Can Aerospace-Focused Entrepreneurial Startups Revive the U.S. Economy
Compared to other industries, aerospace has not been targeted by a plethora of startup companies in the past decade. While we have the latest Internet-focused software and services companies, consumer electronics firms and various types of artistic endeavors (from musicians self-publishing to marketplaces for small artisans to sell their ware directly to customers), aviation has not attracted the same level of entrepreneurial zest. We have a number of well-publicized and space-focused ventures, but we are a bit lacking in the terrestrial portion of ‘aerospace’.
The reasons for this are many, with the primary being the costs and risks associated with developing flight-worthy products, especially those which contain embedded software. This is why most new developments are usually driven by existing companies which have not only deep pockets to dig into, but also an existing customer base to use. I am not dismissive of ‘big company’ efforts, but these are rarely considered ‘disruptive’.
Disruptive technologies typically emerge from unexpected places and unexpected times to displace the current market leaders. Since the U.S. (and Canada, the E.U. and Japan, primarily) are considered the primary aerospace market leaders, we have the most to lose.
The Whole World Wants To Create Aerospace Jobs in their Country
With the stated goals of many countries to expand their focus into aerospace and aviation, due to the job-creating potential and export economy it drives, the U.S. and other established aerospace countries will face increased competition in the years to come. Not only will China, Japan and others develop new aircraft to compete with the established OEMs, but components suppliers from other newly-developing countries will continue to take market share from the established companies based upon cost alone (usually), in the absence of revolutionary products. The aviation market IT-based service providers have been attacked by lower-cost software companies for years now, which seem to offer products which are basically the same, but simply at a better price point. Each of these represents a net loss in jobs for the U.S.
Suppliers of commodity-type products and services will continue to suffer from the shift to China and other low-cost locales. The only way to maintain or grow market share is to out-innovate the competition — especially the non-existent competition, since you want to increase the barriers to entry to your little piece of the airplane before someone else takes a chance on a complacent, entrenched rival. Alas, this rarely happens.
Why Big Companies Often Ignore Truly Innovative Ideas
The Amazon.com bookstore contains virtual bookshelves that are dedicated to books on innovation and how to get your creative juices flowing. There are almost as many as there are books on losing weight, exercising better, eat healthier and related topics, and there is a good reason for this. Not only do unattainable goals sell well, but there is always a new way for you to try (and usually fail) and spend more time and money on learning how to do so. It is difficult to teach people and companies on how to change a mindset, and to suddenly become more open minded to pursuing new ideas. There are entire consulting companies that train large company leaders on the latest way to reinvigorate their staff to be creative, think of new ideas, and give the CEO credibility with the Board of Directors on addressing a non-growing market share issue. Rarely do such efforts bear much fruit.
Established companies are much better at coming up with evolutionary products for a variety of reasons, but are rarely able to use their resources to develop revolutionary solutions. It is as difficult for most people to lose 20 pounds (and keep it off) as it is for a $B company to create a completely new product outside of their comfort zone. In fact, most company’s management teams will disrupt internal efforts to do so, usually unknowingly, as they force motivated employees with great ideas to adapt these ideas to match the needs of finance, accounting, engineering, product support and any other gatekeeper who sees no benefit to working harder. No wonder most ideas at such companies die a slow, painful death as they slowly squeeze the entrepreneurial spirit (and motivation) out of such brave souls. In fact, it can be argued that if your firm is profitable with its current products/services, and customers are reasonably happy, why risk your capital and resources on a risky venture? It is understandable that established management teams might crush the dreams of zealous employees, since most new ideas often fail, and why punish yourself when the risk-to-reward ratio is not in your favor? It is typically easier and less risky to buy out small, innovative companies and adapt their innovations into your product line.
This is why we need new companies to rescue the U.S. in the battle for aerospace jobs posed by the emerging world for the next decade. When you have nothing to lose, you are not held back by existing revenue streams and entrenched bureaucratic processes in chasing new ideas, and this is what we need to contend with. The main issue that we have is that much of the electronics and precision manufacturing advancements are NOT happening in the U.S., minus a few exceptions. With eEnabled aircraft entering the market, and new technology advancements driven by NextGen and SESAR (not to mention by the expansion of satellite communications and other air-to-ground services in general), the U.S., Canada, Japan and the E.U. will be challenged by others which have advanced capabilities to take advantage of the new aviation theater of operations.
Aerospace Needs More Disruptive Ideas
We need big-thinking ideas. We need earth-shattering ideas. We need ideas that galvanize the entire industry and motivate other companies to step it up to compete. These are the type of ideas that create high-paying jobs and new revenue streams and engage a new generation of talent to move aerospace and aviation forward. What we need is more products such as the Apple iPad in the cockpit or cabin, essentially — something that came out of nowhere, spawned a whole industry niche as enthusiasts adapted its use to meet their needs, and then forced the FAA and the entire industry to accept it. There is no denying the influence of the iPad on aviation.
In order to attract not only investors, but even more importantly, young talent to the industry, we need iPad-like ideas that galvanize the aerospace establishment. This level of disruption only happens when we either create new markets, or replace antiquated products/services with ones that provide new entrants with a platform that triggers massive changes. Examples of this include the Apple iTunes store, which provided software developers access to a market which did not exist before iOS devices came into being, and how iStockPhoto allowed photographers and artists everywhere to sell their work, thus reducing costs to end customers by virtue of allowing small providers to license their work. This spawned a new market for images and illustrations for customers who could not afford this before.
New Markets: Space Tourism and 3M (Mining, Manufacturing and Medicine)
Aerospace can point to what is happening in the space tourism market with Virgin Galactic/Scaled Composites (SC) leading the way, and the Bigelow orbiting hotel waiting in the wings for guests to arrive. (I wonder if my Hilton HHonors points will be honored for a free room.) Companies such as XCOR and SpaceX have also challenged the large incumbents of the space industry with their products. However, it is the emerging space tourism industry that has the potential to inspire the next generation of aerospace workers, and this may spawn follow on space-based industries since there will be a means to get there, and a means to stay there cost-effectively.
At this time, only a handful of billionaires have been space tourists, riding old Russian rockets up to the internationally-funded, taxpayer-sponsored space station hotel. Nice but lacking in amenities, I bet. Once Virgin Galactic and its competitors are able to shuttle customers up to the Bigelow Space Hotel & Spa (once they address how to get to a higher orbit), and compete for such shuttling of customers to and from space, you can imagine how mineral exploration companies will be able to make use of such capabilities for their needs. While SC’s initial spaceship may not meet the need to reach the moon or an asteroid with SpaceShipOne, is there any doubt that various companies are not strategizing on how to build upon SC’s current capabilities demonstrated already? We have a commercial space race happening now, and this is only the early phase of the battle to come. Once we have some economically-viable service providers (American Spacelines, United, you get the idea) up and running, this will sprout new industry niches such as mining (“thar’s gold in them thar asteroids”), and medical research and semiconductors (growing certain types of crystals for use in specialty chips and solar cells) for starters.
Nature not only abhors a vacuum, but it also abhors the lack of competition in a market. Once we find a way to profitably mine asteroids or the moon, entire service sectors will spring up to meet the needs of developing new equipment, move it, maintain it and get the workers to it safely. This battle will spawn dozens or hundreds of companies, and undoubtedly many nations will fund their domestic companies to go after this market, especially countries lacking in such natural resources that can be mined in space.
Not only does America need to encourage space-focused startups, but it needs to engage in ways to stimulate the market before others do. This is where the investment in NASA can payoff for the U.S., and research could and should be shared with domestic companies in a greater way. We have a head start due to our past investments as a country, but China and others are closing the gap quickly.
Replacing an Antiquated Market: Bring on the Drones
Arguably, drones are not a new commercial market niche. Rather, they simply replace the use of manned aircraft or other means with smaller, less expensive mechanisms. Once the FAA allows their use in the coming years, it is expected that unmanned aircraft/drones will be used in broadcasting, filming, agriculture/ranching, firefighting, border patrols and various other activities. In fact, many local governments are already passing laws limiting their use before the market actually forms, based upon pressure from special interest groups. This market does not need much encouragement for industry to step forward; it just needs for the FAA to develop the policies, rules and procedures needed for a viable market to form.
The biggest winners in the commercial drone market will not be existing aircraft OEMs or service providers, but newer smaller companies which will develop products to exploit market needs of various expected customers. This battle has already started and the first wave of contestants has already emerged. Since the barriers of entry are low (at this time), it is expected that more companies will form in the next generation of this market (in about three to five years) as lessons-learned from the early pioneers are documented and written about. The drone market will have solutions from all around the world and the low-cost provider will not always win. Due to safety and reliability requirements for airborne vehicles, the market (and the courts) will punish any company which is not able to meet such requirements consistently.
Once again, since smaller electronics and power requirements will drive these products’ development, companies and countries with the capabilities to innovate in these areas will move ahead in the market. This will be a challenge for the U.S. and other countries that ceded such capabilities to others in the past. We need to rise to this challenge in order to survive the coming battles for market share. Building cutting-edge electronics into drones and spacecraft is not easy, and we need to rebuild some of our lost manufacturing capabilities in these areas or suffer accordingly.
There is Hope!
Aerospace and aviation used to attract some of the U.S.’s biggest business thinkers and risk takers. We have a new generation of such leaders emerging, but we need to encourage and invest in the next generation now.
This is where local and state governments can step in — by working on school curriculums to encourage more math, science and engineering at an earlier age, and using aerospace and aviation companies to help define how it’s done. Development of a long-term supply of young talent, coupled with tax incentives to draw companies, should not be underestimated.
With apologies to the small-government advocates, the Federal government needs to be involved — not in building much of the capability for the new markets discussed in this article, but in creating a fertile ground for new companies to plant the seeds by which to support these markets. Funding some of the research to conquer the issues associated with limitations of current technologies will pay off over time, and it will create many new jobs and new capabilities, and inspire a new generation of aerospace enthusiasts. Such research is not viable for most investors due to the timeframes their customers demand of them.
The Apollo launches not only spawned the space industry, but many ancillary industries were affected by the basic research performed. How can you forget drinking orange Tang? This provided a springboard for today’s space entrepreneurs. The U.S. needs to invest in itself to be relevant in the coming century, and our current lead in the aerospace market needs to be refreshed. This is not a time to cut back on education, research and investment in this industry and education. It is a time to double down and use our existing resources to ensure our relevancy in the coming years.
Are you listening, Washington, D.C. (and Sacramento, Olympia, Tallahassee, Austin, Topeka, Richmond, Columbus…)?
John Pawlicki is CEO and principal of OPM Research. He also works with Virtual Security International (VSI), where he consults to the DOT’s Volpe Center, handling various technology and cyber security projects. He managed and deployed various products over the years, including the launch of CertiPath (with world’s first commercial PKI bridge). Pawlicki has also been part of industry efforts at the ATA and other related groups, and was involved in the effort to define and allow the use of electronic FAA 8130-3 forms. He recently completed his writing of the ‘Aerospace Marketplaces Report’ which analyzed third-party sites that support the trading of aircraft parts. For more information, visit OPMResearch.com.