Northern Sky Research

China: Worry or Wait-and-See?

May 31st, 2017 by Carolyn Belle   More from this Analyst | Profile

With 18% of the world’s population and the second largest economy, China is a major player in most global markets for consumption and production – and China’s recently formalized Belt and Road Initiative is already impacting satellite operators both global and local. China is looking to extend this growing economic influence further up the value chain, to a broader role in satellite manufacturing activities globally. Do satellite prime manufacturers need to worry about a more ambitious China impacting their bottom line, or is it safe to take a wait-and-see approach?

Long limited by ITAR restrictions and a dearth of competitive, high-heritage products, China Great Wall Industry Corporation (CGWIC, China’s commercial space sales arm) has traditionally targeted demand from emerging space nations rather than commercial players. NSR’s Satellite Manufacturing and Launch Services, 7th Edition, report found that during the past 10 years, CGWIC captured 32% of the open government GEO communications market while winning a mere 4% of the commercial market. Bundling of satellite manufacturing with launch, insurance, ground segment, and attractive financing made CGWIC bids competitive in the emerging nation niche. Yet as these are more sporadic, less lucrative deals, China’s success in this market was not a threat to the bread and butter of global prime manufacturers.

Yet with a Thaicom win and China’s first MSS satellite launch in 2016, a budding HTS constellation with APT Mobile, and last month’s sale of a 1+ option deal with an Indonesian joint venture, is it time for prime manufacturers to worry?

 While the Chinese DFH-3 and DFH-4 platforms were challenged by a poor Capability : Mass ratio and less advanced payload availability compared to global competition, ambitious R&D has brought next generation platforms more in-line with global standards. The evolved DFH-4s and DFH-4e platforms, launched last November as Shijian-17 and in April as Shijian-13/Chinasat-16, offer more efficient Capability : Mass ratios (DFH-4s is optimized for smaller payloads, while DFH-4e enables greater payload mass and available power), including the addition of electric propulsion for station-keeping. The DFH-5 platform, expected to launch later this year with Shijian-18, continues this development via a planned 125%-150% increase in available payload mass and power compared to the DFH-4. Shijian-13 is equipped with a 20 Gbps HTS payload, a first for China and only the beginning in plans to eventually outfit a DFH-5 with 200 Gbps. With the commercial market trending towards HTS and hybrid HTS/FSS satellites for growth, this technology is all but a prerequisite for selling to commercial operators.

In today’s market of declining capacity pricing and increasing competition among operators, the attraction of generous financing terms cannot be downplayed, and remains an attribute of Chinese proposals in the face of more strict bank or export credit financing in other countries. U.S. manufacturers are at a particular disadvantage here, with Ex-Im funding stalled until a quorum is appointed to the Board of Directors. For small operators, particularly those that fall into the low/medium payload power market addressed by Orbital ATK, SSL, and Boeing, CGWIC could be a welcome solution to impending financial challenges due to rising competition.

Other advantages, including potentially faster production times and a smoother process than working with an ITAR-constrained manufacturer, feed into the appeal that CGWIC is building around its product line.

These investments and strategies have started to pay off. A 53 Gbps Ka-band HTS satellite was sold to a Thaicom subsidiary in October 2016, and a Ku-band HTS satellite was placed under contract with Palapa Satelit Nusantara Sejahtera (PSNS, a joint venture of PSN and Indosat) in May 2017. These are the first Chinese orders from a Thai or Indonesian operator – Thaicom’s most recent satellites were procured from Orbital ATK, while those of PSN and Indosat were built by SSL and Thales Alenia Space, respectively.

Both sales are close on the heels of an agreement with joint venture APT Mobile to establish an HTS constellation, for which CGWIC may provide up to four satellites. APT Satellite has procured its three most recent satellites from CGWIC, has ChinaSat as a key shareholder, and has four Chinese partners in the JV, making this deal interesting less due to the choice of CGWIC than because it creates added competition in the commercial market. This mirrors the August 2016 launch of China’s first MSS satellite, Tiantong-1. As Chinese and Chinese-controlled entities broaden their roles in the commercial satellite operations market, they increase competition and potentially decrease the long-term addressable market size for leading western and Japanese primes.

Similarly, Chinese players have been linked in the last year to the acquisition of at least two commercial operators – Spacecom of Israel and ABS of Bermuda. While neither deal progressed, there is no reason to believe that Chinese interest in an expanded influence on regional satellite operators has wavered. This is an important development for global primes to watch, for if Chinese interests control regional operators, a de facto captive market would ensue.

Appealing to Commercial Operators

For prime manufacturers challenged by a commercial GEO communications market that has been sluggish since 2015 and will average only 21 orders per year through the next decade, any increase in Chinese sales is a threat. Competition is already high, and with OHB’s first launch of a GEO satellite earlier this year and SSTL’s launch in 2018, new players are a reality today’s primes must face.

Nonetheless, the near-term impact of China will be limited. While Chinese platforms and technologies have advanced, and studies in optical and quantum communications are underway, available satellites remain behind the state-of-the-art by Western standards. Various forms of payload flexibility and proven full electric propulsion for orbit raising are increasingly important options for commercial operators – options that are accessible today from only the leading Western primes.

Total cost also remains a question, with little evidence that Chinese-built satellites regularly come in at a lower cost than Japanese, European, or American alternatives. Details of the $208M contract between Thaicom, its subsidiary, and CGWIC remain unclear, but generous discounts to close the deal (typical with first sales) were likely involved.

Finally, for global or regional operators seeking to play in the U.S. government & military communications market – the largest and most lucrative government market – a Chinese satellite is not an option. All global operators sell either directly or through a service provider to the U.S. government, and are unlikely to limit their access to this market by buying from CGWIC.

Bottom Line

In search of an expanded role in regional and global economic activity, China will continue to pursue satellite manufacturing R&D and be aggressive in leveraging this via commercial sales. China’s next moves will likely continue to focus on the Asian market, where CGWIC platforms are more competitive, financing is a more important factor, and regional players are not dependent on U.S. government customers. Early success will capture this less lucrative small and regional satellite demand.

However, not only is China’s technology behind that of competitors at a time when operators increasingly rely on novel solutions, but in many cases the business environment does not justify a Chinese procurement. This restricts the near-term impact of China on the global commercial GEO satellite manufacturing market but does not negate its potential. Bottom Line, China will be a growing threat moving forward and prime manufacturers ought to actively monitor its advances to preserve their own bottom lines.