SpaceX – Lowering the Cost of Access to Space
SpaceX is offering the lowest cost to orbit by turning traditional operations of the space industry upside down
NASA and government-funded companies such as Boeing and Lockheed Martin were the only players in the space transport industry for decades. These organizations received tons of “cost-plus” contracts from the US government (1). What incentives did they have to be more efficient? None. They would reduce their revenues by lowering their costs. As a result, private satellite operators had to pay very high prices to put their satellites into orbit.
Business Model
Elon Musk founded SpaceX to disrupt the industry by offering low-cost access to space. And he certainly did.
This is SpaceX. Source: SpaceX
In 2012 SpaceX became the first privately-funded company to send supplies to the astronauts in the International Space Station (2). The contract with NASA for this service is valued at $1.6 billion (3). But sending cargo to the International Space Station is just one piece of business for SpaceX. The company also launches satellites to orbit at a ridiculously low price. SpaceX charges $61.2 million to launch a telecommunications satellite to orbit, which results in $4,653 per kilogram of satellite. United Launch Alliance – a joint venture of Lockheed Martin and Boeing – charges between $14,000 and $39,000 per kilogram (4). Launching a satellite with SpaceX is even cheaper than doing so with Long March, the Chinese rocket. That is why Space has won $7 billion in contracts with customers such as Orbcomm, AsiaSat, and the US Air Force (5).
SpaceX Dragon capsule docking to the International Space Station. Source: NASA
Operating Model
How can SpaceX offer such low prices?
People. SpaceX is the first venture of Elon Musk in the space industry. Not having preconceived ideas has allowed him to come up with innovate solutions to reduce costs in his rockets. The same is true for his more than 4,000 young employees, with an average age of 30 (6). It is not just a coincidence that the age of the majority of the employees in NASA working in the Apollo 11 program was between 20 and 30 (7). Today, it is around 47 (8). Young people are more likely to innovate!
Processes. SpaceX has a very short supply chain. The company is vertically integrated and 70% of its rockets are manufactured in-house (9). It is much cheaper than buying space components from traditional vendors thanks to new techniques such as 3D printing. And what if they are not able to produce some parts at SpaceX? It is easy. They will buy from companies that have never worked for the space industry and will do some testing to make sure that these parts will work in space, thus lowering costs of purchase. This vertically integrated supply chain allows SpaceX to have huge control of costs.
In-house manufacture of the Dragon capsule. Source: SpaceX
Products. The Atlas V – one of the most successful rockets of United Launch Alliance – has three different engines. To produce these engines, they need three different lines, thus multiplying the cost by three. SpaceX designed its Falcon 9 rocket maximizing commonalities. The engines of the Falcon 9 are almost identical, as well as the fuel tanks.
Falcon 9 engines showing commonality in the rocket design. Source: SpaceX
The “old” space industry had to rely on four different players to launch a satellite to orbit: the satellite manufacturer, a launch operations provider, the rocket manufacturer, and the supplier of engines for the rocket. For instance, NASA would provide launch services (launch pad…) for the Atlas V rocket of United Launch Alliance – which has an engine produced by NPO Energomash, a Russian company! (10) – to put a satellite of the US Navy into orbit. SpaceX already integrates three of these four roles and is already working on its own satellites to provide the whole world with Internet.
Sustainability of the Business and Operating Models
SpaceX is in a virtuous circle. The more flights the company sells, the more resources it has to invest in the development of more efficient space vehicles. The objective of SpaceX is the reusability of its rockets – today they are expendable. If the company could reuse its Falcon 9 for several launches, the cost could be reduced to “$200,000 to $300,000 per flight in fuel and oxygen versus a $60 million rocket”, Elon Musk said (11). SpaceX is already working on Falcon 9 Reusable rocket.
Flight test of the Falcon 9 Reusable. Source: Space X
Today, American astronauts have to travel to Baikonur, Kazakhstan to fly to the International Space Station in a Russian rocket. SpaceX is working on the Dragon V2 – thanks to funding from the NASA Commercial Crew Development program – to provide the US with its own launch vehicle after the retirement of the Space Shuttle in 2011 (12). Boeing is also developing its human-rated space capsule, the CST-100. Which company will win this new space race? Only time will tell.
Sources
(1) Is SpaceX Changing the Rocket Equation, Andrew Chaikin, Air & Space Magazine, January 2012, http://www.airspacemag.com/space/is-spacex-changing-the-rocket-equation-132285884/?no-ist
(2) http://www.spacex.com/about
(3) First Contracted SpaceX Resupply Mission Launches with NASA Cargo to Space Station, NASA, October 2012, http://www.nasa.gov/home/hqnews/2012/oct/HQ_12-355_SpaceX_CRS-1_Launch.html
(4) What it took for Elon Musk’s SpaceX to disrupt Boeing, leapfrog NASA, and become a serious space company, Tim Fernholz, Quartz, October 2014, http://qz.com/281619/what-it-took-for-elon-musks-spacex-to-disrupt-boeing-leapfrog-nasa-and-become-a-serious-space-company/
(5) SpaceX Signs New Commercial Launch Contracts, Press release, September 2015, http://www.spacex.com/press/2015/09/14/spacex-signs-new-commercial-launch-contracts
(6) NASA, SpaceX Aim To Launch Private Era In Orbit, Nell Greenfieldboyce, NPR, May 2012, http://www.npr.org/2012/05/18/152953776/nasa-spacex-aim-to-launch-private-era-in-orbit
(7) The Giant Leaps Symposium, Dick Dahl, AeroAstro Magazine Highlight, MIT, http://web.mit.edu/aeroastro/news/magazine/aeroastro6/apollosymposium.html
(8) NASA Looks to Rebalance Aging Workforce, Nancy Atkinson, Universe Today, April 2009, http://www.universetoday.com/28471/nasa-looks-to-rebalance-aging-workforce/
(9) Production at SpaceX, SpaceX, September 2013, http://www.spacex.com/news/2013/09/24/production-spacex
(10) RD-180 Engine, ULA, http://www.ulalaunch.com/faqs-rd-180.aspx
(11) SpaceX Profitable as Musk Pulls In NASA Contracts, Google Cash, John Lippert, Bloomberg Business, March 2015, http://www.bloomberg.com/news/articles/2015-03-04/spacex-profitable-as-musk-pulls-in-nasa-contracts-google-cash
(12) SpaceX Wins NASA Contract to Complete Development of Successor to the Space Shuttle, Press release, April 2011, http://www.spacex.com/press/2012/12/19/spacex-wins-nasa-contract-complete-development-successor-space-shuttle
This was an interesting perspective on how much ownership SpaceX has taken for the commercialized space program! SpaceX has definitely achieved some impressive results in a shorter time than many government contracts run for. I would be curious to know a couple of more things about their operating model and the general environment in order to get a better feel for the company:
1. Given the young age of the staff, do they have consulting engineers who have worked with NASA and been through some of the common learning growth pains? (i.e. NASA has experienced some major issues in the past http://www.popsci.com/military-aviation-amp-space/article/2009-03/gallery-top-10-nasa-probe-failures and those issues might provide SpaceX some common things to watch out for).
2. Buying components from outside vendors who have certified for use in space often means that vendors have adopted standards implemented by the government for testing the components. Does SpaceX use these same standards or have they gone through and established their top priorities that they test for? While government standards may include overkill, portions of them will have come from past experience, so I would be interested in SpaceX’s cost vs. benefit trade off for safety testing issues.
3. How would the change of government contracts from cost plus to firm fixed price change things? Given the high cost of projects over time, many defense contractors are being forced to change their bids from cost plus to making margin only if they beat their cost estimate.
Thank you for your comment! Here are my answers:
1) As far as I know, SpaceX combines young, energetic employees with experienced professionals. Furthermore, its contracts with NASA come with a series of requirements, including the participation of staff of the agency in the launch operations.
2) I do not think that the trade-off is between cost and safety, but between cost and efficiency. I am sure that safety is priority #1 for the engineers at SpaceX.
3) That is a very interesting question! In my opinion, NASA working with fixed-price contracts will force traditional contractors to be more efficient. And it will be very challenging! Thats is what Mulholland, Boeing Vice President, discusses in this article: http://arstechnica.com/science/2015/11/quietly-the-new-space-race-between-spacex-and-boeing-burns-hot/
SpaceX is a fascinating company — thank you for the overview! A couple of questions that arose for me in reading about their operating model include:
(1) I was struck by the sheer number of employees (4,000). How many of those employees / scientists are focusing on R&D and product development? If SpaceX is able to recruit the top aeronautical engineering talent, what are the implications for NASA (which only has 17,000 active employees)?
(2) to what extent is new technology helping to reduce their production costs, versus a shift in their processes with existing technology? Will technological advancement (like 3D printing, as mentioned in the report) transform the cost to launch materials into space, and eventually human transportation capability? In what time horizon?
Thank you for your comment! Please find my comments below.
1) SpaceX is allocating significant resources to the development of the Dragon V2 (spacecraft to take astronauts to the International Space Station) and the Falcon Heavy (a rocket to put heavier satellites into orbit compared to the Falcon 9). I think that a vast majority of engineers at SpaceX are working on these two products. Unfortunately, I cannot be more precise as SpaceX does not disclose the breakdown of its employees. Regarding the implications for NASA of the recruiting of SpaceX – I think that these two organizations attract different types of applicants. Those interested in an entrepreneurial, business-oriented company would love to work at SpaceX. Nonetheless, those interested in research (space probes, space exploration…) would love to work at NASA.
2) In my opinion, SpaceX has not come up with revolutionary technology. However, they are extremely good at designing efficient processes and products, using existing technology. SpaceX is already working on the Dragon V2 thanks to funds from NASA. They are expected to start flying astronauts in 2017 (source: http://www.theverge.com/2015/11/20/9772564/spacex-iss-nasa-astronaut-crewed-mission-announced); nonetheless, time horizons are not very reliable in the space industry…
Very interesting write-up, Jorge! SpaceX certainly has a compelling value proposition for its satellite customers given its ability to reduce costs through vertical integration, people, and developing new supplier relationships. However, I understand that overcoming regulatory hurdles was also a big undertaking for Elon Musk that paved the way for a lot of SpaceX’s success in entering this industry. I’d be interested in your thoughts on how important this was in their operating model. Also I think that one of the most fascinating things about this company is that their mission is to “design, manufacture and launch advanced rockets and spacecraft. The company was founded in 2002 to revolutionize space technology, with the ultimate goal of enabling people to live on other planets.” Does the goal of enabling people to live on other planets broaden their business model? And do you think that each of Elon Musk’s companies’ operating models will contribute to realizing this business model (i.e. SolarCity, Tesla Motor’s GigaFactory for manufacturing and innovating affordable battery technology, and SpaceX)?
Thanks for your great comment!
I think you are spot on. The dream of Elon Musk has always been to colonise Mars. You can find many articles online talking about this, e.g. http://www.theguardian.com/technology/2013/jul/17/elon-musk-mission-mars-spacex
It seems that his companies are aligned with this objective: SpaceX will provide the rockets to travel to Mars, Tesla is developing batteries that are also very useful for spaceships, and SolarCity manufactures solar power systems that would be necessary not only for space travel, but also for a colony in the red planet.
Regarding the regulatory hurdles that Elon Musk had to overcome to make SpaceX viable – I think that he took advantage of the lack of regulation. Countries cannot own territories in space according to the Outer Space Treaty that was signed during the Cold War. So, anyone can launch a rocket into space as long as the country from where it is launched authorises the flight. That is why SpaceX launched its first rockets from the Marshall Islands in the Pacific Ocean – to avoid the regulatory hurdles of the US! Once SpaceX was proven viable, it was much easier to obtain flight permits in America.
Jorge, thank you for a wonderful post on SpaceX. I have been able to gain a well-rounded understanding of the company.
My first question is around competition from Jeff Bezos’ space company Blue Origin. We recently saw in the news that Blue Origin was able to successfully launch and retrieve a reusable rocket, while SpaceX has not been able to achieve this. With the competitive threat from Blue Origin imminent, do you think SpaceX is well-positioned to face this threat? If not, do you think it will need to change its business or operating model?
Secondly, how far away is SpaceX from designing and producing manned space vehicles? Does it have the capabilities to achieve this in terms of safety and quality? Will NASA allow a private entity to be the main supplier for manned missions?
Lastly, given how durability and quality of parts are mission-critical, can you expand on how Tesla’s quality control function monitors quality of parts sourced from companies which have never produced parts for the space industry.
Thank you for your questions, Aravind!
1) Blue Origin is doing a terrific job. However, I don’t see it is a threat for SpaceX today. Blue Origin is mainly working on suborbital spaceflights. They want to have its vehicle – the New Shepard – ready as soon as possible to fly space tourists. Nonetheless, it is true that they are also working on orbital rockets. United Launch Alliance has contracted the company of Jeff Bezos to build an engine for its largest rocket in development, the Vulcan. Looking forward to seeing what happens in the future.
2) SpaceX plans to conduct manned flight in 2017. NASA will allow private companies to do so. In fact, the agency has a program for that – Commercial Crew Development – which is financing the Dragon V2, the manned spacecraft of SpaceX.
3) According to conversations I have had with employees, they undertake extensive and intensive testing to qualify parts sourced from other companies or built in-house. Unfortunately, I cannot give you more information as SpaceX does not disclose this information.