Background
After a hiatus from our regular schedule, we’re back. Suffice it to say that global events have been busy.
In our last note, we published the top 10 themes and events that we believe will have the most significant impact in 2023. Thirty-seven days into the year, the top three on our list have already seen big hits: AI Sophistication – the flurry of hype around OpenAI and Cybersecurity – Merrick Garland announced the joint FBI/Justice Dept.’s dismantling of the “Hive” ransomware network, the ION Cyberattack, and ongoing Pegasus incidents. (Click to read the note on our website and LinkedIn).
Third on our list we have the Nationalization of Space. As with AI sophistication and cybersecurity, nation-state (and commercial) interest in space has been active thirty-seven days into 2023. To start, we’ll repeat an excerpt from our note on Jan 2nd, 2023.
On November 29th, China launched its Shenzhou-15 spacecraft, taking three astronauts to its newly completed Tiangong space station… We believe the completion of the Tiangong represents the starting shot of a new race in space. While only 1/5th the size of the ISS, the realization of a Chinese presence in low earth orbit is likely to spur Washington into action. Additionally, competing plans for a permanent base on the moon between Washington and a joint Sino-Russian agreement are in development, with no set timelines. Both have an open invitation for other nations to join; however, with the Russian war in Ukraine, many Western European countries like Sweden, France, and the European Space Agency have canceled cooperation with Roscosmos and are likely to back Washington’s efforts representing the collective West. These vying plans for a permanent base on the moon tell us that focus, attention, and, importantly, capital isn’t being drawn away from this new geopolitical arena any time soon.
While events thus far are proving our assertion true, there are multiple components to what it means to truly ‘nationalize’ space. Additionally, we’ll cover areas we believe are primed for retail and institutional investment.
Analysis
Diving in – post cold war/Soviet Union collapse, space operations in recent memory have been a joint venture based on principles of diplomacy, research, and shared humanity materialized in the ISS (International Space Station) manned by the U.S., Russia, Japan, Europe, and Canada. Through a uniquely challenged geopolitical landscape, the regime of peaceful space operations is quickly coming to an end. What we ultimately see coming out of this process is similar to the geopolitical reality on the ground – operations through blocs. That is to say, divided between liberal democracies and authoritarians. Symbolically aligning with this shift in trend was the Russian decision last year to withdraw from the ISS after 2024 and, like China, begin work on its own space station. Russia, unlike China, is under global sanctions affecting everything from finances to technology, making the likelihood of a realized Russian space station slim to none. If it is realized, we’re talking in decades, not years.
Additionally, the pair have also announced the ILRS (International Lunar Research Station) with plans to establish a permanent base on the moon by 2036. Running tandem to authoritarian space operations are similar endeavors by the U.S. and allies through agreements and plans such as the Artemis Accords, U.S.-Japan Space Agreement, Cis-lunar Highway Patrol System, and the Artemis Moon base by 2030. Importantly, the takeaway here is trend. Laying these events out, we can clearly see the lines that are being drawn. As geopolitics becomes more fraught on the ground, we are increasingly unable to (and perhaps also unwilling) to separate operations in space from national security concerns. So, there are two pieces to unpack here – 1. Trend tells us space operations are fraying along national/ideological lines, and 2. We believe this is the correct stance for the U.S. to lead in this new geopolitical arena. All to say, we are big proponents of the Wolf Amendment.
Indeed, we already see the trickle-down effects of nationalized space. Commercial rockets contracted to launch U.S. spy satellites will now have to show the Pentagon that their rockets can withstand interference by China and Russia. The new requirements “show that Pentagon leaders are increasingly focused on China’s capabilities in space… [and] Russia’s space operations have also been drawing more attention from military planners of late.” As a nascent commercial space industry is emerging, it’s heavily influenced by national security concerns. With the onset of the war in Ukraine, Russian officials have said that “US commercial satellites could be targeted if they were found to be assisting Ukraine.” This not-so-veiled threat to Elon Musk’s Starlink satellite network poses a dangerous precedent to all commercial space operators and $424 billion of market value at risk. Using Starlink as a commercial proxy, quantitatively, commercial payloads are quickly taking up a more significant proportion of all U.S. payloads to space,
Source: CSIS -Aerospace & SpaceRef
The DoD’s approach in shaping the commercial space sector isn’t dissimilar to what we do for other industries for the same reason – think technology, specifically semiconductors, the DoD gets involved the greater the potential threat to national security. In the case of the commercial space industry, the DoD is seeking to guide the parameters and trajectory of this new arena, not private enterprise.
And by the numbers, we’re seeing just how prescient this strategy may be. Russia’s belligerent comments aside, the total number of ASAT (Anti-Satellite Weapons) tests has been declining since the 1960s.
Source: Visual Capitalist
While this is encouraging – trend (and Russia) underscores that space as a geopolitical arena isn’t cooling off but rather heating up. During 2022 Russia fell into the ‘significant’ category across all counter-space capability types (below), with China trailing quickly behind. 2022 bucks the cooling of the last 50-odd years, further emphasizing pivot. While last year, the U.S. became the first country to voluntarily adopt a moratorium on direct-ascent anti-satellite missile weapons (DA-ASAT) tests, there remains a host of other counter-space capabilities (listed below), and unsurprisingly Russia and China have not joined in this moratorium. Additionally, as of 2022, the U.S. stands ASAT weapons ready, no longer needing to test.
Sources: Visual Capitalist & Secure World Foundation
LEO (Low Earth Orbit), MEO (Medium Earth Orbit), GEO (Geostationary Earth Orbit)
Moving to a future where we feasibly see more nation-state-led activity in space, the environment that commercial space enterprise must consider becomes increasingly challenged. The destructive nature (below) of co-orbital and direct ascent ASAT weapons creates an enormous amount of long-lasting debris that private operators have to navigate in LEO. This inevitably increases both CAPEX and OPEX for private enterprise, putting long term headwinds on the burgeoning market.
Source: Visual Capitalist
Conclusion
The nature of space operations is rapidly evolving. As we leave behind an era of space operation characterized by short trips, diplomacy, and multilateral engagement, we see the next era underpinned by permanent human presence, unilateral activity, and extension of geopolitical rivalry. We believe China’s Tiangong space station marks only the beginning of this trend. Nationalizing space means operations aren’t “one giant leap for mankind,” but rather a leap for the individual state, and to the victor will go the spoils – dictating the rules of the road, greater surveillance and military capabilities, and ability to deny access (think China arbitrarily claiming swaths of the Pacific through man-made islands).
Under this new regime, we see the growing commercial space industry facing stronger headwinds to growth. While investment opportunities still and will continue to exist, finding winners in an already technically challenging sector will become even more difficult.
Themes
- Commercial Space
- Manufacturing Transportation
- Telecommunication
- Military Hardware Transportation
- Civil Travel & Hospitality
- Defense & Aerospace
- Rare Earth Minerals
While we see the space industry facing significant headwinds to easy growth, this new domain has built-in utility for both government and enterprise over the long run. As a rule of thumb, the intrinsic utility for both public and private operators makes commercial space an area we like for investment. The potential for outsized returns (and inherent risk) is high as the numerous potential commercial applications for low earth orbit are still being tested, developed, and brought to market. A lot of losing still has to be done to begin predicting how the dice will land. Additionally, security and regulatory overhangs, as well as geopolitical rivalry, will continue to shape the ranges in which private ventures can push the bounds of commercial LEO applications.
In any new industry, a lot of capital is required, and in the case of commercial space, a lot of capital will be required. Go figure – the high technology, incredibly technical human expertise, and materials that go into making space operations happen are expensive. Conventional thinking would say that heading into a potential U.S. downturn in 2023 would contribute to industry headwinds. Taking the contrarian view, we believe the argument is stronger that a downturn may benefit the industry. To let Social Capital’s Chamath Palihapitiya explain,
And in the case of commercial space opportunity, we believe there is enough private and public excitement, conviction, and utility to keep risk capital flowing to startups and new issuers. Moreover, Palihapitiya’s proposed environment for a successful technology startup aligns with the outlook today. For our purposes, let’s pretend *space startup.
- Company success is more likely when founded to exploit a new leap of technology. – Re-usable rockets and launch components
- Company success is more likely when founded during a period of higher-than-average interest rates. – Not much explanation is needed here. Fed raised 25 bps on Feb 1st and abandonment of a ZIRP (zero-interest rate policy) mandate
- Company success is even more likely when companies are founded to exploit a technology innovation that involves both software and hardware during periods of higher-than-average interest rates. – Currently, the midst of software but largely hardware innovation in the space in tandem with higher-than-average rates
In this environment, we favor small to micro-cap issuers in the industry with the capital discipline to support sustainable growth over the long term and, importantly, through a new cycle of austerity. Retail money should focus here. Yes, SpaceX and other comps will likely stick around for the long haul, but small space issuers pushing into different verticals using new technology are where we see a real return.
Sources:
[1] https://www.bloomberg.com/news/articles/2023-01-23/microsoft-makes-multibillion-dollar-investment-in-openai
[2] https://www.justice.gov/opa/speech/attorney-general-merrick-b-garland-delivers-remarks-disruption-hive-ransomware-variant
[3] https://www.bloomberg.com/news/articles/2023-02-01/cyberattack-hits-derivatives-unit-of-trading-software-firm-ion?srnd=technology-vp
[4] https://www.bloomberg.com/news/features/2023-01-24/nso-group-s-pegasus-spyware-focus-of-us-eu-investigations
[5] https://acrosstatlantic.com/2023-outlook-geopolitics-on-markets/
[6] https://www.linkedin.com/posts/across-the-atlantic_2023-outlook-geopolitics-on-markets-activity-7015771533230960640-a1Se?utm_source=share&utm_medium=member_ios
[7] https://www.bloomberg.com/news/articles/2022-11-29/space-race-heats-up-with-shenzhou-15-launch-of-astronauts-to-china-space-station
[8] https://theconversation.com/chinas-new-space-station-opens-for-business-in-an-increasingly-competitive-era-of-space-activity-195882
[9] https://www.youtube.com/watch?v=4-mG-FZc0Wk
[10] https://www.wsj.com/podcasts/tech-news-briefing/space-industry-races-to-increase-launches-and-defense-capabilities/c3c6457b-41e4-46a1-bd0f-a3c3d562bbeb
[11] https://spaceref.com/space-commerce/value-of-space-economy-reaches-424-billion-in-2022-despite-new-unforeseen-investment-concerns/
[12] https://carnegieendowment.org/2022/04/20/u.s.-moratorium-on-anti-satellite-missile-tests-is-welcome-shift-in-space-policy-pub-86943
[13] https://chamathreads.substack.com/p/higher-rates-will-lead-to-the-next
[14] https://aerospace.csis.org/data/space-environment-total-payloads-launched-by-country/
[15] https://spaceref.com/space-commerce/value-of-space-economy-reaches-424-billion-in-2022-despite-new-unforeseen-investment-concerns/
[16] https://www.visualcapitalist.com/sp/anti-satellite-weapons/
[17] https://swfound.org/media/207485/vsamson_presentation-for-wilton-park_wp3093.pdf
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