Is it not possible to engineer a craft with a much lower re-entry speed thus reducing friction?
Yes. The problem is slowing from 17,000 MPH to 0.
Remember, it took the entire billion gallons of fuel to accellerate the shuttle from 0 to 17,000 MPH. It takes just as much energy to slow it from 17,000 MPH back to zero. Rather than taking along a second External fuel tank with a billion gallons of fuel into orbit and a retro-rocket, just to slow down, it is more cost effective to just let the air slow you down. You get all that "slow down" energy from the air, and that generates heat.
So yes, you could retro fire a slow-down rocket above tha atmosphere, slow to zero speed and then just simply fall like a rock and keep cool all along the way. But it takes an awful lot of fuel...
Bob