2000 Speeches
Jim Albaugh

Jim Albaugh

President

Space and Communications

"Daring Differently in the New Economy"

US Space Foundation

National Space Symposium

Colorado Springs, Co.

April 05, 2000

Thank you. It's a pleasure for me to be here today in Colorado Springs and participate in what is always a wonderful conference. I want to congratulate Bill Knudsen and the staff of the U.S. Space Foundation for putting together another world-class event this year and for involving the right people discussing the right topics.

In his luncheon speech a few minutes ago, you heard Gen. Lord talk about the aerospace "workforce of the future." And in the panel just after this talk, a bunch of folks far smarter than I will discuss "new dimensions in satellite applications" and the challenges facing an information and communications industry that seems to be evolving at the speed of light.

In some ways, my topic today bridges those two ideas - because increasingly, the future of aerospace and its workforce is tied to how we as an industry are able to manage and exploit the information revolution and our role in the New Economy.

As you know, the theme of this conference is "Space - To Dare Greatly." Now, I don't think a day goes by when those of us in this room aren't reminded how much better our lives are or how much safer our nation is today because of the efforts of those early space pioneers at NASA, the Air Force, the NRO and other government agencies.... Those who dared greatly in civil and military space.

Those of us in the commercial space business also need to "dare greatly" - or more specifically, to "dare differently." Not simply to focus on past, more limited markets but to expand our definition of space-related products and services; to identify new or non-traditional areas of opportunity; and to stop thinking like just "a rocket maker" or a "satellite builder."

It's no longer all about flying higher and faster or implementing new technologies alone. It's also about reducing costs and closing the business case.

In fact, to grow the commercial space business of the future, perhaps one key is to think less in terms of making products or tangible assets like rockets and satellites and more about providing services and adding value by taking space-based data and manipulating it into useful information.

In short, to focus less on products and more on solutions.

We all know the business world has changed.

In years past, businesses were rewarded for making things -- taking incoming materials and changing fit, form and function to make a product. Efforts the economists call transformational. That's what the Industrial Age was all about - getting better at transforming raw materials into finished goods.

Today, we spend most of our time searching for information, coordinating events and monitoring performance - in other words, transactional activity.

We've done some studies and we think transactional tasks drive about 50-60 percent of our costs. But with the advent of the Information Age, we have real capabilities at hand to drive those costs down.

Sure, we still make our legacy products - at Boeing things like Space Shuttles, Airborne Lasers or rocket engines - and hopefully always will. But increasingly in the new economy the things we're producing may not be things at all....

In some ways, a fundamental problem of space is that it is asset heavy.

And it's because of that, I think, that we're beginning to see diverging segments of the space business.

On the one hand you've got launch and satellite manufacturing, which are asset-heavy and investment-hungry. They're transformational, old-economy type stuff. And lately they've had the financial returns to prove it.... Some may ask, why be in it at all?

On the other hand you've got the services businesses, which are asset-light, requiring relatively moderate investment and providing potentially high-return.

To give you an idea of the kind of divergence I'm talking about - and the degree to which the Information Age has really taken hold - consider what's happening on Wall Street.

The hi-tech Nasdaq 100 index has more than doubled in the past year and boasts a price-to-earnings ratio of about 100 - that's more than five times the historical average for U.S. stocks. (Although in the past couple of days we've seen them take a hit on Wall Street, underscoring just how volatile the market is today.)

Meanwhile, the P/E ratio for the venerable Standard & Poor's 500, which includes many asset-heavy, old-economy stocks, hovers at 30. And some of us enjoy P/E ratios even lower than that....

In the old economy, an automobile manufacturer or airplane maker created value with billions of dollars in fixed assets that depreciated as they aged. . . . In the new economy, value is created by people and their intellectual capacity. Ideas are worth more than fixed assets. . . .

The new currency isn't metal... it's mental.

Now, I might be getting myself in trouble here with some of my best customers, many of whom-just my luck-seem to be sitting in this room today.... But in many ways the government is not an ideal customer in the new economy.

Or, said another way, some aspects of the US government acquisition process reinforce bad habits, such as prolonged acquisitions, government-specific designs and low-rate production - assets, assets, assets....

In the commercial market, companies don't get rewarded for investments in asset-heavy government or commercial space programs. We get rewarded for high-value, asset-light activities.

Certainly, Boeing has some asset- and investment-heavy programs like Delta IV, but many of the new opportunities we're pursuing don't involve heavy manufacturing or building things but, instead, using existing assets in innovative ways to provide the kind of new services or interoperability the market demands.

More and more, we see the market demanding integrated solutions that make use of existing assets in creative ways.

No customer today wants a voice system, a location system, a data system, and an entertainment system, separately. Customers want integrated solutions that can connect the dots between GPS, a communications satellite, a ground system and a mobile platform.

We see big business in integrating these multiple services in a single device to provide customers hassle-free, transparent operations... and we can do it without a big asset investment.

Now, my guys don't always like this; they want to build hardware.... But companies today are putting investment where they can generate value and revenues.

Space infrastructure isn't that place. . . Space services is.

Look at Hughes Electronics, for instance. Hughes Electronics is selling Hughes Space and Communications but keeping the services part of the business, where they see a potential for big returns.

Now after listening to the first part of my talk, you might ask, why is Boeing proposing to buy the satellite manufacturing piece? My answer is simple:

Boeing wants to buy Hughes Satellite and Communications not for its satellite-building capabilities, but for its intellectual capital and knowledge of space-based communications, which will help us in Systems-of-Systems and creating interoperability and services opportunities.

So, in the bigger picture, perhaps the fundamental structure has to change.

If aerospace companies are to compete with the "dot.coms" for people, capital and investment, we can't do it using the old business paradigm. If we want to go head-to-head against new-economy companies that use zeros and ones as their bricks and mortar, we need to make some real changes.

I'm particularly concerned about our ability to attract and retain the best people. . . . Recent demographic studies of our workforce show that only 7 percent is under 30 years old. . . 10 percent is over 60. . . . and more than half is over 45. In fact, the average age of aerospace industry workers is eight years older than that of general science & engineering workers.

I'm not sure I have the answer, but I think we may need to take a look at bringing our compensation and profit-sharing, as well as other personnel practices, more in line with those of the information and communications industry.

But to have profit-sharing make any sense, there has to be the opportunity for profits, beyond the existing government limitations. (I'm not looking for a hand-out here. I'm just looking for a potential upside far beyond the limits that are now in place if we truly perform.)

Now, if we as an industry must be daring and think differently in the new economy, so, too, must the government sector. The government also has a role to play in helping commercial aerospace companies compete in the new economy.

Investing in high-risk, long-lead technologies is required if the government wants to help the space industry remain competitive.

Let's take a look at one specific area, like propulsion.

Over the last several years there has been a lot of talk about reducing the cost of access to space.

The trade studies rage on -- reusable vs. expendable... Russian vs. US. . . Single-stage-to-orbit vs. two-stage-to-orbit... Exotic ideas like piggy backs, magnetic levitation or aircraft-towed... All-liquid or more-and-bigger solids... Hydrogen or kerosene-fueled vehicles... Conventional bell nozzles or differentially throttled aerospikes...

Unfortunately at the root of the problem is propulsion. For the most part, we're just trying to improve 30-year-old technology. What we need is a technology breakthrough.

Achieving a revolutionary propulsion breakthrough, however, is very capital-intensive.

Truth is, next-generation, truly revolutionary propulsion is probably billions of dollars and many years away. That level of investment and the uncertainty of return are at odds with the new economy.

Industry can't-and won't-foot the bill. It has to be the role of the U.S. government.

Right now, we're excited that the NASA budget contains $6 billion over the next five years for reusable launch vehicle technology. In my view, the lion's share of this must go for propulsion.

So continued research and development funding is one area the government can look at, but there are others that we as an industry must advocate from a consensus position.

As an example, consistency in government contracting springs to mind.

Government agencies doing business with aerospace firms must stop canceling or changing contracts. Government customers need to baseline a contract and then stick to it, not change it halfway through.

In other words, civil and military customers can't say they need a certain number of launches and then turn around and say they only need half that... or tell a contractor they require 130 B-2s and only build 20... or 750 F-22s and only build 350... or 240 B-1s and only build 100.

A little closer to home, Boeing Space and Communications has facilitated a factory to build 30 Global Positioning System satellites and now we will probably only build six. While I know there are reasons for the change, this is not a good use of capital.

Other examples of what the government can do to help the US aerospace industry remain competitive include: a) providing for higher financial rewards, not worrying about profit but focusing on contractor performance; b) simplifying acquisition regulations, for while progress has been made, much more can be done; and c) adopting a mentality of shared destiny between the government and its contractors that flows down to all levels in both industry and government.

(In the area of export control, we all know the issues and we're really pleased with efforts being taken by Jacques Gansler and Dave Oliver. Everyone is trying hard to resolve the issue, but for every day that passes, we're losing market share.)

Similarly, industry must step up and demonstrate that it is worth the effort. We must improve quality, cost performance, reliability and innovation. We cannot always hide behind outdated regulations and uncertain appropriations. We must perform better on every contract, on every program, on every service.

The aerospace industry has a significant role in the new economy. And it can have a greater one. To a large extent, it will be what we make it.

We must work together, we must challenge conventions, we must perform at new levels.... We must reinvent ourselves not simply in our brochures, but in our culture.... We must dare greatly if we are to succeed.... The payoff could be tremendous... and the price of doing nothing, disastrous.

Thanks again to the US Space Foundation for this great forum. I have enjoyed being here and having the opportunity to talk with you this afternoon.