SpaceX – Low cost access to space

$60 million rockets? What a bargain!

“SpaceX designs, manufacturers and launches advanced rockets and spacecraft.”[1]

As the first privately funded company to successfully design and launch an orbital spacecraft [2] and the first company to achieve in-space docking with a crewed space station,[3] SpaceX has achieved goals that were previously the exclusive domain of national governments. Equally impressively, SpaceX has achieved the lowest costs of any launch vehicle manufacturer, including those in India and China. Prior to SpaceX, a typical U.S. government satellite launch cost ~$200 million[4]. SpaceX is able to achieve per launch prices of ~$60 million[5]. Low cost access to space was and is the primary value proposition SpaceX promised its customers, and the company has been highly effective at organizing its operations around this mission. To date, the company has achieved 18 successful orbital launches of its Falcon 9 rocket.

Company business model:

SpaceX has three types of customers: U.S. government space agencies, international governments, and commercial space companies. For international governments and commercial space companies, SpaceX offers only one product, space launch services (i.e. delivery of a spacecraft to orbit). For U.S. government customers, SpaceX also offers space launch vehicle and spacecraft design services, whereby the U.S. government subsidizes SpaceX’s research and development for the creation of new launch vehicles and spacecraft that it can then purchase. Currently, SpaceX has a contract backlog of 50 orbital launches representing over $3 billion in revenue and is under contract to develop a crewed spacecraft for NASA.[6]

Operating model

SpaceX is unique among US space contractors in its high degree of vertical integration. The company develops and manufactures in-house more than 70% (of both $ volume and mass) of its two main products.[7] SpaceX is the primary actor in all phases of product lifecycle, including vehicle design/engineering, component manufacturing, software development, subsystem assembly, vehicle integration, vehicle testing, launch operations, and on orbit operations. SpaceX’s vertical integration is a key factor in its low costs. The company is able to share facilities, equipment, infrastructure and personnel across activities and product lines.For most of the company’s history, all manufacturing, design, and business offices were history housed in a single 95,000 square meter facility in Hawthorne, California. Its primary competitor for US government launches, by contrast, serves only as the systems integrator and launch operator and has over 1,200 subcontractors, which operate a huge number of facilities spread all over the country.

Other key factors enabling SpaceX’s low costs include its young, highly motivated and non-unionized workforce willing to work significant unpaid overtime. SpaceX targets the top graduates from prestigious engineering programs and recruits them with the promise of playing a major role in exciting missions such as putting a human on Mars.

SpaceX, as a late entrant to the space manufacturing industry, purchased state of the art automated manufacturing equipment, including a 3-D printer that can print flight hardware rocket engines out of titanium[8]. Overall the company has optimized its production process for a highly automated bulk manufacturing process which was previously unheard of in the space industry, where hand assembly of components is still the norm.

SpaceX also designs its products to fit within this bulk manufacturing vision. For instance, whereas most space launch vehicles have either two or one engines and has a custom engine for each rocket. By contrast SpaceX’s main rocket, the Falcon 9, employs 9 identical engines. Its larger vehicle, the Falcon Heavy, uses 27 of the same engine. Similarly the maneuvering Draco thrusters on the Falcon 9 are the same as those on the Dragon spacecraft. By manufacturing a smaller number of systems in larger volumes, SpaceX is able to achieve better economies of scale and lower prices.

Finally, the operating model helps drive the business model because as by far the lowest cost provider of space launch services, SpaceX has also been able to secure the greatest number of launch contracts, further driving high volumes and economies of scale. Unfortunately, the pressure to perform likely contributed to SpaceX’s launch failure on June 28. However, with a roughly 5% failure rate, SpaceX’s performance is still in line with that of more experienced launch vehicle manufacturers, and the company is expected to return to flight by January 2016.











8 thoughts on “SpaceX – Low cost access to space

  1. SpaceX has done an amazing job harnessing the energy of younger engineers – the type of energy that NASA has capitalized on for close to half a century. The difference, which this article accentuates, is that SpaceX is orders of magnitude more nimble and willing to push limits to achieve goals. There is a reasonable likelihood that their competitor, ULA, is bankrupt within the next 5-7 years. Yeah, they’re significantly more reliable than SpaceX – for now, but that changes as SpaceX builds up more data points with successful launches. That reliability comes at a massive cost that customers are likely to not continue paying more. And they can’t compete on cost with SpaceX – but they could, over time, after emerging from a bankruptcy.

    SpaceX has a serious set of goals in front of it. And I don’t mean the “go to Mars” stuff – I mean just filling the orders for what people have already bought. My biggest concern for SpaceX is scale – lean, mean, and scrappy only works for so long. At some point, they will have to make tweaks – invest in more facilities, pay employees more, migrate off of skeleton crews and add more staff, etc. I fundamentally believe they can do that and still be as competitive as they currently are. My fear is that if they don’t make these changes in the next couple years, someone(s) will either get hurt or killed. And unlike NASA, who has killed 19 astronauts to date, my fear is that it will be some innocent, ambitious young engineer out on a test rig or on an assemble line trying too hard to push the limit to reach these ambitious goals.

    Time will tell. Good article!

  2. Thanks for writing – SpaceX has an interesting operating model that effectively supports its business! Just wanted to mention some additional, core sources of future revenues/cost advantages that are critical to understanding the company’s big-picture strategy:

    1) Reusability of rockets – the ability to recover rocket parts significantly reduces the cost of space travel. This goal is already embedded in SpaceX’s operations, with attempts to land the Falcon 9 booster on a barge built into three missions to date and significant engineering investment in reusability going forward. Furthermore, Blue Origin – the private space firm owned by Jeff Bezos – just successfully landed their New Shepard rocket after launching to the edge of space. That achievement puts significant competitive pressure on SpaceX to continue lowering cost barriers to space travel.
    2) Development of global satellite internet service – this is a major potential revenue generator for SpaceX and a key motivation for Google and Fidelity’s recent investment in the company.
    3) The path to Mars – Elon Musk’s commitment to getting humans to Mars is not just a personal goal. It’s a real driver of SpaceX’s operational strategy that is not supportive of its current business model. This misalignment is very much intentional – company plans to use revenues from its launches and satellite internet project to fund Mars exploration and potential colonization, and Musk plans to do so even if the latter is not profitable. In fact, Musk has publicly announced that SpaceX does not intend to go public before the company puts humans on Mars.

    1. Good points. The reusable element is pretty massive – if done right, it can cut the cost of a launch down an order of magnitude.

      The Blue Origin landing, despite the media hype, puts virtually no pressure on SpaceX. What SpaceX is doing is about 100x more complicated. Let me explain:

      Blue Origin’s rocket launches basically straight upwards and then stops, falling back down to earth. The analogy is throwing a tennis ball straight up, it decelerates then falls back down to you on the ground close (relatively speaking) from where you first threw it. So once the rocket starts to fall back down, its really just a matter of doing a controlled burn to slow the spacecraft down and put it down softly – it isn’t moving fast along the ground left to right, just free-falling. The technology to do this is actually relatively straight forward.

      SpaceX’s rocket launches off the pad and pitches over near horizontally. It does this so it can accelerate to 17,000MPH+ to circularize (i.e. get into a stable orbit). You can’t orbit unless you build up enough horizontal velocity to combat gravity. After a few minutes, as it usually passes over Africa, the rocket is going some large fraction of this 17k MPH speed when the bottom part (first stage) separates and the rest of the rocket turns on and the payload continues its journey to space (on the upper stage). The first stage is now traveling at a ridiculous ground speed and free falling back toward the earth’s surface slowly. This is the amazing part. SpaceX reignites that stage, stabilizes it from a tumble over the east pacific, then burns the engine to slow itself down so it can descent down to earth where it will land on a moving barge in the ocean.

      Very different engineering challenges. One involves lobbing up a mass then applying the brakes gradually over time as you fall. The other does the same thing but involves you first slowing down a bullet.

  3. Greg, Dr. Emmet Brown, and Monica – fascinating points! I can’t speak with the same rocket science fluency as you all, but I did take TOM and watch Star Wars once.

    Here are a few thoughts I had while reading Greg’s well-researched post.
    1. Failure Rate: What would the impact of a continued 5% failure rate be on future contracts? Given that SpaceX is almost entirely B2G (G: Government, if that’s a real acronym), it seems reputational risks of failure are lowered. I wonder if that calculus will change once manned programs begin.
    2. Standardization of component manufacturing: It is interesting to hear that standardization of component manufacturing (i.e. bundling together of the same engines to increase rocket size) is relatively new to spacecraft production. I suppose that because NASA has generally relied on reusable spacecraft with intermittent launches and no recent re-designs, there has been little competitive pressure to innovate along these lines. With the shuttle now out of operation, and NASA relying on private company launch services, the incentives (and therefore cost competition) has increased. I wonder if this hospitable business climate will change once NASA’s new shuttle program is back on-line. Specifically, would NASA have institutional pressure to support and sustain its own internal shuttle/delivery program over less costly private players? I am not sure, but I would imagine sustained, reliable performance by SpaceX in the interim will establish enough credibility with the U.S. government to earn it a continued role in space delivery after the new shuttle program begins.
    3. Mars Colonization: This was an interesting point brought up in the earlier comments. It seems that Mars has been a major recruiting tool for top talent, and that it is a priority for Musk beyond any business rationale. Given Mars is his goal, it makes sense that he would delay an IPO until after a manned mars mission. I wonder if this would affect NASA’s role at all. Specifically, is SpaceX is successful, I would imagine there would be less Congressional willingness to fund a follow-on NASA mission to Mars. Achieving something on this scale might actually cement SpaceX as a replacement, or at least competitor to, NASA programs. Given the immense barriers to entry in this field (capital requirements and talent), such a move could be incredibly lucrative for SpaceX in the long term.

    Greg, Monica, and Dr. Emmett Brown – please feel more than free to follow up with any responses to these questions/ideas. I would love your thoughts!

  4. Fascinating post Greg. It appears as though Space X has essentially been able to become the ODM for the government, and commercial space companies. How was it able to catch up (and seemingly be on the cusp of lapping) NASA who presumably would have half a century of research plus coordination with other well-funded organizations such as the Department of Defense, and CIA. Has his manufacturing/operating process in any way been an improvement/optimization of NASA’s or entirely different all together or has this been Space travel from scratch?

    Today in the Google Car case we talked about the firm’s value proposition and how new seemingly tangential projects may 1. have more relevance than they might outwardly appear and 2. be able to transfer parts of their operating efficiencies to adjacent complements. Greg, what is Musk’s goal? How does Space X fit in to his broader set of goals and do you see any adjacent competencies between Space X and say Tesla? Are there any lessons from Google Car that you think Musk should consider as he seeks to revolutionize the Space industry?

  5. Sounds like the Elon Musk of Nuclear energy needs to come along. One of the biggest economic hurdles for nuclear energy is the upfront plant costs, and since the political process is so incredibly substantial to approve and build one, everything becomes one-off. SpaceX’s approach of standardizing a modular, repeatable rocket to scale up to various jobs is brilliant, and its this level of standardization that could be a great example for other industries in need of a fresh perspective.

  6. Great article Greg. A couple of comments/questions.

    You mention early on that SpaceX delivers a rocket to space for $60m which is a significant discount to previous launch price tags. I’m wondering what other factors matter to its customers. Is cost really its main competitive edge and if so how defensible is this positioning when now every billionaire and their dog wants to own a rocket company.

    Also, as mentioned in a few of the comments above, where do you see the next likely adjacencies for SpaceX to move into? Are they a rocket company, a space company or a manufacturer of high precision equipment? In defining this what core competencies do they currently lack to appropriately capitalize on these opportunities?

  7. It’s interesting that part of SpaceX’s competitive advantage is its labor force. In many ways, this is not a sustainable model. As competitors enter this space they will be able to poach key talent and not only take existing developments but leverage these minds to surpass SpaceX. It must be said that retention and motivation must go hand and hand with innovation and progress.

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