Ross (from May 1995)

Vice President and General

Manager

Space/Strategic Propulsion

Alliant Techsystems

Jerome Simonoff

Consultant

Larry N. Speight

Vice President, Space and

Strategic Systems

Honeywell

Courtney A. Stadd

Managing Partner

Global Technology Ventures

Peter B. Teets

President, Information and Services

Sector

Lockheed Martin Corp.

David W. Thompson

President and CEO

Orbital Sciences Corp.

Joseph P. Zimonis

Executive Vice President and

General Manager

USBI Co.

Note: OTA appreciates and is grateful for the valuable assistance and thoughtful critiques provided by the advisory panel members. The panel does

not, however, necessarily approve, disapprove, or endorse this background paper. OTA assumes full responsibility for the report and the accuracy of its

contents.
workshop Participants

Dennis Borkland

Program Manager

Thiokol Corporation

James C. Grohowski

President

Astrotech Space Operations

Joe Hermann

General Manager

Space Communications

Cincinnati Electronics

Joe Jones

Principal

J.F. Jones Group

Steven Krise

Program Manager

Sunstrand Corporation

Charles Laxson

Executive VP, Engineering

Gulton, Inc.

Glen Martin

Plant Manager

Kaiser Space Products

John Preble

Manager

Business Development

Moog, Inc.

Jan Shafer

Vice President - Engineering

Stainless Steel Products, Inc.

Arthur Temmesfeld

Chief

Advanced Practices

Deployment Branch

Wright-Patterson AFB

Gary Tyler

Vice President

Business Development

Dual, Inc.

Note: OTA appreciates and is grateful for the valuable assistance and thoughtful critiques provided by the workshop participants. They do not,

however, necessarily approve, disapprove, or endorse this background paper. OTA assumes full responsibility for the paper and the accuracy of

its contents.

vi
workshop Participants

Dennis Borkland

Program Manager

Thiokol Corporation

James C. Grohowski

President

Astrotech Space Operations

Joe Hermann

General Manager

Space Communications

Cincinnati Electronics

Joe Jones

Principal

J.F. Jones Group

Steven Krise

Program Manager

Sunstrand Corporation

Charles Laxson

Executive VP, Engineering

Gulton, Inc.

Glen Martin

Plant Manager

Kaiser Space Products

John Preble

Manager

Business Development

Moog, Inc.

Jan Shafer

Vice President - Engineering

Stainless Steel Products, Inc.

Arthur Temmesfeld

Chief

Advanced Practices

Deployment Branch

Wright-Patterson AFB

Gary Tyler

Vice President

Business Development

Dual, Inc.

Note: OTA appreciates and is grateful for the valuable assistance and thoughtful critiques provided by the workshop participants. They do not,

however, necessarily approve, disapprove, or endorse this background paper. OTA assumes full responsibility for the paper and the accuracy of

its contents.

vi
vii

cknowledgments

Col. Charles R. Banta (retired)

U.S. Air Force

Washington, DC

John Beard

ICI Fiberite

Winona, MN

James Carlson

Institute for Defense Analyses

Alexandria, VA

Paul Dergarabedian

TRW

Redondo Beach, CA

Dennis Granato

U.S. Department of Defense

Washington, D.C.

Tom Griffin

Aluminum Pression Products

Santa Ana, CA

Charles R. Gunn

NASA

Washington, D.C.

Charles B. Kafader

OEA Corporation

Aurora, CO

Larry B. Mattson

TRW

Redondo Beach, CA

Henry M. Minami

Rocketdyne

Canoga Park, CA

Warren G. Morimoto

United

Technologies/

Pratt and Whitney

West Palm Beach, FL

Greg Newmaster

Fike Corporation

Blue Springs, MO

Eric E. Nichols

Naval Space Command

Dahlgren, VA

Thomas Oldenburg

U.S. Department of State

Washington, D.C.

John Paugh

U.S. Department of Commerce

Washington, DC

Gary A. Powell

U.S. Department of Defense

Washington, D.C.

David P. Radzanowski

U.S. Congressional Research

Service

Washington, DC

Gary Reitmeier

Sealing Services, Inc.

Lancaster, NY

Richard Scott

U.S. Department of

Transportation

Washington, DC

Scott Spiegel

Hughes Space and

Communications Co.

Note: OTA appreciates and is grateful for the valuable assistance and thoughtful critiques provided by these individuals. They do not, however,

necessarily approve, disapprove, or endorse this report. OTA assumes full responsibility for the report and the accuracy of its contents.
contents

1 Introduction, Background, and

Findings 1

Background 2

Findings 2

2 Characteristics and Observations 11

The Significance of the Lower Industrial Tiers 11

The Nature of Lower-Tier Firms 12

Recent Studies 15

Implications of Future Vehicle Choices 16

Single Sources and Sole Sources—How

Vulnerable? 18

3 Workshop Highlights 19

Current Status and Critical Sectors 19

The Impact of Future Vehicle Choices 21

Relations with the Government, Primes, and Major

Subcontractors 22

Research and Development 23

Global Competition and Cooperation 24

Preservation of the Technology and Industrial

Base 25

viii
Introduction,

Background,

and

Findings 1

R

eductions in space and defense spending over the last decade and a lack of consistent policy toward space transportation research and development have proved challenging for the U.S. space transportation industry. The

lower tiers of the space transportation technology and industrial

base have been especially affected.

Although a number of studies have assessed the viability of the

space transportation technology and industrial base, they have focused on the large prime contractors that integrate and assemble

space transportation systems--expendable launch vehicles

(ELVs), reusable launch vehicles (RLVs), and long-range ballistic missiles. 1

The studies have all but ignored the lower tiers of this base, i.e.,

the firms that supply most of the subsystems, components, and

parts used in space transportation systems, despite the fact that

these firms collectively account for roughly half of the value added to space transportation systems. OTA’s research suggests that

these lower-tier firms are feeling disproportionate pain from defense cuts, but are largely overlooked by policymakers in Washington.

The U.S. aerospace industry as a whole is downsizing, rationalizing, and reducing the number of lower-tier suppliers, in part

to achieve economies of scale. The space transportation industrial

sector is already characterized by relatively small production vol -

1 Space transportation in this background paper refers to vehicles able to carry payloads or passengers to orbit. This background paper does not address suborbital launch

systems or transportation systems designed primarily to move payload or passengers between or beyond Earth orbits. Currently, the partially reusable U.S. Space Shuttle is the

world’s only operational RLV.

“... failure or withdrawal of a single

supplier.. could cause

delays in important

programs, significant

unexpected future

expense, and

reliability concerns ....”

| 1
2 | The Lower Tiers of the Space Transportation Industrial Base

umes and few suppliers of many subsystems and

components. Reductions in the number of space

transportation suppliers largely reflect a lack of

business, rather than a drive to compete more effectively. 

As congressional and executive branch policymakers head toward a new millennium, a major

concern will be whether factors, such as limited

demand, skepticism about government intentions,

strained relations with prime contractors, and the

perceived ineffectiveness of government procurement reform, will compel key firms and the capabilities they embody to abandon the space transportation market altogether. Policymakers will

need to know if sufficient suppliers will be available at an acceptable cost to support the nation’s

space transportation requirements. And they will

need to know how their policies, traditionally

crafted with prime contractors in mind, will affect

the half of space transportation dollars represented

by the lower industrial tiers.

BACKGROUND

At the request of the House Science Committee,

OTA is conducting an assessment of the current

and future health of the U.S. space transportation

technology and industrial base.2 The study encompasses all aspects of the U.S. space transportation base, including research and development (R&D), production, operations,

maintenance, acquisition, and management. It

also addresses the entire spectrum of commercial,

civil, defense, and intelligence space transportation systems, both expendable and reusable, as

well as long-range ballistic missiles.

The federal government is a main customer and

regulator for space transportation systems and services and has heretofore paid most development

costs. Government actions and policies, therefore,

have a direct and often overwhelming impact on

the space transportation industrial base.

As part of this assessment, an OTA workshop

examined the current status of lower-tier firms,

those companies that provide either hardware or

services to the handful of prime contractors who

supply space transportation systems (see box 1-1).

Lower-tier firms provide about 50 percent of the

value added to aerospace systems, as well as hardware, software, and materials without which there

would be no finished products. For this reason

alone, understanding the lower industrial tiers is

crucial to understanding the space transportation

technology and industrial base as a whole.

In addition to those who attended the workshop, OTA interviewed representatives of two

dozen other lower-tier firms. While OTA recognizes that this industry sample was not selected

randomly and hence the findings are not necessarily generalizable to the industry as a whole, participants were selected from the full range of providers of space transportation subsystems,

components, and parts, and services, and from basic commodity to major system manufacturers.

In addition, this background paper was reviewed by members of the full assessment’s Advisory Panel, participants in the lower-tier workshop, and others.

The remainder of this chapter summarizes the

main findings of this paper. Chapter 2 discusses

the definition and significance of the lower tiers,

special features of the space transportation industrial base, and recent studies of the space launch

industry. Chapter 3 presents some of the workshop discussion in more detail.

FINDINGS

1. Many of the lower-tier manufacturing firms

that supply space transportation system

parts, components, and subsystems are not

diversified and depend heavily on the

launch vehicle, missile, and related military

markets. These firms share a pessimistic

2 The first report of this assessment was published in May 1995. It examines the Clinton Administration’s new space transportation policy

and implementation plans and raises issues of particular interest to Congress. See U.S. Congress, Office of Technology Assessment, The National Space Transportation Policy: Issues for Congress, OTA-ISS-620 (Washington, DC: U.S. Government Printing Office, May 1995).
Chapter 1 Introduction, Background, and Findings 13

In this background paper, the terms “prime” or “prime contractor” denote the first-tier firms responsible for the final assembly and integration of space transportahon systems These systems are sold by

the prime contractor to commercial and government customers, either directly or in the form of launch

services

Simplified Industrial Tier Pyramid

1st tier

prime contractor

design, integration, assembly

3rd tier subcontractors

components

4th tier suppliers

subcontractors, parts

5+ tiers suppliers

The lower tiers of the space transportation industry pyramid begin with subcontractors that manufacture major subsystems and components of space transportation systems, and extend to suppliers of

parts, hardware, and basic commodities, who may be five or more tiers removed from the primes The

common distinguishing characteristic of lower-tier firms is that they sell to the prime contractor or to

other lower-her firms, rather than directly to space transportation customers.

SOURCE Off Ice of Technology Assessment, 1995

view of their future business prospects. A majority of the manufacturing firms in the

Some other firms, however, have significant

non-government business, enabling them to

respond with somewhat more flexibility to

the decline of their government launch vehicle and missile work. Attrition is high

among all lower-tier firms: new suppliers

may have to be found within five years for 35

to 40 percent of critical subsystems and components currently being procured for use in

Department of Defense (DOD) launch vehicles.

workshop depend on government orders for 75 to

100 percent of their gross income in the space and

missile field. Several see no future business at all

in space transportation. One heavily governmentdependent firm, part of a larger entity, closed its

plant shortly after the workshop. Its last, large program had come to an end, with no follow-on business in sight. It was one of only two firms capable

of producing its principal product.

All of the firms report significant downsizing

in their government operations over the past sev-
4 I The Lower Tiers of the Space Transportation Industrial Base

1991 1992 1993 1994

DOD 8 1 0 8 1 2

NASA 2 5 5 4

Commercial 1 2 3 4

TOTAL 11 1 7 1 6 20

SOURCE National Aeronautics and Space Administration, NASA

Pocket Statistics, 1995, p B-4

eral years—typically, staffs have been reduced by

30 to 60 percent. This downsizing appears to result principally from the decrease in defense orders and the small, albeit slightly growing, demand for space transportation (see table l-l).

At least two firms represented at the workshop

have successfully reduced their dependence on

government business, although it still makes up

an important share of their work. One other firm,

which provides essential equipment for both U.S.

and foreign launch systems, also has a very strong

business base in non-aerospace activities. Conversely, only one very small firm, which is entirely dependent on space transportation business, reports itself entirely satisfied with both the size and

nature of its government space business base.

A government participant in the workshop

cited an ongoing Air Force assessment of the stability of the supply of critical space transportation

subsystems and components. This study indicates

that new suppliers will have to be found within 5

years for 35 to 40 percent of such items currently

being procured for use in DOD launch vehicles,

because present producers will no longer be producing the items in question or will be out of business.

2. More and more launch vehicle subsystems

and components are produced by only one

or two U.S. suppliers. Buying from one or

two suppliers may result in lower unit costs

through economies of scale, and may even

enhance prospects for the suppliers’ survival by enlarging their business bases. On the

other hand, failure or withdrawal of a single

supplier, for whatever reason, could cause

delays in important programs, significant

unexpected future expense, and reliability

concerns if a new supplier must be hurriedly

qualified.

There is a strong possibility that the market will

drive out all but a single supplier of one, a few, or

even many key systems, subsystems, or components. Opinions differ as to the significance of this

phenomenon. In a 1995 study, DOD concludes

there is no need for concern, because “the major

prime [contractors and second-tier subcontractors] have demonstrated an ability to manage the

risks associated with a changing vendor base.” 3

The authors of that report believe that the demand for U.S.-produced space transportation systems will continue to be sufficiently high to keep

firms engaged in the market, and that any supplier

problems can be satisfactorily addressed on a

case-by-case basis.4 In the past, DoD has resorted

to “lifetime buys” (purchasing enough of a given

item to last the expected life of the affected program) and other relatively expensive measures to

ensure availability of critical components.

The views of the OTA workshop participants,

however, were in notable contrast to the DOD

finding. They echoed a 1992 National Space

Council study that expressed concern that

“cutbacks in government procurements... will

quickly eliminate unique capabilities provided

by second- and third-tier contractors, create foreign source dependencies, or even lead to production gaps (’dark factories’) that can only be

bridged at much greater expense than that

associated with maintaining capabilities.”5

3 U.S. Department of Defense, Industrial Assessment for Space Launch Vehicles (Washington, DC: Department of Defense, January 1995),

p. ES- 10.

4 Informal DOD comments on the first draft of this report, June 7, 1995.

5 Vice President’s Space Policy Advisory Board, The Future of the U.S. Space Industrial Base: A Task Group Report (Washington. D.D.: The

White House, November 1992), p. 25.
Chapter 1 Introduction, Background, and Findings | 5

OTA’s analysis of the space transportation industrial base, as well as its work on the defense industrial base, suggests that both views are partly

valid. Given the right mix of ample funding and

adequate lead-time, prime contractors can probably ensure the continued availability of critical

subsystems and components, particularly if they

are not constrained by technical and contractual

requirements that limit their flexibility unduly.

Prime contractors, however, cannot be expected to take preventive steps to maintain lowertier capabilities unless they can expect to profit

from doing so and they have ongoing procurement

contracts. For this reason, the risk is real that interruptions in the supply of critical lower-tier products could disrupt critical DOD and National

Aeronautics and Space Administration (NASA)

missions.

3. The lower-tier firms do not believe that ambitious new space transportation initiatives

will result in decisions to build new vehicles.

Experience with past, abortive programs,

ranging from Shuttle-C to the National

Aerospace Plane, has convinced them that

the federal government lacks both the will

and the resources to produce major new vehicles or systems.

Lower-tier firms are deeply skeptical of

NASA’s X-33 program, which aims to codevelop

with industry a completely reusable RLV to reduce dramatically the cost of transporting payloads to orbit and eventually replace the Space

Shuttle. Most are also doubtful that DOD’s

Evolved Expendable Launch Vehicle (EELV) program will produce a new evolutionary family of

ELVs, as opposed to minor modification of existing systems. Several note disappointing experiences with previous, aborted projects, such as the

National Aerospace Plane, the National Launch

System, the Advanced Launch System, Spacelifter, and Shuttle-C (a cargo variant of the Space

Shuttle).

Many workshop participants and reviewers felt

that by trying to pursue the RLV and the EELV developments simultaneously, while continuing to

operate the Space Shuttle, the United States risks

arriving at the year 2000 with a design for the RLV

that is too costly and not capable enough, but

without an EELV. They expressed concern that the

RLV development program (and the continuing

operation of the Shuttle program) will capture

most of the space transportation funds available in

the DOD and NASA budgets. In this scenario, the

United States would then be obliged to continue to

rely on the Space Shuttle and minor modifications

of existing medium and large ELVs.6

Workshop participants are also skeptical that

prime contractors intend to contribute significantly to the development costs of the X-33 program.

Two firms say they were approached by prime

contractors to join teams competing for the X-33

procurement, but on the condition that they help

fund the team’s activities. They were unwilling to

do so, although some lower-tier firms have made

such contributions where the future market was

more predictable—for example, in the development of a new commercial aircraft. One participant summed up the general view, asserting that

there was no confidence that the firms would “get

their money back” from such an investment.

Workshop participants also question whether,

aside from classified military applications, there

is sufficient heavy-payload demand to warrant

spending on both the high-capacity end of the

EELV range and on the medium-to-heavy X-33.

They comment that small low-Earth-orbit (LEO)

communications satellite systems, such as Iridium, and scientific spacecraft, such as Clementine

6 Proponents of this view acknowledge that separate budgets are involved, but point to past experience with shared programs as evidence

that the Congress tends to treat the space transportation components of the NASA and DOD budgets as closely coupled and subject to common

constraints.
6 | The Lower Tiers of the Space Transportation Industrial Base

and the Millennium series, represent the only real

growth market, and that this market can be served

by medium-sized and smaller ELVs.

4. One of the most serious problems faced by

lower-tier firms is the loss (through retirement or downsizing) of experienced people,

and the limited intake of young engineers

and specialists. This trend is eroding the industry’s knowledge base. A parallel problem is posed by the lack of investment in lower-tier manufacturing facilities, due to

limited technological change in systems and

general pessimism about future business.

Companies report that lower-tier hiring of

young engineers and technicians in the space

transportation industry has virtually ceased for the

last few years. At the same time, many of the experienced people responsible for the original design,

development, and production of the current space

transportation fleet have retired, while corporate

downsizing has forced many of the mid-level

people out of the business.

Workshop participants report that fewer than

half of the people involved in their space transportation business five years ago are still in the

field. Moreover, because of the lack of new projects, almost all of those younger engineers who remain have not participated in the development of a

major system, which experts believe is an essential element in training a successor generation.

Firms generally say that there has been little

new investment in their space transportation-related manufacturing facilities. Like the vehicles

they produce, these facilities largely reflect

technologies 25-30 years old. Materials and fabrication techniques have not changed significantly due to the conservative nature of the business

and the lack of new space transportation development funding. With a dim view of future business

prospects, lower-tier firms have little incentive to

invest.7

5. Lower-tier firms have not yet benefited from

procurement reforms instituted by DOD

and NASA.8 The continued application of

traditional government requirements and

oversight, despite the reforms, has been a direct deterrent to efforts to diversify into

commercial markets.

Executives at lower-tier firms feel that prime

contractors pass on or “flow down” intrusive government requirements intact, sometimes adding

requirements of their own. There is a general perception that the primes are unwilling to risk procuring systems or subsystems on a commercial

basis, even if the revised rules appear to permit it,

because of the risk of disqualification for not complying with government requirements.

Workshop participants argue that federal procurement reforms have not materially changed the

business environment for the lower-tier firms, and

that the current environment deters them from efforts to diversify into commercial markets.

Flowed-down federal regulatory burdens act as a

tax on their products, making them noncompetitive in the commercial marketplace.

One major obstacle to diversification is the difficulty of changing lower-tier firms’ corporate

culture from one that is accustomed to meeting

traditional government procurement requirements to one that is agile and responsive to the rapidly changing commercial market.

One workshop participant holds that it is impractical to organize a firm, or a plant, to meet both

sets of requirements, and that this fact makes attempts to transition into the commercial marketplace much more difficult. Because lower-tier

firms generally tend to be smaller than the primes,

this is more likely to be true for the former than the

latter. Lower-tier firms also cite the prohibitive

cost of maintaining two production and accounting systems (one for government, the other for

commercial customers) and the government’s in7 The lack of investment in these companies may actually compound their problems, because new manufacturing technologies could enable

them to transition to lower-rate production more efficiently.

8 See box 2-1 in chapter 2 for a brief summary of the reforms that have been undertaken.
Chapter 1 Introduction, Background, and Findings | 7

sistence on “most favored customer” pricing as

strong deterrents to moving onto a commercial

footing.

6. If low-cost, reusable space transportation

systems become a reality, they may greatly

reduce the demand for ELVs, resulting in a

sizable shift in the make-up of the space

transportation industry. First, lower-tier

firms dedicated to technology applicable

only to ELVs may find themselves without

work, as the systems they support are displaced. Second, even companies with RLVrelevant technology will have limited production volumes as their products are

reused rather than expended or replaced.

Provision of spare parts for and maintenance of a relatively tiny reusable vehicle

fleet may be their only source of revenue

once the initial production run is completed.

Some important lower-tier firms do not expect

to benefit from a shift from ELVs to RLVs, because a next-generation reusable vehicle is unlikely to use their technology. Because of the importance of some of these firms (e.g., producers of

large solid rocket motors) to long-range ballistic

missiles, further impairment of these firms’ business interests could have broader implications.9

These firms believe that if there is to be any worthwhile future government business, it will come

from missile programs and ELVs, rather than future reusable vehicles.

These firms believe that the Space Shuttle experience demonstrates that an RLV program is apt

to over-promise, face chronic funding shortfalls,

and end up requiring a large and costly “marching

army” of prime contractor and NASA employees

to maintain and operate the system. Firms are

deeply critical of current NASA spending for

Space Shuttle infrastructure, both internally and

on support contracts, which they say is absorbing

the funds that should be invested in new space

transportation technologies and systems.

Other companies, with experience in the aircraft industry or on the Shuttle, have somewhat

better expectations. Even these, however, foresee

only a limited initial market, followed by a long

period of high operating costs and relatively little

production business for them.

7. Relations between lower-tier firms and

prime contractors are strained.10 Lower-tier

firms maintain that as the primes downsize,

they become more vertically integrated and

increasingly compete with their suppliers.

Lower-tier managers also complain that the

primes negotiate cost-plus development

contracts with their customers (NASA and

DOD, in particular), but negotiate fixedprice contracts with the lower tiers, shifting

much of the business and technical risk onto

their shoulders. Furthermore, the primes

(as well as some government laboratories)

often compete against their suppliers for

federal R&D funds, absorb them internally,

and do not pass them along to help fund lower-tier R&D.11

In general, workshop participants feel that relations with prime contractors have deteriorated in

recent years, reflecting the pressure of downsizing

and reduced defense spending.

Lower-tier manufacturing firms report episodes in which the primes initially out-sourced

components to them, inducing the lower-tier firms

to invest in tooling and start-up costs, only to reverse themselves within a year or two and pull the

work back in house. In some cases, this cycle occurred more than once for the same set of compo9 The Air Force is developing an ICBM Long Range Planning (ILRP) activity to address the future of the ballistic missile industrial base.

Most of the focus of the ILRP currently is on reentry vehicles and guidance systems.

10 One reviewer (at a prime contractor) sees no sign of such difficulties at his firm or between the other primes and their suppliers, but virtually all other reviewers (particularly those at lower-tier firms) support this finding.

11 There are some cases in which the primes have established strategic relationships with key suppliers, including the sharing of R&D funding, but to date these cases appear to be fairly rare.
8 | The Lower Tiers of the Space Transportation Industrial Base

nents. Some believe that this happened because

the primes seek, at first, to reduce the manpower

impact of shrinking business by pulling as much

work as possible in house. After a period, the

firms discover that they are inefficient producers

of some items, and decide to out-source them in

order to cut costs. Then a new round of downsizing pressures hits, and the cycle repeats itself.

Lower-tier manufacturers report that the

primes are not generally willing to fund any R&D

by lower-tier firms, either from their own resources or by passing along government funding.

Even when primes did not do the R&D by themselves, their internal bureaucratic “taxes” and

those imposed by the funding agencies siphon off

so much federal funding that relatively little actually reaches the lower tiers.12

8. Lower-tier firms are unwilling to fund R&D

to meet a government requirement in the absence of a good prospect of series production, or unless the resulting product has

“dual-use” potential on the commercial

market. They are deeply pessimistic that

such prospects exist in the space transportation business. Some firms have newer

technology on the shelf, which could be incorporated in existing vehicles, but primes

and/or customers are unwilling to bear the

cost or risk. Meanwhile, it is increasingly

difficult and costly to continue to produce

antiquated systems and components.

Lower-tier manufacturing firms say that they

can not justify spending corporate funds on R&D

related solely to launch vehicles, because the future business potential is not large enough, or secure enough, to justify it. One manager tells of being persuaded to invest corporate funds in new

technology under the Advanced Launch System

program, only to have the investment written off

when that program was canceled.13 Lower-tier

firms will invest in new technologies that can be

used in space transportation systems, but only if

there are other—preferably commercial—markets for them.

Several companies say that they have, on the

shelf, launch vehicle component technology considerably more advanced than that which is flying

in today’s space transportation systems. Proposals

to incorporate this new technology in space transportation systems are typically not accepted by the

customer, because of the additional cost involved

or questions of reliability and safety. Some experts point out that such reluctance may be entirely justified, and that new technology infusions

need to be carefully incorporated into planned, integrated vehicle upgrades, in order to avoid system engineering problems.14

Meanwhile, however, it is becoming increasingly difficult and costly for firms to continue to

build antiquated designs. Short production runs

and long set-up time dictate high-cost production.

For example, in order to get one of its suppliers to

produce a component for a subsystem used in the

Titan launch vehicle, one lower-tier firm had to

buy a large quantity of the item, far more than the

near-term requirement would justify. Another

firm notes that the facilities used to fabricate, assemble, or integrate the existing, antiquated designs are aging and costing more and more to operate; in addition, the people familiar with the

designs and specialized production processes are

retiring, further complicating production.

9. Managers at the lower-tier firms believe that

they (particularly the liquid-fueled propulsion firms and their suppliers) will bear the

brunt of any decision to incorporate Russian

12 For example, lower-tier firms point to the proliferation of support contractors or internal staffs at the prime contractors, whose role is to

prepare reports to management or to the government customer, or to generate plans for the work to be done rather than doing the work itself.

Funding agencies and their subordinate staffs impose similar “taxes” on R&D funds en route to contractors.

13 The company was later able to use the component in a non-launch-vehicle program, but this was not anticipated at the time of the initial

R&D commitment.

14 The Air Force says that it will consider new technologies in the EELV program if they promise to lower costs.
Chapter 1 Introduction, Background, and Findings | 9

or other foreign technology in U.S. space

transportation systems.

Lower-tier firms generally believe that they

will bear a disproportionate share of the impact of

the incorporation of Russian technologies into existing U.S. space transportation systems. Suppliers are particularly concerned, because U.S. prime

contractors are being encouraged by the Clinton

Administration to use Russian liquid-fueled engines in new and upgraded systems. Several expressed the view that the U.S. Government was

permitting foreign policy concerns to take precedence over preservation of a sound domestic

launch vehicle industry.

Others noted that the draft DOD policy that applies to these proposals would require suppliers to

demonstrate that adequate provision has been

made against disruption of the launch schedule,

and that production of foreign-designed components will eventually be shifted to the United

States. Experts point out, however, that such a

shift would result in significantly higher one-time

and recurring costs than if the components were

produced in Russia, and would necessitate a steep

learning curve for the American suppliers, whether they were firms new to the space market or established suppliers obliged to retool for Russian

designs.
Characteristics

and

Observations 2

s

ince the mid- 1980s and the Challenger accident, the nation’s space launch capability has been under sharp scrutiny. Studies of the technical options for new launch systems and the demand for space launch services, in

particular, have been plentiful.

Without evident exception, however, existing studies have focused virtually their entire attention on the major prime contractors—the relatively few U.S. firms that produce and operate

launch vehicles for government and commercial customers. OTA

studies of the defense technology and industrial base have noted

that focusing on prime contractors alone overlooks a significant

fraction of any industry-a fraction that often has very different

perspectives from the prime contractors.2

THE SIGNIFICANCE OF THE LOWER INDUSTRIAL TIERS

In the space transportation industry, the major first-tier firms or

“primes” are responsible for overall assembly, integration, and

often operation of U.S.-made space transportation systems. In addition, they are increasingly involved in the fabrication of sys1 As quoted by Aerospace Industry Association President Don Fuqua, Military Space,

Dec. 12, 1994, p. 1.

2 For example, see U.S. Congress, Office of Technology Assessment, Assessing the

Potential for Civil-Military integration: Technologies, Processes and Practices, OT.4-

[SS-6 11 (Washington, DC: U.S. Government Printing Office, September, 1994); Building

Future Security, OTA-ISC-530 (Washington, DC: U.S. Government Printing Office, June

1992); and Redesigning Defense: Planning the Transition to the Future U.S. Defense Industrial Base, OTA-ISC-500 (Washington, DC: U.S. Government Printing Office, July

1991 ). While these studies addressed the broader topic of the defense technology industrial base, much of the U.S. space launch industry can be regarded as a subcategory of the

defense base, and the analysis is generally applicable.

“The Earth is

covered by

two-thirds water

and one-third

launch studies. ”

—USAF Secretary

S. Widnall l

I 11
12 | The Lower Tiers of the Space Transportation Industrial Base

tems, subsystems, and component parts for their

vehicles. Rockwell International, Lockheed Martin, McDonnell Douglas, and Orbital Sciences are

the only current U.S. builders and operators of

proven space launch vehicles; several smaller

firms have launch vehicles in various stages of design or development.

The lower tiers of the space transportation industry begin with second-tier subcontractors that

manufacture major subsystems and components

for incorporation by the primes into space transportation systems. Third-tier firms sell to the second tier, fourth-tier to the third tier, and so on until

the level of raw materials is reached. The common

distinguishing characteristic of lower-tier firms is

that they sell to the first-tier firms, or to other

lower-tier firms, rather than directly to the final

space transportation customer.

THE NATURE OF LOWER-TIER FIRMS

Lower-tier firms vary greatly in size and organization. Some are entirely or almost entirely dependent on space business, but most are more diversified, if only within the government marketplace.

Some are independent, while others are divisions

of larger corporations. Some do most or all of their

space business selling to a single prime contractor

for a particular launch vehicle series; others sell a

narrow range of products to virtually the entire list

of primes.3 Still others have developed a wider

range of products drawing on a core firm capability, which they successfully sell to both the primes

and other customers. One firm, for example, sells

pyrotechnic devices that are widely used on U.S.

and European expendable launch vehicles

(ELVs), the Space Shuttle, military aircraft, and in

most of the world’s automotive airbag systems.

Complicating the picture, many lower-tier

firms sell products to both primes and other

lower-tier firms. This is particularly common

where the primes have undertaken the assembly or

fabrication of items formerly made by subcontractors.

OTA studies of the defense technology and industrial base found that between 40 and 55 percent

of defense procurement funds spent for aerospace

systems (depending on the specific system involved) are passed on by the prime contractors to

their supporting subcontractors and suppliers. An

input-output analysis being conducted by OTA in

connection with its assessment of the U.S. space

transportation industry yields similar conclusions

for that industry. That analysis (which is being refined and further validated) appears to demonstrate that between 45 and 50 percent of the value

added to U.S. space transportation systems can be

attributed to lower-tier firms.

During the OTA workshop discussion, some attempt was made to distinguish between secondtier firms (those that sell directly to the primes)

and third-tier or lower companies, which sell in

turn to other lower-tier firms. The analytical value

of these internal distinctions among lower-tier

firms lies chiefly in understanding the extent to

which government policies, in the form of regulations, requirements, and oversight directed at the

prime contractors, may flow down to lower-tier

firms, and how much this flow-down is attenuated

as it passes through additional layers.4 This information is critical to policymakers who may expect their legislation or regulations to govern 100

percent of government outlays for space transportation, when in fact they may not reach far beyond the primes. (See box 2-1 for a summary of

current procurement reform activities.)

Below the subcontractors, and occupying the

lowest tiers of the industrial base, are the commodity suppliers of parts and materials. Many

suppliers in the space transportation industry produce “dual-use” equipment and supplies that are

used in both space and non-space applications. As

a group, these firms are more diversified than the

3 Such as range safety receivers used to trigger the destruction of a launch vehicle that strays off-course and threatens populated areas.

4 OTA has written extensively on the differences between government and commercial procurement. See, in particular, U.S. Congress, Office of Technology Assessment, Assessing the Potential for Civil-Military Integration, op. cit., footnote 2.
Chapter 2 Characteristics and Observations | 13

A number of acquisition reform steps have been taken or are currently being contemplated that will

affect the purchase of space transportation systems In February 1994, DOD’s white paper, Acquisition

Reform: A Mandate for Change, outlined its vision of future defense acquisition. This vision Included

increased commercial purchases; greater use of commercial specifications and standards, reduced

admimstrative burdens on providers of defense goods and services, and the adoption of some commercial business practices by the DOD procurement bureaucracy. In early March, DOD released its first

report measuring progress in the acquisition of commercial and non-developmental items.1 In June

1994, the Secretary of Defense issued a directive changing the use of military specifications and standards 2

The Federal Acquisition Streamlining Act of 1994 (FASA) was passed in October 1994. FASA incorporates many of the acquisition law reforms proposed by the congressionally mandated Acquisition

Law Advisory Panel, which in January 1993 issued a report to Congress on streamlining defense acquisition laws. The Act addresses the purchase of commercial items and services, provides a clearer definition of commercial items and services for use by the contracting community, eliminates the requirement for cost and pricing data on commercial items; and makes it more difficult for the government to

demand technical data rights for items developed with private funds

In addition, FASA addresses a number of other reforms that should make it easier for commercial

firms to do business with DOD (e g , raises the Simplified Acquisition threshold and reduces the use of

unique socioeconomic clauses in certain categories of government contracts).

As this report was being written, Congress was contemplating four additional major acquisition reform bills. These include:

—The DOD Acquisition Management Reform Act (H.R. 1368 and S. 646), sponsored by Rep, John Kasich

and Sen. William Roth. This bill rolls the military services’ research, development, and acquisition agencies

into a central office. It calls for programs to be canceled if they fail to meet performance goals. It stops the

Pentagon from reserving 60 percent of maintenance work for military depots.

—The 1996 National Defense Authorization Act (H.R. 1530 and S. 727), sponsored by Rep. Floyd Spence and

Sen. Strom Thurmond. This bill is supported by Pentagon officials. It repeals the fee added to foreign military sales that helps recoup U.S. - funded research and development, ends the 60-percent set-aside for

military depots, and allows pilot programs to be exempted from regulations.

—The Federal Acquisition Improvement Act (H.R. 1388 and S. 669), sponsored by Rep. William Clinger and

Sen. John Glenn. This bill was drafted to apply to the entire government. It allows government contract

officers to limit the number of bidders in competitions. Complainants would pay the cost of frivolous bid

protests. The bill also precludes protests of competitions staged on the electronic commerce bulletin board

the government is setting up.

—The Federal Acquisition Reform Act (H.R. 1670), sponsored by Reps. Floyd Spence and William Clinger.

This bill ends the requirement to hold “full and open competitions,” going further than the H.R. 1388 /S. 669

provision to limit bidders. It also repeals the recoupment fee on exports, codifies the practice of buying

commercial goods and services whenever possible, and relaxes accounting practices for them

1 R. Noel Longuemore, “Memorandum for Deputy Secretary of Defense Measuring DOD Progress in Acquisition of Commercial

and Other Non-Developmental Hems, ” Mar 4, 1994

2 William J. Perry, Secretary of Defense, “Memorandum for the Secretaries of the Military Departments Specifications and Standards—A New Way of Doing Business,” June 29, 1994

SOURCE Office of Technology Assessment, 1995
14 | The Lower Tiers of the Space Transportation Industrial Base

subcontractors, and are more integrated with the

commercial market. Firms in this category contacted by OTA were often only vaguely aware (or

even unaware) that their products were used in

space launch vehicles.

❚ The Limited Space Transportation

Market

Perhaps the most significant feature of the space

transportation technology and industrial base is

the limited market for space transportation systems, compared with commercial and other defense aerospace products.

In 1994, the United States conducted only 27

space launches, of which 7 were flights of the partially reusable Space Shuttle. From 1980 through

the end of 1994, the total was 274, of which 66

were Shuttle flights and 208 were ELVs (an average of only 14 new vehicles produced per year).5

This limited production rate, spread historically

across six or more vehicle families, has only a few

direct analogues in the military aerospace sector,

and creates a significantly different business environment for the lower-tier space transportation

firms than what is ordinarily encountered in the

defense or commercial marketplaces.

Projections of future demand for ELVs generally portray a slowly growing commercial market,

while the launch rate for captive U.S. government

payloads is relatively flat or declining somewhat.

Moreover, intensifying foreign competition for

commercial payloads from Europe’s Ariane, Russia’s Proton, and China’s Long March vehicles has

reduced the U.S. share of this market to only 16

out of 66 geosynchronous orbit payloads scheduled for launch over 1995-97 (launch contracts for

17 satellites are still to be awarded).6 This relatively flat demand for U.S. vehicles will be complemented, beginning in 1996, by launches of the

initial constellations of low-Earth-orbit (LEO)

communications satellite systems (e.g., Iridium,

Globalstar), but the U.S. ability to retain a significant share of this market is also in question.

❚ Who Are The Customers?

Another important feature of the space transportation industry is that the prime contractors serve

several customers, each with technical and procedural requirements that often differ significantly.

McDonnell Douglas, for example, sells Delta II

vehicles or launch services to DOD, NASA, and

commercial communications satellite owners.

The governmental customers differ substantially in the way that they approach these procurements, although the degree of difference is a contentious topic between NASA and DOD. In

NASA’s view, DOD buys launch vehicles and

launch services separately. In addition, NASA’s

technical and procedural requirements are significantly different from DOD’s. NASA states that it

is required by law to purchase launch services

(where a commercial vendor both provides the vehicle and launches it, under a single contract),

rather than launch vehicles. NASA believes it is

effectively precluded for this and other legal reasons from joining in common procurements with

DOD.

DOD, on the other hand, says that it also buys

launch services, but with special conditions that

are dictated by the requirements of national security. DOD asserts that NASA overstates the differences between their practices and the difficulty of

joint procurements, and that NASA tends to be

more restrictive than DOD in the detailed require5 ANSER Corporation, 1994 Space Launch Activities (Aerospace Division note ADN 95-2, Arlington, VA, January, 1995).

6 U.S. Department of Transportation, Commercial Space Transportation Advisory Committee (COMSTAC), Commercial Spacecraft Mission Model Update, May 1995. See particularly Appendix 2: 1995 Mission Model—Near Term. Note that the figures cited reflect spacecraft

launched into geosynchronous transfer orbit, rather than launch vehicles; that no small launch vehicles are included; and that slightly less than

50 percent of all Ariane launches involve two spacecraft per launch vehicle. Nevertheless, this model indicates that the U.S. space transportation

industry’s share of the commercial satellite market has declined to only 5 to 6 medium-to-heavy class launches per year, less than 25 percent of

the total.
Chapter 2 Characteristics and Observations | 15

ments it imposes on its vendors.7 All government

customers are more specific and intrusive than

commercial purchasers, who tend to impose few

requirements on the prime contractors other than

performance on schedule, to specification, and at a

certain price.8

When the customer’s requirements differ, the

requirements levied on the lower-tier firms often

vary accordingly. Moreover, the primes tend to

add their own accounting or oversight requirements on top of those flowed down from their

commercial and government customers.

RECENT STUDIES

The two most recent, comprehensive studies of

the space launch industrial base are the DOD’s

January 1995 Industrial Assessment for Space

Launch Vehicles, and “The Future of the U.S.

Space Industrial Base,” compiled by the Vice

President’s Space Policy Advisory Board in November 1992.

The DOD assessment explicitly “focuses on

ELVs and the prime contractors that produce

them.”9 It concludes that “the U.S. space industry

will continue to meet DOD requirements into the

foreseeable future,” because “existing manufacturers of DOD’s space launch vehicles are profitable despite declining sales, increased competition and significant excess capacity in the large

and small vehicle segments.”10

The assessment goes on to foresee substantial

industry consolidation, and to anticipate that

DOD will benefit, “since consolidation will lead

to reduced overhead costs and reduced prices.” It

notes that DOD’s acquisition process gives it

more information about subcontractor costs and

therefore more leverage over prime contractors

than commercial buyers could achieve. It concludes that although the lower tiers of the industry

will consolidate, sufficient capable suppliers will

remain, and that “the major prime and first-tier

contractors have demonstrated an ability to manage the risks associated with a changing vendor

base.”11 Finally, it sees no need for changes in procurement policy or DOD’s business practices, despite ongoing reform efforts within DOD and the

executive branch in general to adopt more commercial business practices.

In 1992, Vice President Quayle’s Space Policy

Advisory Board’s report (hereafter, the Quayle report) took a somewhat less optimistic view of the

situation. It opened with the observation that

“today, a unique combination of circumstances is

adversely affecting the U.S. space industrial

base.... [It is]...faced with major uncertainties

from each of three business areas: military space,

civil space and commercial space.”12

The Quayle report noted that the space transportation industrial base was affected almost

equally by DOD and NASA actions and that, for

different reasons, both budgets were under pressure. The report concluded that military space

might fare better than other defense sectors, since

many of the production systems were not keyed

directly to the past Soviet threat. For NASA’s part,

the report noted that a flat budget and growing operational commitments meant that NASA would

be hard pressed to undertake new initiatives in

7 For a further discussion of these different views, see box 6 in U.S. Congress, Office of Technology Assessment, The National Space Transportation Policy: Issues for Congress, OTA-ISS-620 (Washington, DC: U.S. Government Printing Office, May 1995), pp. 44-45.

8 One reviewer commented that there are also payload-related variations that tend to make each launch vehicle essentially custom-made,

whether it is built for NASA, DOD, or a commercial customer.

9 U.S. Department of Defense, Industrial Assessment for Space Launch Vehicles (Washington, DC: Department of Defense, January 1995) ,

p. ES-1.

10 Ibid., p. ES-8.

11 Ibid., p. ES-10.

12 Vice President’s Space Policy Advisory Board, “The Future of the U.S. Space Industrial Base: A Task Group Report,” November 1992,

pp. 23-24.
16 | The Lower Tiers of the Space Transportation Industrial Base

technology or space systems, which contribute

significantly to the competency of the space transportation industrial base.13

Turning specifically to the industrial base, the

Quayle report described it as “capable, but fragile.” Addressing the lower tiers (and focusing

mainly on spacecraft rather than launch vehicles),

it noted:

Many aerospace prime contractors are concerned that cutbacks in government procurements or declines in export orders will quickly

eliminate unique capabilities provided by second- and third-tier contractors, create foreign

source dependencies, or even lead to production

gaps (“dark factories”) that can only be bridged

at much greater expense than that associated

with maintaining capabilities. In the space field,

some important components such as solar cells,

nickel cadmium batteries and control moment

gyros have only a few domestic sources.14

OTA’s analysis of this case, as well as comparison to the situation across the broader defense industrial base, suggests that both views are partly

valid. Given the right mix of ample funding and

adequate lead time, prime contractors can probably ensure the continued availability of critical

subsystems and components, particularly if they

are not constrained by government requirements

that limit their flexibility unduly. However, prime

contractors cannot be expected to take preventive

steps to maintain lower-tier capabilities unless

they can expect to profit from doing so. For this

reason, the risk is real that interruptions in the supply of critical lower-tier products could disrupt

important DOD and NASA missions.

IMPLICATIONS OF FUTURE VEHICLE

CHOICES

Current NASA and DOD development plans include three principal programs under the overall

rubric of the National Space Transportation

Policy:

 The X-33, a sub-scale advanced technology

demonstrator. It will be, at a minimum, an autonomous, suborbital, experimental precursor to

a commercial, single-stage-to-orbit, reusable

launch vehicle (RLV) in the medium-to-heavy

payload class.

 The X-34, a partially reusable demonstration

vehicle for small LEO payloads.

 The Evolved Expendable Launch Vehicle

(EELV), a new, single family of medium and

heavy launch vehicles based on an evolutionary

redesign of one or more existing ELVs.15

All three systems are being designed to reduce

space transportation costs, with the greatest cost

reductions planned for the RLV systems.

Many lower-tier firms, particularly those involved in production of ELV subsystems or components, are skeptical that partially or fully reusable systems will replace ELVs for all

applications. In any case, their economic survival

depends on the correctness of this judgment; for

example, manufacturers of large solid rocket motors and their suppliers are concerned that the

X-33 concepts discussed so far exclude the use of

large solid rocket motors.16 Conversely, some

firms that have developed competencies in systems and subsystems used in aircraft or in the

Space Shuttle see the reusable systems as more in

13 Ibid., p. 24. This prediction was made well before recent major cutbacks in NASA’s budget.

14 Ibid., p. 25.

15 See U.S. Congress, Office of Technology Assessment, The National Space Transportation Policy: Issues for Congress, May 1995, op.

cit., footnote 7. In addition, NASA is planning a modest series of flight tests using a modification of the McDonnell Douglas DC-X, called the

DC-XA, and may pursue major block upgrades to the Space Shuttle beginning in 2000, if the X-33 program does not look as if it will lead to a

commercial RLV.

16 A LEO RLV could be designed to accept solid rocket motor strap-ons to boost its orbit or increase its payload capacity.
Chapter 2 Characteristics and Observations | 17

their interest, although they typically point out

that once a few reusable systems (perhaps five,

initially) are built, their role would be reduced to

maintenance or the supply of spare parts.

In addition to these proposed governmental initiatives, several private-sector efforts could affect

the prospects of the lower-tier firms. These include:

 McDonnell Douglas’ initiative to develop a Delta III launch vehicle to compete with Atlas, Ariane, Long March, and Proton.

 Efforts by Lockheed Martin and Orbital

Sciences, in particular, to respond to a projected

demand for increasing numbers of small launch

vehicles.

On May 10, 1995, McDonnell Douglas announced that it intends to develop the Delta III, a

medium-heavy ELV capable of placing up to

8,400 pounds in geosynchronous transfer orbit. It

made this decision on the strength of a contract

with Hughes Space and Communications International for 10 firm launches of Hughes’ largest satellite, the HS601, plus 10 or more additional

launches. The first 10 launches would take place

from 1998 through 2002, with optional launches

continuing through 2005. The total value of the

contract, depending on options exercised, could

be up to $1.5 billion.17

The Delta III development could result in an

improvement in the U.S. market share in its

launch class, to the extent that it wins orders that

would otherwise have gone to Ariane, Long

March, or Proton. But it could also undermine Atlas’ market share, a prospect that may partly explain Lockheed Martin’s decision to form a new

marketing arrangement to market the Atlas and

Proton vehicles jointly. Hence, the Delta III’s

entry into the market appears likely to result in a

small to moderate expansion in the demand for the

products of the U.S. lower-tier firms.

The chief commercial application for small

launch vehicles, such as Lockheed Martin’s LLV

and Orbital Sciences’ Pegasus and Taurus, will be

the launch of LEO communications satellites. In

its latest projections of the demand for LEO

launch services, the Department of Transportation’s Commercial Space Transportation Advisory Committee estimates small launch vehicle demand at 4 launches in 1995, growing to 9 to 14 per

year from 1996 through 2005.18

The Advisory Committee projects that demand

for medium-to-large launch vehicles from this

source will equal 5 to 10 per year during

1996-1998, from 0 to 6 per year in the years

1999-2001, 6 to 9 per year in 2002-2003, and 4 to

6 per year in 2004-2005.

Attainment of these levels of demand for either

size class of launch vehicle depends on realization

of scenarios involving the operational deployment of two to three “Big LEO” satellite systems,

such as Motorola’s Iridium, and one to two “Little

LEO” systems, such as Orbital Sciences’ Orbcomm.19 It is not yet clear, however, whether

these expectations will materialize. Projections of

launch demand resulting from new satellite services have sometimes been severely overstated.20

Increased demand for small launch vehicles (a

field in which the United States, at this time, is in a

dominant position) could be a positive development for the industry, including the lower-tier

17 McDonnell Douglas Aerospace press release, May 10, 1995; Hughes Space and Communications International press release, May 10,

1995.

18U.S. Department of Transportation, Commercial Space Transportation Advisory Committee, “LEO Commercial Market Projections,”

May 1995.

19 The distinction between the two lies in their capabilities and, secondarily, the size of the satellites used. For purposes of this study, the

significance is that “Little LEO” systems will rely largely on small launch vehicles for both initial deployment and the launch of replacement

satellites, while “Big LEO” satellites are to be launched initially on medium-heavy launch vehicles, with only replacements carried on the smaller vehicles.

20 For example, inflated expectations for the launch of large numbers of direct TV broadcast satellites in the mid-to-late 1980s seriously

distorted estimates of launch vehicle demand at that time.
18 | The Lower Tiers of the Space Transportation Industrial Base

firms. On the other hand, these vehicles are relatively cheap and simple; the per-vehicle return to

the lower-tier firms is thus relatively low

compared with larger vehicles.

Growth in demand for small launch vehicles,

most of which use solid rocket motors, could also

help maintain the industrial base for the production of long-range ballistic missiles, through sustaining demand for large solid rocket motors and

expertise in their application to complete systems.

To the extent that the LEO market for medium-tolarge ELVs does indeed develop, it could further

strengthen the business base for lower-tier firms.

As mentioned in chapter 1, however, commercially viable RLVs could significantly alter future demand for ELVs.

SINGLE SOURCES AND SOLE

SOURCES—HOW VULNERABLE?

One response to competitive pressures and declining markets on the part of the primes has been to

seek cost savings through greater vertical integration (bringing work in house that formerly was

done by subcontractors or suppliers) or through

reducing the number of outside suppliers of a given subsystem or component part. In this respect,

their behavior is no different than that of much of

U.S. business in recent years. An important question, however, is whether these trends adversely

affect the sustainability of lower-tier capabilities

in the U.S. space transportation industry, given the

high-cost, low-volume, specialized character of

the business.

The authors of the DOD’s Industrial Assessment for Space Launch Vehicles see no correlation

between a reduced number of lower-tier suppliers

and loss of industrial capabilities. They believe

that consolidation and extensive use of single

sources is a natural course of action for U.S. aerospace companies, given the high cost of qualifying products for space applications. They point

out that the U.S. national interest lies not in the

preservation of particular companies, but rather of

essential capabilities. They predict fewer lowertier firms (as well as prime contractors), but do not

foresee loss of essential capabilities among the

lower-tier firms, and expect to address any problems that develop on a case-by-case basis.21

Others, including a majority of lower-tier firms

contacted and some government officials familiar

with the space transportation industry, are not so

optimistic. They believe that the combined impact

of limited demand for space transportation, skepticism about government intentions, strained relations with prime contractors, increasing foreign

competition, the perceived ineffectiveness of procurement reform, and other, psychological factors

may cause a number of key firms to leave the

space transportation market altogether, and will

deter new firms from entering that market.

They also believe that the sharp decline in entry

of new engineers and scientists into the space

transportation industry, coupled with the layingoff or retirement of many experienced, senior personnel, is leading to a weakening of the sector’s

overall capabilities. Finally, they note the vulnerability of some key lower-tier firms to external

forces, such as environmental regulations that

could challenge their ability to stay in business.22

OTA agrees with DOD that a reduction in the

number of suppliers, by itself, is not inherently

worrying. Indeed, a shakeout resulting in fewer

suppliers, each receiving a larger share of the

available business, might be a healthy adaptation

to the post-Cold War environment.23 However,

there is a legitimate concern that the shakeout will

go too far, and that the primes will encounter inordinate delays and high costs related to qualifying

new firms or facilities to replace suppliers who

have left the marketplace.

21 U.S. Department of Defense, personal communication, June 1995.

22 Producers of solid-propellant rocket motors appear to be particularly vulnerable to environmental regulatory pressures.

23 U.S. Congress, Office of Technology Assessment, Building Future Security, op. cit., footnote 2, pp. 90-91.
sion at

o

The

eluded

Workshop

Highlights

TA’s workshop on the lower industrial tiers of the space

transportation industry was held on March 2, 1995. Workshop participants are listed in the front of this report. Unlike chapters 1 and 2, this chapter reflects only the discusthe workshop.

complement of firms represented was fairly diverse. It inseven manufacturing and three service firms, ranging in

size from a few millions of dollars in annual sales to over a half–

billion. Firms were selected from a cross section of the industry,

including avionics, propulsion, structures, materials, instrumentation, and fuels. And they were selected for their work on the

full–range of current space launch vehicles and long–range ballistic missiles, as well as many retired systems. The firms characterized themselves as occupying predominantly the second and third

tiers. l

CURRENT STATUS AND CRITICAL SECTORS

The single most striking characteristic of the discussion at the

workshop was the general pessimism of the participants, based on

the view that the defense and space markets were shrinking and

that this trend was unlikely to reverse itself.

One participant said that his firm has dwindled from 500 employees to 240 over the last three years, and is having difficulty

getting its suppliers to build the obsolete components that are re1 According to preliminary input–output analysis, OTA estimates that the second and

third tiers account for more than 35 percent of the value added in space transportation systems. OTA conducted telephone interviews with representatives of the fourth and lower

tiers, which account for less than 10 percent of value added, to augment the discussion in

chapters 1 and 2.

“... the United

States has not yet

adequate/y defined

its goals in the

space launch

field.. .”

3

I 19
20 | The Lower Tiers of the Space Transportation Industrial Base

quired to support existing launch vehicle designs,

because of their pessimism about the future of the

market.

Another agreed, and said that as a result, his

firm’s facilities are obsolete and the know–how to

maintain and operate them is dissipating as retirements and downsizing continue. He reflected

skepticism that current launch vehicle development studies would result in anything being built,

and emphasized that preservation of the industry’s

skill base could not be achieved by studies, but

only by the actual construction of new or evolved

launch vehicles.

Another participant said that his firm would be

closing its plant for the manufacture of large solid

rocket motor nozzles at the end of March 1995, because its business base had evaporated. The result,

he said, would be to leave only one surviving firm

in his market niche.

Another participant described his firm as heavily diversified, with as much sales volume in the

non–aerospace market as in aerospace. He described the company’s military and other government business as shrinking rapidly, and its remaining base primarily in the aircraft field rather

than the missile and space business.

When asked to identify elements of the lower–

tier industrial base that are being particularly hard

hit, one participant said that solid propulsion is especially vulnerable. Makers of long–range ballistic missiles and tactical missiles have little work.

If that trend continues, they will become increasingly dependent on their related launch vehicle

business both for work and for maintaining critical missile capabilities.2

Solid rocket motors are currently used in several expendable launch vehicles or ELVs (e.g., Delta, Titan, Lockheed Launch Vehicle, and Taurus),

and are a major component of the Space Shuttle.

The Lockheed Launch Vehicle and the Taurus use

a motor derived from the Peacekeeper intercontinental ballistic missile. DOD and NASA space

transportation development plans, however,

could all but eliminate the need for solid rocket

propulsion in launch vehicles, if the Evolved Expendable Launch Vehicle (EELV) program and reusable launch vehicle (RLV) programs are successful and rely exclusively on liquid–fueled

engines.3

Continuing on this theme, one participant

noted that some firms producing inputs to the solid rocket business are also leaving the business.

For example, he said, there is only one maker of

rayon for carbon–carbon composite structures.

Aerospace forgings are almost impossible to get

now in any size, he continued. There are only a

handful of shops in the country big enough to handle the equipment, and some of them are leaving

the aerospace business.

As for restarting a program after a hiatus, he

said, once a plant closes, its specialized facilities

are lost to the industry. In his view, it is almost too

late to reverse the trend. NASA’s current proposal

for the X–33 RLV foresees a delay of 4 to 5 years

before serious production can begin on anything

beyond the initial demonstration vehicle, and

many subcontractors will be out of the business by

that time.

One of the most serious problems faced by lower–tier companies is the loss of experienced

people and a lack of hiring of young engineers and

technicians. All the firms that commented on this

issue said that they have not hired anyone in several years. Young engineers are staying away from

aerospace, they said, because of its declining employment and uncertain future. One mentioned

that his firm had previously drawn on a pool of

young engineers who came to the firm under

2 All current U.S. long–range ballistic missiles have solid rocket motors. If solid rocket motor capabilities were lost, the government could

conceivably design new weapon systems based on new RLV technology and liquid–fueled engines. This possibility is not now being seriously

considered.

3 See U.S. Congress, Office of Technology Assessment, The National Space Transportation Policy: Issues for Congress, OTA–ISS–620

(Washington, DC: U.S. Government Printing Office, May 1995).
Chapter 3 Workshop Highlights | 21

work–study programs, but that the firm had

stopped using these “co–ops” several years ago.

In general, participants said that fewer than half

of the people in their companies involved in

launch vehicles five years ago are still in the field.

In time, they predicted, even though some firms

might survive, they would not have retained the

pool of skills unique to the industry (such as designing for the special requirements of operating

in the vacuum of space), because work and training will not have continued.

Participants also commented on the dearth of

investment in launch vehicle–related industrial

facilities. They asserted that there has been little or

no investment over the past 25 to 30 years. Materials and fabrication techniques have not been

changed, they said, and space technology in some

areas, such as advanced composites, is “Stone

Age.”

Participants identified environmental regulations as a major brake on doing business. They felt

that stringent application of environmental controls was significantly raising their costs and complicating their operations. In this regard, they cited

the phasing–out of ozone–depleting chemicals,

Superfund–related litigation and cleanup costs,

and overly stringent water–quality requirements

on manufacturing facilities.

One participant noted that even though water

entering his facility was more contaminated than

when it left, his firm was obligated to make its runoff meet Clean Water Act standards as if the supply water had been pure to begin with.

Another participant mentioned that lower–tier

firms in Southern California are finding themselves unable to obtain working capital, even with

firm contracts in hand, because banks avoid funding anything in the aerospace field. Others had

heard of similar cases in other parts of the country,

and speculated that banks fear that any government aerospace contracts are imminently vulnerable to alteration or cancellation. 

Finally, one participant cited an ongoing Air

Force study that he said appears to conclude, on

the basis of limited data, that 35 to 40 percent of

the lower–tier firms in the space industry will

cease doing government–related business within

the next five years. He believes there would probably still be sources for the items that the lower–

tier firms had provided, but said that the impact on

the lower tiers would be far greater than on the

primes. The primes, he said, would find other

business to do or consolidate, but they would not

go out of business.

THE IMPACT OF FUTURE VEHICLE

CHOICES

Most participants expressed skepticism about the

proposed EELV and X–33 RLV programs. Several strongly doubted that there was a commitment

in the government to build a new vehicle after so

many false starts. One argued that the EELV program was likely to be carried through, but others

commented that at best the EELV program was

more likely to result in an upgraded Delta or Atlas

than a new family of vehicles.

Another participant said that while a follow–on

RLV derived from the X–33 demonstrator would

clearly be a new vehicle, he foresaw a repetition of

the Space Shuttle experience, with cost growth

undermining any hoped–for savings. He further

doubted that the funding could be found for the

level of effort required. Noting that the government was seeking substantial corporate investment in the program, he said that the prime contractors were skeptical too, and that the lower–tier

firms had been burned too often. Some participants expressed concern that the EELV and X–33

RLV programs were not sized to meet the needs of

the commercial market and the smaller, cheaper

spacecraft that both DOD and NASA are emphasizing.

Commenting on NASA’s stated plans to decide

in 2000 whether to pursue a next–generation RLV

or invest in refurbishing the Space Shuttle, several

participants agreed that it would probably be

cheaper to build a new RLV than to redesign or rebuild the current Shuttle fleet. Some doubted that

NASA considers extending the life of the Shuttle

to be a serious option, while others believed that

the most likely outcome of developing the EELV

and RLV in parallel would be a decision not to pursue the RLV, and to upgrade the Shuttle instead.
22 | The Lower Tiers of the Space Transportation Industrial Base

Two participants in the workshop noted that

they had been approached by prime contractors to

join teams bidding on the X–33 program, but that

the primes had been seeking significant advance

payments from subcontractors wishing to join

their team. Their firms had refused to contribute,

these participants said, and so other firms were

chosen for those teams. Their reluctance was not

due to a lack of capital, but because they did not

foresee any future market. They said that their

firms had contributed willingly to new project

teams in the commercial aircraft industry, where

they saw the future business potential.

If the X–33 RLV demonstrator succeeds and a

decision is made to go forward with a full–scale

RLV, some firms at the workshop believed they

would benefit because of the “airplane–like” nature of many of its systems. Those firms primarily

associated with ELVs saw no relevance to their future prospects, which are closely tied to the future

of the EELV program.

One participant noted that although any benefit

to his firm from the Space Shuttle program was far

in the past, a large share of the NASA budget continued to go to that program, rather than to supporting the industrial base. He predicted that a future RLV would follow a similar pattern, resulting

in a limited amount of initial business for the

lower–tier firms, followed by years of little or no

return while the money flowed into operations.

RELATIONS WITH THE GOVERNMENT,

PRIMES, AND MAJOR

SUBCONTRACTORS

Relations with both the prime contractors and the

government are a major concern for workshop

participants. One flatly described the prime contractors as his firm’s main competitors, because of

their tendency toward greater vertical integration.

Others agreed, adding that the accounting systems

of the primes tended to obscure the true cost of

substituting in–house manufacturing for subcontracting.

For example, one described a situation in which

his firm lost a contract after producing a few units

because the prime wished to produce the units in

house, and could make doing so appear less expensive by not including overhead in the cost figure. Two others noted experiences in which

primes first took work in house, then re–dispersed

it to subcontractors once it became clear that in–

house production was not economical. Another

pointed out that because subcontractors were

downsizing and losing skilled personnel, prime

contractors increasingly risked having no alternative to doing the work themselves, even if they

lacked the subcontractors’ past experience and

ability to do it well.

Several of the participants complained about

being asked by prime contractors to contribute to

front–end costs as a condition of teaming on new

business. One said that since his firm had diversified, and its launch business was no longer a

large–enough share of the total, the company

would not invest in this way. He predicted that this

practice would cause some of the most–skilled

lower–tier firms, subcontractors that had built

quality products since the 1950s, to disengage

from the space market, forcing the primes to build

complete systems more and more in house or to resort to new, inexperienced subcontractors.4

Another participant commented on the potential difficulties brought on by consolidation

among the prime contractors, increasingly obliging lower–tier firms to deal with only one or two

potential customers. He said that the prime contractors were applying intense pressure to the

lower–tier firms to reduce costs. He emphasized

the difficulty that both prime contractors and lower–tier firms—accustomed to working with government requirements—would have in adapting

to the commercial marketplace.

4 A reliance on so–called “build–to–print” companies, in particular, can in the long–run be a false economy, if full–service subcontractors

with design capabilities are driven from the market. See Building Future Security, OTA–ISC–530 (Washington, DC: U.S. Government Printing

Office, June 1992), p. 94.
Chapter 3 Workshop Highlights | 23

Turning to the government, one participant said

that he believed that the government procurement

culture and its counterpart, the corporate culture

accustomed to doing business with the government, together represented the biggest obstacle to

sustaining the lower tiers of the space launch vehicle industry.5

All participants were strongly critical of government procurement practices, and frustrated by

the dissonance between claims of substantial reforms and the requests for proposal to which they,

through the prime contractor, had to respond.

They felt strongly that the effects of procurement reforms are not being felt at the lower tiers.

All complained about the cost and complexity of

conforming with government accounting and

technical oversight requirements. One participant

argued that firms might be dissuaded from entering the commercial market place or implementing

cost–saving methods for that market, because of

government “lowest–price” requirements that

would oblige them to reduce their prices to the

government if they offered their goods or services

on the commercial market at less than the government contract price.

There was some debate about the behavior of

the prime contractors in the area of requirements.

Most participants felt that prime contractor behavior tended to mimic or even reinforce the government’s intrusive controls and inspections. At least

one participant disagreed, arguing that some

prime contractors (those with both commercial

and government business) are capable of significantly greater flexibility and commercial behavior

when not under government procurement strictures.

One participant felt that the government’s application of the Commercial Space Launch Act6

could inadvertently pose a severe competitive

threat to his firm. On the one hand, he complained

that the government was making too much use of

dedicated payload processing facilities, in lieu of

those commercially available. On the other, as the

government downsizes, he foresaw the possibility

of a government decision to privatize these payload processing facilities at minimal cost, in effect

setting up a competitor who would not have to invest substantially in order to enter the market.

Another felt that particularly in the area of program support and software development, the government was already a strong competitor, taking

business from the lower–tier firms. Since the government was also downsizing, and beginning to

cut deeply into its infrastructure, he believed that

the same forces leading to more vertical integration by the primes—the desire to protect their employment and skill bases—would also lead the

government to pull more of the lower–tier work in

house (e.g., into the defense, energy, and NASA

laboratories and centers).

RESEARCH AND DEVELOPMENT

There was a general consensus that lower–tier

companies were not spending on R&D unique to

launch vehicles, because of a lack of confidence in

the future of that market. One participant said that

his firm ceased such expenditures three years ago.

Instead, he said the firm is spending for R&D in

areas with future business potential. Another firm

would only be willing to spend on R&D related to

launch vehicles if the resulting technology would

have a direct, specific application to its much larger, more stable commercial aircraft business.

One participant said that the underlying problem remained the lack of confidence in the government’s committing enough resources to build a

new launch vehicle. Another said his firm did only

very narrow, focused R&D with immediate application to its products, and could not afford to do

5 For a complete discussion of these issues see U.S. Congress, Office of Technology Assessment, Assessing the Potential for Civil–Military

Integration: Technologies, Processes and Practices, OTA–ISS–611 (Washington, DC: U.S. Government Printing Office, September, 1994)

6 The Act was designed to facilitate the transfer of government–owned launch vehicle components, equipment, tooling, and ground facilities to the private sector. It was subsequently repealed and recodified as 49 U.S.C., Subtitle IX.
24 | The Lower Tiers of the Space Transportation Industrial Base

any related to launch vehicles. Still another commented that technology available off the shelf in

his company is so far ahead of that used in current

ELVs that there is no real need for additional R&D

to support space transportation needs at this time.

Others observed that another disincentive to

doing self–funded R&D was the risk that the

primes would secure the rights to the resulting

technologies and apply them to other programs,

from which the developers would receive no residual benefit.

Several participants said government funding

is fundamentally ineffective in stimulating or supporting R&D among lower–tier firms. They

agreed that such funding is almost always absorbed by the prime contractors, so little reaches

lower–tier firms.

One cited work done for the Advanced Launch

System, entirely on his firm’s own account; none

of the program’s funding filtered down to the subcontractors. Another commented that prime contractors typically negotiate cost–plus development contracts with the government, but try to

persuade their suppliers to take on fixed–price development tasks. Participants generally agreed

that many lower–tier firms are not willing to take

such risks, given their bad experience with earlier,

abortive launch vehicle programs.

Generally, participants felt that most lower–tier

firms got little benefit from various mechanisms

established by the government to assist industry

R&D, such as Cooperative Research and Development Agreements or the Advanced Technology

Program. They noted that doing non–product–

related R&D for the government was not usually

attractive to lower–tier companies, because of potential difficulties establishing subsequent technical data rights.7 Participants doubted that OTA

would find many lower–tier companies wanting

to do R&D for its own sake.

There was particular dissatisfaction about

working with NASA field centers and Department

of Energy national laboratories on technology development projects. One participant said that projects done at NASA’s Lewis Research Center, for

example, which seemed to be targeted at specific

problems in Shuttle design, were never incorporated in the vehicle. Another said that he believed

many technology projects at laboratories were

make–work. He found it hard to understand why

companies should want to be involved in such activities. Still another spoke of finding his company in actual competition for focused R&D contracts with the in–house workforce at a national

laboratory.

GLOBAL COMPETITION AND

COOPERATION

Participants generally agreed on the need to ensure launch capability for national security missions, but disagreed about whether this required

government intervention to ensure the survival of

any company or group of companies.

One participant was concerned about the potential for the emergence of a single U.S. launch company, while others questioned if even one needed

to survive. One mentioned the possibility of

stockpiling either U.S.– or foreign–produced

launch vehicles to serve defense needs, in lieu of

trying to maintain production capability.

Participants agreed, however, that at best, the

government was focusing on the primes, and that

little attention was being given to the impact of

foreign competition on the lower tiers. One participant believed that neither DOD nor NASA would

intervene to save a particular company. All agreed

that restoring a launch vehicle production capability after permitting a hiatus would be very expensive and difficult, and that allowing foreign firms

control of the launch market would potentially

lead to higher launch costs for U.S. satellite

manufacturers and eventually to the erosion of the

U.S. lead position in satellite manufacturing and

services.

Several of the firms represented in the workshop sell limited amounts of equipment to foreign

7 Small subcontractors also often lack the manpower and legal expertise to compete for government R&D programs.
Chapter 3 Workshop Highlights | 25

launch vehicle programs, but all agreed that such

business is minor compared to what could be expected if a new U.S. program or programs got underway.

PRESERVATION OF THE TECHNOLOGY

AND INDUSTRIAL BASE

Participants in the workshop felt that the United

States has not yet adequately defined its goals in

the space launch field, and that reaching a consensus on these goals was a fundamental precondition

to specific measures to preserve the space transportation technology and industrial base.

Participants generally agreed that if the President and Congress wished to preserve the U.S.

space transportation industry, including its lower

tiers, it should make a real, long–term commitment to development of at least one new launch

vehicle. Most believed that no single system,

whether expendable or reusable, could meet all

probable requirements. All participants agreed

that there was no substitute for a real development

program to revive the lower–tier firms, and that

only with confidence in the long–term intentions

of the Congress would companies be willing to

take the risks and make the long–term investments

required to keep the U.S. space transportation industry viable.

Participants largely agreed on the need for the

government to do more to safeguard and stimulate

the technology base. Several participants strongly

advocated earmarking focused (as opposed to basic) R&D funding exclusively for the private sector, instead of allowing the national laboratories to

compete for it. They also urged streamlining the

government’s R&D management processes, so

that more of the funding would actually go to do

the research, and less to oversight and management. Finally, they emphasized the need for structural reform to ensure that R&D funding would

flow down past the prime contractor level, and

that the benefits of procurement reforms would be

felt by lower–tier firms.