United States: Up, Up, And Away

Last Updated: February 19 2013

Fast, flat, and lean, SpaceX is helping America's space industry regain its competitive edge.

Ten years ago, SpaceX was barely a blip on the aerospace industry's radar screen. Since then it has skyrocketed to prominence, notably as the first private company to have berthed a spacecraft at the International Space Station.

Top executives say they're just warming up. The company's manifest includes contracts for more than 40 rocket launches. It is poised to supply manned spaceflight services to NASA with its Dragon capsule. Even its aspirational goal, a Mars mission to make humankind an "interplanetary species," seems possible one day.

SpaceX co-founder Elon Musk, 41, made a small fortune helping to develop PayPal. He reinvested a good deal of it to make rockets streamlined and reusable, hoping to dramatically reduce the cost of spaceflight. In the process, he brought a fresh approach to the mandarin complexity of aerospace contracting, a style derived from his experience as an Internet entrepreneur. Simply put, SpaceX thinks big, moves quickly, and avoids bureaucracy.

"We've tried to maintain the best elements and practices of a startup," says general counsel Tim Hughes, who was one of the first hundred employees to join SpaceX when he left a committee staff job on Capitol Hill in 2005. Hughes ticks off the cultural qualities that set SpaceX apart: a flat management structure, empowerment of employees to make realtime decisions, a relentless focus on efficiency, and equity ownership of the company by all employees.

At the company's growing complex in Hawthorne, California (which includes a state-of-the-art production facility that is just under one million square feet), visitors will also notice another Silicon Valley trademark: everyone works in cubicles, not offices. There are open lines of communication between disciplines within the company, Hughes says.

When Hughes came to the company, it was so lean that some questioned his presence. "I remember an engineer asking me on the first day, 'Why do we need a lawyer anyway?'" But Hughes's work as counsel to the House Science and Technology Committee gave him a solid grounding in space issues. And as deals were struck, Hughes was in the catbird seat. "I've had the opportunity to define and build the legal and government affairs functions for the company from the ground up," he says.

"And I've gotten to be a part of every major deal that we've done, whether selling rockets, financing the company, purchasing real estate, or any other facet of the business."

So far, the workhorse SpaceX product is the Falcon 9, a two-stage rocket used in May to mount the company's history-making demonstration resupply mission to the ISS. A commercial launch, on average, costs about $54 million, one-quarter of the cost of competing U.S. rockets of comparable capability. About 80 percent of Falcon 9's components are made in-house, a response to the high cost of aerospace parts. SpaceX developed Falcon 9 for about $440 million - about one-third the cost of the traditional NASA approach, according to a 2011 NASA study.

Not only did SpaceX produce Falcon 9 less expensively, it only took about eight years to do it, including work on the predecessor Falcon 1 prototype. Production speed is another Silicon Valley legacy - traditional space firms go for performance first. "Sometimes we are focused on beating the competition to market, and other times we aim to penetrate markets dominated by entrenched monopolists," Hughes explains.

One of the things SpaceX has working for it is a cadre of young and talented engineers and technicians, says Bradley Wine, co-chair of the Government Contracts Practice at Morrison & Foerster. "When you get a chance to walk around there, the people are young and excited, driven by a mission."

Although SpaceX has grown to about 2,000 workers, it punches over its weight in the industry, Wine notes. "Compared to Lockheed, SpaceX is not a huge company." Prior to SpaceX's debut, the share of commercial launch contracts awarded to U.S. companies had dwindled, thanks to competition from cheaper vehicles from Russia, France, and China. But just as Apple and Google have stormed the world market for portable devices, SpaceX is rejuvenating the U.S. launch capability. Its manifest includes payloads from Canada, Thailand, Taiwan, and Argentina, although its single largest customer remains NASA (a recent case, contesting a NASA contract with SpaceX, was defeated, with Morrison & Foerster's help).

The federal government's decision not to replace the outmoded Space Shuttle with a next-generation government vehicle has opened up opportunities for companies like SpaceX, says Rick Vacura, also a co-chair of the Government Contracts Practice at Morrison & Foerster.

With the U.S. currently dependent on Russia to deliver astronauts to the ISS, hopes are high that SpaceX will be the next provider of manned spaceflight systems. As Vacura puts it, "From my contacts in the government, everyone is really cheering SpaceX on and hoping they will be successful."

Silicon Valley Takes Orbit

Although it competes in the aerospace sector, SpaceX looks and feels more like a Silicon Valley startup: T-shirts and running shoes are typical dress for SpaceXers, with innovation encouraged at all levels. "Informality is one of the perks of working at a young, dynamic company," notes general counsel Tim Hughes. SpaceX founder Elon Musk sets a bar for innovation that the late Steve Jobs would have admired. When SpaceX propulsion chief Tom Mueller first met Musk, he ventured he could cut costs on a certain engine by a factor of three. Musk's reply: he needed a factor of 10.

And SpaceX sets ambitious goals. Google launched in 1998 with the mission "to organize the world's information and make it universally accessible and useful." For his part, Musk wants to use SpaceX to make man an "interplanetary species," while still realizing value for shareholders. The target helps focus and motivate employees, Hughes says: "We know we are aiming toward something far bigger than ourselves."

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morrison & Foerster LLP. All rights reserved

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