The Eaker Institute
for Aerospace Concepts
"Building the Final Frontier:
An Eaker Colloquy on the future of the U.S. space industrial
base"
December 1, 2000
Gen. Thomas Moorman: People
remember your stories often better than your content, so I will
start off with a story. After I retired, I did some speaking. I
was speaking to a group somewhat like this. An individual who
used to work with me who is now in the private sector was
sitting up front. He is key to the story. I said, "Hey, can
everyone hear me?" A person way in the back says,
"General, speak up. I can’t hear you real well".
This guy up in the front jumps up and he says, "I’ll
trade places with you. I’ve heard Moorman speak before".
That didn’t happen too often when I was
on active duty in the last few years, but I will try to say
something that is compelling that will keep your attention. The
subject is the space industrial base. Let me put it in the
context of what I am going to talk about and in the context of
the AFA, if I can. This was a study that began in the September
1999 time frame. It is about a year old. I will give you the
slides leading up to it. I think it is extremely significant to
be talking about the industrial base to this group and to
besponsored by the Air Force Association.
First chart. If I talk about
the Air Force and specifically the Air Force Association, the
idea that the Air Force and industry are a partnership has a
long lineage. I would like to think that our Air Force has
appreciated this linkage from day one way back to the Army Air
Corps. Appropriately enough, the statue that you see when you
come in the AFA is [Lt. Gen. James H.] Jimmy Doolittle.
And [Gen. Henry H.] Hap Arnold was the first to really worry
this problem way back when he was a lieutenant colonel and
colonel. He was concerned about aircraft production in 1920s
and in the 1930s.
Everyone also knows about [Dr. Theodore]
von Karmen. Von Karmen was the mother of all commissions and the
mother of all studies was his studies that were commissioned by
Arnold right after World War II. What he did was have as a major
portion of one of his volumes, this linkage between the U.S. Air
Force and industry and the appropriateness of worrying about the
industrial base and the appropriateness of worrying about
science and technology as a component of that. Ballistic missile
development and production, you may not know this individual
[John] von Neumann, but he was the person who really led to a
lot of the recommendations having to do with the ballistic
missile program and later with the space program. The last
person on this chart we all know and all revere and respect is
General [Bernard A.] Schriever.
It is wholly appropriate for me to be at
this group talking about the industrial base and specifically
the space industrial base. This also has been interesting
because the AFA has just sponsored the major symposium out in
Los Angeles, which a few years ago changed its focus to worry
about the space program in the LA venue, and one of the linkages
and one of the themes out there that has really improved, I
think, in the last 15 years is the bringing together of the
senior leadership of the Air Force as well as the worker bees of
the Air Force, with industry. The last few years, you see all
the CEOs now come to that and you talk problems that are of
mutual concern. That has set the stage of AFA and the relevance
of this study for AFA and the U.S. Air Force. Next chart.
The study that General [John] Shaud [AFA
Executive Director] mentioned began last fall and the fall of
1999 and it was sponsored by two folks: Dr. Jacques Gansler, the
USDA&T [Under Secretary of Defense for Acquisition and
Technology] and Mr. Keith Hall, the director of the National
Reconnaissance Office. Let me try to talk about the context in
which this was commissioned. First of all, Dr. Gansler, if you
all don’t know, wrote his PhD thesis on the defense industrial
base. Interestingly enough, he ended up being a daunting client
for Booz Allen. But he was concerned about the issue. But the
real driver for this issue is the former Dep Sec Def [Deputy
Secretary of Defense], John Hamre. Mr. Hamre was getting a lot
of space-related activity being briefed to him in the fall.
There was the future imagery architecture decision. There was
General Larry Welch’s broad area review on space launch. There
were a series of consolidations being considered, and we had at
the same time defense stocks beginning to go down substantially.
He was the one who kicked this off, and I hadn’t realized in
the fall of 1999 how interested John Hamre was in this subject
until about a month after we commissioned this, he gave what has
now been identified as the famous Martha Stewart speech, wherein
he described that Martha Stewart’s company had an initial
offering higher than most defense stocks and it was going crazy
while our stocks were going down. He took a lot of heat from
Wall Street, I might add, on that, but that was what was a
couple of lines in a speech wherein he started formally talking
about his concern about not just the space industrial base, but
the defense industrial base. Quite honestly, God bless him, I
think you will see when I go through this pitch why I think it
was inspired for him to do that. We were asked to look at
providing assessments and options for DoD and NRO consideration.
Next chart.
Here is the task and it was an important
task and the words are important and I’ll try to define them
for you. It says, is the projected space and industrial base
sufficient? What sufficient means is, can we do what we have to
do now? Do we have the capacity to do what we need to do and if
we look out to the future some 15 years will we have the
capability to do this?
National security, that means the
intelligence community and the Defense Department. For the next
15 years, our sense was you couldn’t get any further than that
and would there be adequate competition? As we did the study in
this case we looked at competition to say, not only do you have
two or more in the game, but can they make any money at it? That
latter thing is a very important aspect and you are going to see
that I have a lot of industrial component to this talk because
the idea of making money and being a profitable industry has to
be a consideration for the Defense Department. Interestingly
enough, this is what was in scope, which were spacecraft
sensors, launch boosters and systems integration. Outside of
scope, were mission ground stations and the so-called TPED –
tasking, processing, exploitation and dissemination. As it
turned out, this was big enough without going this way. Next
chart.
I am not going to spend a lot of time and
bore you with process, but I will give you a little bit of
framework here. Data collection involved talking to everybody
who was involved in the business, in the government, in the
space business and then going and talking to the 21 major space
companies. I am very pleased to say that we got tremendous
cooperation from industry. They filled out a very detailed
brochure or series of questionnaires for us to give us the data
to do this study. They turned it around and we came up with a
lot of ways to analyze the data. Interestingly enough, and it
shows my short sightedness or what I didn’t understand about
the industrial base. When I started this study, I believed we
would be talking about technologies, that we would be talking
about, can we continue to make the high-tech stuff or do we have
sufficient competition in the production of rad-hard parts? Or,
solar cells? Or rubidium clocks? Or whatever have you. We
identified a series of those. As it turns out, the important
thing to me in this study is up here in the macro issues,
although we spent a lot of time - to give you a context, I
briefed Dr. Gansler for 12 hours on this study in three
different sessions. You are going to get the abbreviated form,
and even this is probably going to be a little long for you.
This is where we spent our time, and I’ll try to do the foot
stomping to wake you up about the things that you ought to be
interested in, and our outputs were a series of deep dives on a
lot of different subjects. Next chart.
This is an interesting chart in that we
now have a data base, courtesy of the industry and the
industry’s cooperation. By the way, I should say, one of the
reasons we got as the cooperation we got was that –
fortunately, I represent an outfit that is not a hardware house
so it was easier for people to deal with giving data, but there
was concern in the questionnaire. There were four categories of
data in the information that we got. The first category of data
was not releasable to the government, interestingly enough. The
second category was data where the industry had to be obscured
– the specific company. Third category was proprietary. Fourth
was things you could read in annual reports. With that as a
caveat – and I signed up to a series of non-disclosure
agreements – we were able to get a lot of data from industry.
As a consequence, one of the things that
it allows you to do now – and this is just a framework,
because everyone worries about costs and how you build costs up,
what this tells you is, if you are looking at a satellite, about
60 percent of the satellite in an aggregate sense is the
payload. About 20 percent is systems integration and about 20
percent is the bus, the thing that the payload rides on. We are
able to break the data down to assembly level in costing. This
is a very valuable tool now in a costing sense and it allowed us
to assess a lot of things subsequently. Next chart.
Here the people we talked to in the demand
source, represent virtually all of the government customers for
space activities or the acquirers and operators of space
systems. As you note, we also talked to NASA and we talked to
NOAA and you may say, what does NOAA have to do, but they are
building the next generation of weather satellites and
environmental monitors. Next chart.
These are the industry sources and some of
you all from industry will see your companies on here.
Twenty-one companies, about 90-92 percent of the business. You
may say, gee, I don’t see a lot of the smaller subs. In the
space business, as many of you all know, in some cases a prime
is a sub and in other cases you turn it around where a major
company is a sub and then he’ll become a prime, if you
understand what I am saying. There are relatively – the big
guys constitute most of the industry. Eight percent are the
smaller subs. Next chart.
Because I never know whether I’ll finish
this pitch in my allotted time, I am going to give you the
conclusion up front. The foot stomper or the Cliff note to this
brief is that there is more than adequate capacity. In fact,
there is still overcapacity in this industry, and I will talk to
you about that. By and large, there is sufficient competition. I
qualify that. The by and large is that we found there are areas,
and not a lot of them, but there are certain areas where there
is no commercial market or there is not enough government market
to have more than one producer. That ends up being what I call a
center of excellence. A center of excellence is a monopoly you
want. There are a few of those in the space business. I go back
to the theme – if you are going to look at competition, the
competition has to be viable. People have to be able to make
money.
The foot stomper is the deteriorating
financial health of the space sector. It poses a threat to
future space industry sufficiency and competition. The thing
that was the biggest surprise to us was the financial help. I am
going to give you a short financial synopsis on this, but it is
based on an awful lot of data. The sub heading on this is excess
capacity for both launch vehicles and satellites. There is a
growing reluctance for companies to invest in restructuring. The
reason for that is, and something I hadn’t realized, is other
than the first year or so as people downsized and restructured,
the money was not being returned to the bottom line. In the
process, it went into the defense process and it did not go back
to the bottom line, so the share holders and the boards, when
they were sitting around a table, would see and talk about this
and they didn’t see the incentive from the Defense Department
to further downsize, because they weren’t getting a share of
the activity. I think that is an important thing and I am going
to talk to you about how OSD and the NRO have reacted to this
data. But this is a fact that is now understood and accepted.
Erosion of key human resource
capabilities. A foot stomper for you. When we interviewed the
senior leadership in the aerospace industry, the immediate,
unanimous unequivocal number one problem for them all was the HR
people. Big problem for our industry today for lots of reasons
and I’ll talk about that. Another thing that came out that I
had not realized and I was a pretty heavily briefed guy when I
was on active duty, was some trends that had greatly diminished
our innovation. I am going to talk to you about one of those,
which was a big surprise.
Since this chart was made, I think we’ve
had three or four additional consolidations, but at the time
when we briefed, we said there are going to be more
consolidations because of what I said up here. Next chart.
I am going to talk about macroeconomics
for you and it has been a long time since I took economics in
college so this is new-found knowledge. I will put it in what I
consider a run-Spot-run kind of – that I could understand and
I hope it will be clear to you. But the macroeconomics are not
good for the aerospace industry at all and I want to talk to
that. Next chart.
This is a transition chart. Everybody has
seen the decline of the Defense budget since its heyday, from
the 1987-88 timeframe, which was kind of the peak in the Reagan
Administration, and you all have seen this chart, but this is a
transition into industry-speak rather than military speak. You
never see a military chart or a government chart that talks
about compound annual growth rates. This in turn is really a
compound annual reduction. The compound annual reduction
averaged three and a half percent since its heyday. Now, to be
sure, if we look out there, it is programmed to go up in the
next POM gradually and I should give that. This cuts off at
1999. But this is the transition chart. Now, let me talk to you
about return on sales. Next chart.
Let me explain the chart to you. Return on
sales is a metric which is operating income over revenues. This
is percentage before taxes. This is the timeline. Let me give
you a comment on the credibility of the data and what the data
is. The pink line here is data from a Booz Allen data base that
has been maintained since 1980 on 200 sectors in the aerospace
and defense sectors. A sector would be Lockheed Martin
electronics or Boeing military aircraft sales. You can see this
line. Then, because our task was space, we cut it by
approximately 40 space sectors. That is this blue line. The
first thing you do when you look at this is you say, if you are
like I am, you look at this one and this one and nothing else on
the chart makes an impression. So, let me try to explain what
these are. This in simple terms is the cumulative effect of the
Challenger accident and Titan. That is the overwhelming thing
for the space community. This was the cost of coming off the
shuttle and what this is, is right now.
Now I go down here and this is 1999 and
this is pretty precipitous. What I want to leave with you is,
1999 was not a good year for the space business. Not a good year
because I will call you back to just a year ago: launch
accidents, Iridium and ICO [Intermediate Circular Orbit company]
troubles, difficulty in commercial communication sales as a
result of the aftermath of the Cox Commission [headed by Rep.
Christopher Cox, examining technology transfer to China], and
satellites that couldn’t be sold and those kinds of things.
Lots of impact on this. As I say, Dr. Gansler, PhD in economics
of the defense industrial base, he looks at that and he says,
his term, bumpy chart. What should I read out of this bumpy
chart? Let me try to put that into context. Remember it is
return on sales before taxes and over a seven year period,
starting in 1980, this business was about an eight and a half
percent business. That is the return on sales. The next seven
year cut was about a seven to seven and a half business. This
cut gets it down to about seven. While I think this is an
anomaly, what we would say is the inflection point or as you
look out, we don’t think this is going to come back up to
here. The foot stomper is, in a return on sales sense, we are
gradually coming down in this business. That is all I want you
to know. If I look at the services business, we are up in the
15-20-25 percent return on sales. I am not espousing that
aerospace should be there. The hardware business is always going
to be different than services, but this isn’t a real good
trend. That is all. Next chart.
Let’s look at return on assets. This is
a measure of revenues over average assets. Space, again, same
data base. Back here space was a very good business. For one
primary reason is, in this case, remember an asset is - the
government in the early days, because there weren’t that many
people in the business, paid for the facilitization, the special
facilitization. In the space business, big things are like
thermal bake chambers or things like that. Once you start
getting a lot of guys in the business, then the government
backed away from that and industry had to start buying their
own. That is what you see coming down here. Trends are going
down on return on assets. Next chart.
Here is return on assets trend cut a
little different way and now I want to put you in a context so
you can put this, so you can have an appreciation. Here is a
band that I put on here and the band is – again, I want you to
put yourself in the position and what I was trying to get across
to the Defense Department and to the NRO leadership, is you need
to have some appreciation for what the board rooms of aerospace
industries are thinking about when they look at this industry.
What this says is same kind of data. Today this is the current
yield on a good percentage of our major defense companies have a
bond rating of triple B minus. For you all who don’t think in
those terms, that is just above junk bonds. The other thing that
means and that is – and I’ll show you the chart on this –
is when you go out for new money, it costs you 11 percent. Now,
you are sitting around this table now and I have to go do a new
space initiative or new something that requires me to go into
the money market. For that money, I could invest what money I
have in a T-bond and get six percent. I am just trying to draw
the parallel. That is the kind of things people are looking at
as to how good of a business is this. On top of that, and I
don’t have a chart to say that, is the U.S. government because
of uncertainties in procurements, in some cases people said,
"Gee, they are not a particularly reliable buyer. Never buy
as much as they say they do and then they kind of change their
mind on schedule and whatever have you". Again, I am giving
you the talk around the board table. There are a lot of reasons
for that. That explains it. Next chart.
Here is net debt trends and I will say
this cuts off at 1999 and that is when I was doing the briefing,
was the first part of this year and into the summer. But this
basically shows the total amount of debt and I will remind you
all that it begins in this kind of timeframe because in 1993 as
most of you all know, the Defense Department had a meeting and
said, we need to consolidate. Thus, the major industry went into
a major consolidation in this decade. How you read the chart is
it says, when you acquire, you pay money – my terminology.
When you merge, you do it in stock. When you pay money ends up
really hitting you in a debt basis and so what this shows you is
the way industry looks at by company. Let me qualify here. This
works out to be at this point in time, Lockheed had a debt of
about $12 billion. If you’ve been reading today’s financial
or this week’s financial statements, you see Lockheed is
buying down a lot of debt as a result of Saunders and Manassas,
you know, BAE. This is going to come down. This is almost a
worst case, it is when I am looking at it. You look at Boeing.
Boeing was debt-free back here but overwhelming because of their
commercial aircraft business. You will identify and maybe even
participate in a lot of these mergers. Next chart.
This is the obverse or what does it mean
in another way. This is the BIT – earnings before interest,
taxes, depreciation over interest expense. What this says is how
much of your walking around money ends up going to service debt.
That is what this is and if your ratio was one, it means all of
your money is going to pay down the interest on your debt. This
is better now on all of these axises. This shows you the
circumstance. Next chart.
This chart probably is the easiest to
understand and has had the biggest impact in this briefing. It
made a big impact on me and that’s why its here. Everybody I
briefed really "gets it" on this chart. This is credit
rating, and these are companies --Boeing, General Dynamics
(General Dynamics is not in the space business anymore, but
they’re on there for comparison), Litton, Lockheed Martin,
Northrop Grumman, Raytheon, TRW. The first right thing you see
is in 1993 --the consolidation business --in every case, our
bond rating was better in the industry. The second thing you see
is — there are several folks who are down in this area, which
isn’t real good. And they are Litton, Lockheed Martin,
Northrop Grumman, Raytheon and TRW. All go to the marketplace
and money costs them either 10 or 11%. Things are a lot better
than they were a year ago. Lockheed is trying to raise that,
[debt rating], clearly, and buy down the debt. They are paying
almost $2 billion to pay down the debt. Next chart.
Most of you see this in the stock market
if you have a portfolio or if you track all this. The easiest
way to understand all this is not all these metrics I’ve been
giving you, but looking at stock prices. This just says — and
this has changed, by the way, which is pretty graphic. Today the
NASDAQ doesn’t look so good. The Aerospace and Defense Index,
back on January 1st 1996 a dollar in aerospace and
defense was worth a dollar and then on September 1st,
2000, it was still worth a dollar. That’s the composite of
stock prices. I have not updated it, but its up here. NASDAQ
also is down quite a bit. We haven’t done this, but the big
message was that [aerospace-defense] was pretty static and this
[NASDAQ] looked better. These are normalizing, but I guess one
of the messages — in fact--would say to you that Raytheon and
Lockheed, I think both, have almost doubles. It turned out that
when we did this study, this was about the low point. They
almost doubles in stock price in the course of this study. But I
would say to you that some of the systemic issues are still
there. Don’t be completely seduced by stock prices to say this
problem is by the wayside. Another bit factor in why defense
stocks are now up — that most analysts will tell you — is
that defense stocks being mature are beneficiaries of the flight
from NASDAQ. But the message I want to get across is the
systemic issues about return on sales, return on assets and debt
rating are still there. Next chart.
I’ll get off this now. The message for
everyone and particularly for the government was: we don’t
tend to understand industry’s viewpoint or we don’t get
financials into our review process. And one of my messages for
the leadership is we should. WE should train it in our schools
— our acquisitions schools — and we should demand it as part
of the acquisition review process.
Now let’s talk about general findings.
This sums up a tremendous amount of data, but remember that
"demand" is the government. In the space business,
interestingly enough, in the face of all that, we’re going to
generally replace all our legacy systems in space in the next 10
to 12 years. So there’s a big challenge on industry at this
particular time. From an industrial base point of view, our
brilliance in our industry has some impact — some unintended
consequences. One is, because they’re so much more capable
now, we’re flying fewer satellite systems of a lot greater
compatibility. And they’re lasting, by and large, 2 to 3 times
longer. That’s all good, by the way. From an industrial base
point of view, what that says is greater gaps between starting
these things. And what you should be thinking about is: how do I
keep industry engages when I’m stretching out the new starts?
How do I keep the marching army engaged in doing something and
keep them from flying to dot.coms or keep them from flying to
something else? Another aspect that comes off of this is that
from our perspective our system in the Defense Department looks
at acquisition in a vertical way — very program-centric. When
you goo to a DAV, you look at a program. The point is, on this
chart, we should be thinking about — not only do you have to
think that way, but you also need industrial base
considerations. You need to look horizontally., when you go to
these DABs. You’ve got to have a mechanism that forces you to
look at that. A classic case for the U.S. Air Force on the
aircraft side is JSF [Joint Strike Fighter]. The biggest issue
in JSF is industrial base. Then, in the launch business, we
thought that this was going to be OK. And the reason we though
it was going to be OK was that Defense and intelligence were
going to ride the tide of this commercial growth — and I went
around giving speeches on how great it was going to be, so that
shows you how good my crystal ball is — but the bloom is sure
ly off the rose in commercial space. And I think its going to
recover, but it’s not going to be the way we thought it was
going to be 3 or 4 years ago with the skies darkened by
commercial satellites. And that has great implications for the
viability of the launch business. Next chart.
On the supply side, I think I’ve covered
most of this. Increased business risk without adequate returns.
I talked about the debt rating, talked about the
unattractiveness of investment, I think I’ve covered most of
this.
When we went around and briefed — and we
went around and briefed the senior leadership, not only to
inform them, but also as a thanks because they really were very
cooperative in giving us data to support. And when I did brief
them, they concurred in the assessment.
Now very quickly in a capacity sense —
and I’m going to go through this very quickly — this is the
result of visiting every company, walking the floor,
understanding — even by square footage — how much of their
capacity was being utilized in the space business — a lot of
support to this. This is large, medium and small satellites.
This is 7500 lb satellites and up, what constitutes a large one.
Medium is between 3500 and 7500 lb to orbit, and small is 3500
lb and below — just a way of looking at it. And you read this
in units, and this is our total capacity to produce satellites
of 7500 lb and above. The national security demand is here. Big
satellites are driven by and large by national security needs.
US civil demand is NASA and this is the next-generation space
telescope that falls in this category. And what is says is we
— at this point, and I would be pretty comfortable that it’s
near that today — are 64% overcapacitized. Now, by the way,
we’re overcapacitized in the aircraft business too, and other
places. And so the number is not what you should focus on
necessarily. Here [medium satellites] we’re 52%
overcapacitized, but here’s where the commercial business is,
by and large, 3500 - 7500 lb. And that’s why this block looks
the way it is. And here’s the national security and civil,
leading to this. And here are the smaller satellites, 3500 lb
and below. This still, however includes Iridium. Iridium may
very well continue — there’s a lot of emphasis to continue.
And if it continues, you have to replace it. And that’s in
this right now as a replacement for Iridium. Next chart.
Here’s launch vehicle supply and demand.
This just says we have substantial excess capacity in the launch
vehicle business. Part of that is square footage, and that’s
what this says. And this is added to here because we also only
fly about 75% of the manifests. So that has to, in a financial
sense, be calculates. Next chart.
Here are assessments and findings, and you
aren’t interested in the specific technologies, but we have
detailed briefings on the technology is each one of these areas.
As I said, I thought this would be where our whole effort would
be at one time. It turned out that was not so. But in blue are
the things we found were issues. In green were things you ought
to watch, and these were non-issues, where we thought they were
issues. Then we went into these kinds of subjects: EELV —
that’s the Evolved Expendable Launch Vehicle —
profitability. And then we went into policy and spent a lot of
time in here. Export controls — we did interviews, — general
procurement issues, R&D and human resources. And as I said,
each one of those — that’s why I expanded it to 12 hours for
Dr. Gansler — each one of those is a briefing unto itself.
Here’s the thing — and I’m going to
give you the quick Cliff notes. I want you to imagine the
acronym IRAD — independent research and development. Think
about it as all capital letters. The message of this slide is
IRAD today is small "I", a little bit bigger
"r", bid "D." Let me explain what that
means. What that means is that, because costs have been driven
down to a point, because the competition is real keen, you are
now buying down risk with IRAD money, as opposed to putting it
into innovative research and development. That isn’t a
condemnation, it is a sign of the times. But it’s a
troublesome sign of the times, and government ought to realize
that if you only measure IRAD in the aggregate and don’t go
back and look at it, it will be obscured. What you really want
to know is how much of your IRAD is truly independent, and how
much of it is going to program-specific. And that just shows you
— this ends up as about 13 companies, not the 21. And this
shows that in 1996, 75% in the space business was truly
independent. "Aligned" means aligned to a program.
Warranted means the government really signed a contract with
industry or industry signed a contract with government that said
they would build something with IRAD money to demonstrate
capability. Kind of a separate cut. And look at the substantial
difference. This is a message to the AFA — I’m privileged to
sit on the S&T committee — but this is an important thing,
because this has two components, ladies and gentlemen. Not only
is it your innovative technology that allows you to stay ahead
of everybody else, but something that we don’t appreciate —
and didn’t appreciate — the relationship between IRAD and
people. And let me give you a little quick deal there. It turns
out that IRAD, the innovative stuff, is what gets young people
in the door. They don’t want as much to work on program —
specific stuff that may have this long-term horizon. They want
to work on the real spiffy stuff. I’ll give you a good
example: NASA has a very large IRAD budget and lots of spiffy
technology programs. Industry — even through NASA’s return
on sales is pretty small because of "faster, better,
cheaper" and those things. People do business with NASA for
lots of reasons, one of which in NASA’s programs get people in
the door.
People do business with NASA for lots of
reasons, but one of which is NASA’s programs get people in the
door. People get excited about mission to planet Mars and those
kinds of things. Not only is it eating our seed corn. But it
also is making it harder to attract people. That is my message.
And retain. Next chart.
Now I am going to go to the HR business,
because this is the biggie. If I had one thing I really want to
emphasize for the AFA and emphasize for industry and emphasize
for the government, it is this number one program and it is
exceedingly hard for you to read, but these are environmental
factors and these are impacts and I am going to touch a few of
those. It is a tight labor market, particularly less than three
percent unemployment, particularly for electrical engineers,
computer software and systems engineering folks. Aerospace and
defense has a bit of a battered image. I don’t want to
oversell that and get people in a big funk. But the stock prices
were down and they are now back up quite a bit, but there has
been a lot of bad news and there are few new and exciting
programs. Here is an interesting phenomena. This is not meant to
be xenophobic comment. This country was made by the immigrants.
On the other hand, it has a component in the space business.
What this says, and U.S. News and World Report about 10-15 years
started tracking, in fact they’ve done it for this year, too
– tracking the percentage of foreign nationals in our U.S.
educational institutions -- and it is a steady rise, to the
point where it is nominally about 40 percent in your S&T
career fields in the graduate and undergraduate programs. Big
statistics and it continues to go up. There is two aspects about
that. Remember, I am worrying about the industrial base. I am
pleased that really helps our schools, paying tuition and
whatever have you. But I am concerned about two things. One, in
the space business, a lot of programs are not available to those
foreign nationals because of classification issues. The second
thing, contrary -- and this is an intuitive sense, I couldn’t
develop any data on this -- but contrary to 20 or 30 years ago,
when people were staying. They got educated here and stayed, we
are seeing a lot more people go back to their country because
their aerospace industry is budding and they are developing and
so you don’t have the resource that you once did.
Here is an interesting thing. This is
cultural shift to more fluid career paths. I don’t know
whether I have the time to show you the data, but back when I
was a pup, and John told you B-47 stories to put you in the
context, people came and worked for aerospace companies for
20-30 years. Very paternalistic. Today, the whole system is
based on mobility. If you ain’t moving, you ain’t moving
kind of thing. All our young people are socialized that you
should be moving, particularly in the IT [Information
Technology] business. Today, what that translates to is that BS
graduates can have a minimum of five employers. That is what the
data shows. Back in 1960 it was 1.5. In some cases, it is up
around 7 or 8, which is the IT business. A lot of churn in the
system.
Here is another thing, and for you all who
represent the senior leadership of the aerospace industry, one
of the things we found is that we aren’t making the proper
demands on our HR departments in aerospace. What do I mean by
that? By and large -- and for any of you who are in this
business, I don’t mean this as harsh as it may come out -- but
we can do a great job in measuring statistically data, like EEO
[Equal Employment Opportunity] data. What we don’t do is we
don’t measure the impact of loss of people in productivity, or
whether – we don’t have a way of documenting in our
strategic planning systems the impact of loss of people on the
bottom line, on our enterprise. The tying together of our good
people and our measurement devices is not as valid as I think it
should be. What worries me about that is if it is the number one
problem facing industry today, the HR people have to be part of
the strategic team. We have to put demands on the HR people to
give us data to tell us what the status of our work force is and
the quality of our work force. Very tough to do quality metrics.
We can do quantity metrics, but we are not doing real well on
the quality side. Continue to make demands on the people.
What are some of the impacts. This is a
greying industry. It won’t surprise most of you all. Space
work for us is now eight years older than the average U.S.
science and engineering workforce and it is going up. Said a
different way, there are an awful lot of people in the business
who came in the golden days of Apollo, SDI [Strategic Defense
Initiative], buildup of he NRO, etc. Those folks -- this was a
great place to be, the space business in the 1960s and 70s --
those people are beginning to retire.
Here is a phenomena, the aerospace
industry in terms of people is about 66 percent as large as it
was in 1990. Said a different way, it has come down about 34
percent in terms of people. However, we make twice as many
offers to fill 66 percent of the slots. In 1990, interestingly
enough, aerospace and defense was number three on the
attractiveness scale of companies or industries that you want to
work for. Today it is number seven. Just in a decade. There is
also a bi-modal distribution.
Here is the chart that shows you the eight
year older and based on a lot of statistical abstract data and
whatever have you. This shows you the space industrial base and
age. In 1990, the average age was 40-45. If I look at the total,
this is what it looks like. What you are comparing is 45 versus
37. Next chart.
Here is that bi-model distribution. This
also is almost identical to the civil service in the Defense
Department. Almost a complete overlay. This says 54 percent of
our work force is 45 years old and older. Nothing wrong with 45.
I’d love to be 45. Some of my best friends are pushing 60. But
this is the way it looks. But here look, you’ve got a little
trough here. These are the guys who are going to replace these
folks. This is that bi-modal distribution. Next chart.
Here is the enrollment in engineering
schools and science and technology degrees. This shows in 1981,
green is undergraduate, red is Masters, and blue is PhDs. You
can see the trend. Again, I don’t mean this to be a xenophobic
comment, but this does have implications – you don’t have as
many people to draw on as a result of this. Next chart.
I have shown you – this was the chart I
showed you before and the question is, is it time for the
national security community to take a more activist role in
industrial base issues. We clearly believed it is and I am
pleased to say that both Dr. Gansler and Keith Hall have really
taken this on board and there have been a lot of things done and
I am pleased about that. I don’t want you to go away thinking
that the glass is half empty and in a funk. What I want you to
go away is as a disciple that this is not something you have to
worry about continuously and pushing your companies and if you
are representing the government, pushing the government. Next
chart.
First thing I would say for a lot of
reasons, Congress has seized on this issue. I am very pleased
about that. In this year’s authorization act, which was
sponsored interestingly enough and that is by [Rep.] Dave Weldon
[R-FL] and not [Rep.] Curt Weldon [R-PA] and vice presidential
candidate Joe Lieberman, sponsored a commission to be appointed
by March 1st of next year to look at the health of the aerospace
industry. Here the duties and areas for assessment are the
budget, acquisition, taxation policies and processes, laws
policies, international trade and you can read the export
control issue here, which I could wax eloquent on or at least
wax, for some time. But I didn’t because I think that has got
a lot of national attention now. The space launch infrastructure
issue and support for science and technology education. I am
very pleased with that and I know the industry associations have
been very influential in getting this sold. Next chart.
Let me tell you a couple things that are
going on in the Defense Department. We have seen this year some
changes in a couple places which I think are interesting. I
won’t bore you to read that, but Dr. Gansler has put out an
amendment to the DoD directive which in summary form says
you’ll be considered in industrial base issues formally in the
acquisition process.
Let me read it to you: The Department must
take all necessary actions to promote a competitive environment,
examination of alternative systems, structuring science and
technology investments to ensure the availability of competitive
suppliers, ensuring prime contractors foster effective
competition and qualified international sources. Acquisition
technology and logistics decisions will be made with the full
considerations of their impact on a competitive industrial base
including not only the prime contract level, but the subcontract
level.
Another very tangible thing is the paid
cost rule. That is an esoteric thing, but it basically makes a
big difference in cash flow. Air Force [Maj.] General [Timothy
P.] Tim Malishenko was in the lead in this, who also heads up
the Defense Contract Management Agency and what that is, is
heretofore primes were not paid until the primes paid their
subs. Now, what that did was there was a period of time of about
30 to 45 days of money that was in float and so now the paid
cost rule says the primes get paid at the same time. That is a
big deal. We are talking hundreds of millions of dollars into
the system now 45 days before it was before. That is one of
those good deeds of Dr. Gansler and Tim Malishenko and others.
The NRO, by the way, has established an office now to work
industrial base issues.
I’ll stop there.
Question & Answer
Q: We’ve got a lot of momentum thinking about
industrial base issues and now with the change of
administration, do you think there is a plan in place that
will help, not lose, the initiative here?
General Moorman: I don’t know
whether I am the right guy to ask about a plan, but I do
believe that on both sides of the aisle there is appreciation
of the issue now and to me the aerospace commission will be
the thing to provide the focus and so my sense is that I am
very gratified with how the government has taken this and I
know the Hill is concerned about it. It really gets back to
what General Shaud was saying, that this is a partnership and
we do not – my view is, in the government, we did not have a
sufficient appreciation of the condition of the industry and
the long-term uncertainties that it produces. Whatever side of
the aisle you are on, you’ve got to be concerned about that.
Q: The question I have is what the
country will actually let us do, and it goes back to some of the
things that we worked on before we got out and it has to do with
things like Discoverer II, hyperspectral imaging — the real
leading-edge kind of work that people would love to get into,
maybe even Space-Based laser, but then there’s a lot of reins
in the Congress that try to pull these things back, that are
afraid of pushing the envelope in a lot of areas. The money is
available, and people would like to pursue it, but you can’t
get the go-ahead.
General Moorman: Now I am worried.
(Audience laughter) One thing I didn’t – I can’t talk
about it. I’ll give you the qualification, but there is
another impetus to stand by for and that is all I can tell you.
You remember this study was for the national security community
– read: military intelligence community. There are three
commissions that will also tend to focus interest in the space
business that are ongoing. One has just reported out and I
commend the NRO report to you. That was published just last
week. I am on one that is chaired by former SecDef [Donald]
Rumsfeld on organization and management. We by law will report
out on the 11th of January. Then there is something
called the NIMA commission, which is the National Imagery and
Mapping Agency commission, which is also ongoing. I think that
will also – in addition to this commission – and I think
also things like QDR [Quadrennial Defense Review] and those
kinds of change agents will all have space and industrial base
kinds of issues as part of it. It will tend to shed light on
these issues or the importance thereof.
Q: You didn’t mention the Boyd
Commission.
General Moorman: [Gen. Charles G.]
Chuck Boyd would shoot me in the forehead. There are four
commissions – what I meant to say and let the record reflect
and please don’t mention to Boyd that I forgot the Hard-Rudman
Commission, formerly known as the Gingrich Commission, is also
in the end game and has published two volumes already and one of
those volumes talked about space, for example, and talked about
the importance of space. In this group, we all tend to think
about space in the national security perspective, but it talks
an awful lot about the economic viability of the country tied to
a rigorous and vigorous space program. Yes, that is another one.
Q: There seems to be some language —
to talk a little bit about Dr. Bansler’s 5000.1 directive.
There is language in there regarding competition. Now,
competition could be beneficial concerning maintaining a healthy
competitor base, as you stated earlier. It also can be
interpreted to mean as many suppliers aout there as possible —
not necessarily an economically optimal number of suppliers
given the size of the marketplace. Is there anything in the
finer print that I didn’t see in your chart up there that
get’s into that?
General Moorman: I thought I had
touched on that, but I probably wasn’t very clear. Our
message, and I certainly cannot speak for Dr. Gansler, but our
message in this pitch was there is sufficient competition in
virtually all areas, but there are areas where competition is
not viable because you cannot support two and you should use an
economic metric as part of your judge of viability of
competition. I believe Dr. Gansler is witting and understands
that. As I say, I am a little more bold as a retired type than I
was on active duty, but I don’t believe it is wise for me to
interpret what Dr. Gansler and his folks meant on that. You need
to ask the acquisition folks. Part and parcel of this whole
theme here was you’ve got to understand the financial metrics
to really understand this business and the government needs to
do that. And by the way, it is no surprise nor no condemnation,
but we have less industry experience in government than we did
20 years ago. Hard to argue with that. The downside of that is
the perspective of industry, therefore, has to be
institutionalized into the process because you are not going to
have as many people who naturally know that and have had
industry experience.
Q: Your report on the defense
industry’s health comes against the backdrop of the Defense
Science Board’s final briefing charts that were released last
week, and the 27 initiatives that Gansler has commissioned to
implement those, including eliminating pay-cost and also
changing the bar to allow the bonuses to be allowable. How
effective might those 27 steps be in instigating some of the
issues you’ve laid out in the space industry?
General Moorman: What you didn’t
see. We had a whole section and we pre-dated Phil Odeen’s DSB
[Defense Science Board] study. We had a whole section on what
are the things you might do programmatically or policy wise and
those got rolled up into the DSB and they got rolled up into a
lot of this. I am not saying it is one to one, but they had the
benefit of this data and I think they are – a lot of those
initiatives will do a lot towards building confidence in the
financial community in the industry and I think it will also do
a lot towards strengthening the industry just by and large. They
are linked together. I went and briefed the DSB for some
time...You may not be following what Tony Capaccio [journalist
with Defense Week magazine] said there. The Defense Science
Board was commissioned to look at this study in a defense
context about two or three months after we started our study and
they reported out and their slides were just recently released.
Our studies are complementary. They were on defense, ours were
on space. But I kind of believe what I said there, that space as
a microcosm has some differences, because space systems are
basically onesy twosy or certainly not hundreds where airplanes,
tanks, missiles and things are in the hundreds and thousands.
There is the scale issue, but by and large, most of the issues I
spoke to apply not just to space, but I believe, to defense.
That got picked up in the DSB, that same theme.
Q: What do you see the defense
industry needing from the military and the military from
industry?
General Moorman: Industry needs from
the military a good requirements set. They need stability.
Stability, by the way, I would like to see more consideration of
multi-year programming. The annual budgeting process is a real
dilemma and the instability of programs is very difficult. As I
mentioned in here, by and large, the Defense Department is
pretty mercurial and what I mean by that is we never build as
many as we say nor do we ever build it on the schedule that we
initially say, when industry has planned out their plan on how
they are going to go about that. That creates great
perturbations. It goes to everything, across the board. You are
not going to change that completely, but one of the ways you
could improve stability is multi-year programming. That is,
where you have more stability in your program and your budgets
may be instead of once a year, you may submit programs two
years. Multi-year programming, for example, in the C-17 saved us
billions. In the DSP [Defense Support Program] we bought a
satellite on the savings of the Defense Support Program from the
savings of multi-year programming.
A huge benefit, for example. OK, good
requirements set, some stability and the third thing I would say
is an active partnership in communications. Understanding is
taking industry’s view of that. We’ve got to do better.
We’ve got to communicate better. We’ve got to. One of the --
part of communications here was making sure that the industrial
base or industrial context is considered in our acquisition
proffer; that we have program managers and our acquisition
executives and everyone who is involved in the process
understanding those kinds of methods, understanding the
mind-set. That doesn’t say we are going to, that I am
espousing to the government that they completely take the
industry’s viewpoint. What I am saying is we don’t have
enough people who understand the dynamics – I keep saying
"we", I have to get away from that. The government
doesn’t have enough people with that understanding, intuitive
sense.
That was industry to military. What does
military need from industry? Better productivity. More attention
on innovation. Candor. How things are going. That is the flip
side of a communications drill. Candor on both sides of the
business. I’ll keep it at that.
Q: To buy down their debt structure,
they may sell off their profitable portions because they are
specialized to do aero things and space things. Do you see space
taking a bottom line as mergers continue?
General Moorman: You mean space taking
a second priority? I don’t know. I’m not sure I can say
that. The merger thing as you saw the merger created the debt
picture which created the bond rating problem which created, I
believe, a lot of the stock problems.
But, on the other hand, we have to
continue to downsize because we are still inefficient in a lot
of areas. We have to figure out the proper way to incentivize
and we also have to always be mindful, one of the needs for
industrial base considerations is that as you are doing your
acquisition strategy plan, one of the recommendations we had
was, you are doing an acquisition strategy plan, that is the
first thing you do. Industrial base considerations get built
into that before you even bid on anything. Industry is involved
up there. So that you have some sense of the consequence of your
action, that is, as I am building this in, the unintended
consequence, if I go down this path, what do I do to
competition? What do I do to industrial base? Those kinds of
things. Or am I, let me give you an example. It is a micro
example. This will probably be in the report, I can’t
remember, but I’ll give you example. Up there you saw rubidium
clocks. Rubidium clocks are the atomic clocks that go on global
and GPS [Global Positioning System] satellites. They are the
things that make GPS satellites really work. They are incredibly
accurate for a long period of time. There is one company and I
won’t mention them, you’ll figure it out, but there is one
company that makes it. The business is pretty small for
space-based rubidium clocks. The rubidium clock business is
terrestrial. This particular house isn’t in the terrestrial
side. Because it is such a small business and because the
follow-on to GPS is kind of slipping to the right and we may use
a different technology, there is a decision that outfit may go
out of business. The SPO [System Program Officer] turns around
and what does he do? He buys up all the rubidium clocks there
are. I am not knocking the SPO, that is what I would do if I
were the SPO, but if I were the SAE [Service Acquisition
Executive] or something, I would worry about the long-term
implications for something that was as important as precision
atomic clocks. That is just a very small – the unintended
consequence of actions when people don’t have an industrial
base mind set. In space, I am not especially worried if it is
aircraft versus space systems. I am worried about keeping the
good people. I am really worried about that and there are a lot
of things in space that are a bit black art and those guys who
did the magic back in the 1970s and 1980s are leaving. How do
you refresh that and whatever?
Q: Do you see any competition between
commercial space for the human resource people, the innovative
people and national security space?
General Moorman: That is a good
question and I didn’t get into that. I had about 50 HR
charts/bar charts. I could have bored you to tears. There is
some competition. The biggest competition for people who are
exiting the space business or the aerospace business, that is,
is generally not other related aerospace business. It is
generally the dot.coms. Or it is generally the IT business. I
don’t think we cut it by – I guess to make your point, you
would say the IPOs [Internet Provider Organizations], Teledesics,
Iridiums...
As you say, Loral commercial has had the
emphasis here recently. They’ve put their marker down. I
imagine there is, but my greater concern is outside the
industry, going other places. It comes about because of
people’s propensity to move, people’s understanding of their
value in the marketplace, people’s desire to make a quick hit.
What I mean by that is the only thing about space is you are
stretching this thing out, is young people today would like to
work on something that has a payoff in two or three years. Space
systems may be 8 to 12 years. That is something you have to deal
with. We have to have something that keeps them interested.
There is another interesting thing. I said they know what their
worth is. They also gravitate toward equity-granting outfits.
One of the suggestions we had was that industry start thinking
about, how do you start getting equity in companies earlier?
That is what the dot com guys do. I can give you 50 examples of
people who left places because they got equity shares as junior
engineers. I will give you another interesting example from the
Defense Department. One of the suggestions we had in our line up
that is being considered was a compensation scheme. Right now
– and I don’t know the exact number – I think there is a
limit of $225K or something, which is the top price you can pay
an aerospace worker, executive, that is allowable. Everything
else goes against profit. Having said that, that amount is
determined by a survey within aerospace. My comment when I
looked at that was, hey, that is not who you are competing with.
That is not the right survey. You have got to survey some of
these dot.coms to get a right number. You have got to expand
your horizon. That is 1960s/70s thinking. That is not today’s
thinking. That is just a little minor drill. Bottom line is, I
worry much more about the dot.coms than the equity granting
outfits.
Q: As bad as things look, why do you
think there are so many companies seeming to enter the field:
everything from Kissler to Mircorp? Seemslike there’s a
profusion of new company’s in a whole variety of areas .
What’s wrong with all this?
General Moorman: I am not sure I can
answer that because part of it has to do with the allure of
space. I think that is a big deal. The idea of having a rocket
company that puts a satellite in orbit a new way, is a pretty
alluring kind of thing for venture capitalists. You’ve got a
lot of those guys. Not all of them are going to survive based
upon the manifest that we are looking at. I think the lure is
the primary issue. And I think there is also a hope that we are
going to find more innovative ways of doing things and that we
will put a higher premium on compressing the cycle and space may
be a leader in that regard. I don’t have a good answer other
than that, because the particular area you talk to is the
low-priced rockets. There are a lot of people in that business.
Q: I’m feeling like you’ve handed
me a big disconnect here. I’m waiting for the offsets and
I’m waiting for the funding. Do you see it within the
capability of te federal government to solve the problem, or do
we have to privatize some of the existing infrastructure to
really solve the problem?
General Moorman: That is a leading
question, but I kind of agree with the premise of it. I do
believe that for support structures, you are going to get more
privatization and I think you can ultimately do it quite a bit
cheaper. The area I am most interested in or most competent in
is space. An area to look at, for example, is the Boeing
Lockheed merger with USA – United Space Alliance – and how
they are doing in privatizing the shuttle operation. They have
had a pretty good scheme and it is turning out pretty well. I
think a lot of the support activities will end up getting
privatized. Having said that, the great caution in privatization
is, don’t go too far because you will end up civilianizing the
enterprise which is so important to the military, and how do I
provide career paths for my military space folks? That is the
balance. But I think privatization is a wave that is coming –
outsourcing and privatization.
Q: The flip side of the privatization
question is: do you see certain areas where nationalization ends
up having to be a necessity? And I’m wondering whether the
national teams that are emerging are actually a harbinger of
that direction.
General Moorman: The question had to
do with nationalization and we have seen some national teams
occur. We see that in space-based laser. We see that in Advanced
EHF [Extremely High Frequency], for example, in the space
business. I am not so sure that I think that is the harbinger of
nationalization. There were other circumstances that led – I
don’t think it was, this is a step toward nationalization. I
think it was, in the case I am most familiar with, my personal
view, Advanced EHF, it was the team that had brought you MILSTAR
[Military Strategic and Tactical Relay] and there was a desire
to get it as – the replacement for MILSTAR 7 -- as fast as
possible. That was the fastest way to get there. The people who
might have competed could get together because of the MILSTAR
precedent and also the imperative to do something as fast as we
could, I believe, led to that. You need to ask somebody who
really knows something, who was in that act. I don’t see
nationalization yet on the horizon. There might be a need to
nationalize in some thing that is threatened. That would be an
extreme step on the nationalization step.
Q: (From Gen. Shaud) One of the
banners flown on the Hill recently, and maybe portends what’s
going to happen is recapitalization. I wonder if you could speak
to that a little bit, with regard to space. There’s two
aspects of that at least one is replacing the legacy systems,
which you had on your charts; the other has to do with
modernization itself. In other words, stepping into that world
of innovation. One of your major points is that we’re not
going there. Not only that, we don’t have the people that will
take us there.
General Moorman: The replacing of the
legacy systems is a big deal. Let me try to draw a parallel to
you which will resonate to the aviators in the crowd or those
who really work the aviation industry. This is a pretty
unprecedented time for the space business. I want you to think
about a sine wave or curves that approximate decades. In the
1970s, we replaced fighters – F-16, F-15. In the 80s,
nominally, we replaced bombers – B-1 and B-2. In the 90s we
replaced the airlift fleet – C-17. In 2000 we hope to replace
the F-15/F-16 with the F-22 in substantial numbers and get a big
run on JSF. You can see we kind of spaced it out. Here in the
space business, you’ve got this big womp where all the sum
total of those sine curves are all now concentrated in this next
decade. The decade really is like 2003 to 2013 or 15. That is
going to put a big push on a lot of things – money, people,
industrial capacity. Those kinds of things. I think we have the
industrial capacity business. That is something that is a
programmatic issue and a phasing issue and whatever have you,
but it is pretty significant.
That is all part of the modernization
business. That is, a space budget for the Air Force is nominally
about $6 billion. That is, interestingly enough, even with all
that replacement, relatively constant, but it goes a little bit
in the out years. The big bubble are things I didn’t even talk
about. If you believe that we are going to reinvent Discoverer 2
or a Space-Based Radar in some way, that is another bump out
there. If you believe that money that is now being pumped into
prototypical technologies, enabling technologies for space-based
laser, ends up giving you something, you are out a little
further for sure, but that is another big bump on the military
space budget. Then the third thing I would say is behind
Discoverer and the demonstrator space-based laser is replacing
AWACS with an air MTI [Moving Target Indicator] system. You look
at that and that is a fairly huge bow wave out to the year 2020.
That is a huge modernization challenge. At the same time, the
air side of the Air Force is trying to replace lots of things
and the Air Force is modernizing a lot of things, but some
things are not getting modernized, like the KC-135 fleet for
example and those kinds of things. It is going to continue to be
a big push. I am pleased and I think a lot of progress has been
made in the last year and a half to two years in appreciation of
the need for modernization and the increase in modernization.
The modernization budget, when I was vice chief for all the
services, was about $40 or $41 billion, what we would call a
procurement budget and now it is up over $60 billion, which is a
good lick. Most people say it has got to get closer to a $100
billion to fit in everything you need to have in there.
My personal belief is that there will be
competition between that is because my sense is we made a huge
mistake in not funding Discoverer. Space-Based Radar is a huge
force multiplier for the way the United States wants to go to
war. It is going to get there. I just can’t tell you when. It
is exceedingly important and I also believe JSTARS [Joint
Surveillance and Target Attack Radar System] over time is going
to be very valuable but it is ultimately going to be done from
space.
Q: Did you look air divestiture as a
way to fund the innovational space? Some of these innovations
your talking about are substitutes and/or complements for things
that fly through the air right now.
General Moorman: That is a different
study. As you know, I looked at that in another study and I
think the substitution aspect has to get cranked into the life
cycle costing as you think about these programs. I will leave it
at that. Thank you very much.
