Suspected Chinese spy balloon is a Sputnik moment for the space industry

Now that the US military has shot down a suspected spy balloon from China, there will be debate over the balloon’s meaning, its capabilities and why it was there in the first place.

While former CIA director Michael Hayden said Friday that its threat to American welfare has been greatly exaggerated, others described the incident as a wake-up call. HR McMaster, Trump’s former national security adviser, hopes it will lead to a “Sputnik moment,” a return to the U.S. space race with the Soviet Union. The Wall Street Journal even warned of a “ballooning gap” with China.

The balloon was flying at about 60,000 feet and was probably gathering intelligence. It flew over military sites, and the Pentagon said it was a surveillance balloon, which China’s foreign ministry denied, saying it was “a civilian aircraft used for research, mainly for meteorological purposes.” The wreckage of the balloon is now being recovered and tested to learn more about Chinese technology.

As the rhetoric around the China threat hits a hyperbolic pitch, one thing is clear: space is space — for military contractors and private capital, that is. When I asked military industry experts and investors in recent months about the broad trends they see in the coming year, many emphasized that space-related technology, as well as satellites and drones, is a booming industry. While each of these technologies do different things and operate at different heights, they are each areas of intense US competition with China – and technologies where artificial intelligence and autonomy will be tested.

Former President Donald Trump launched the Space Force, but this new space race is not the exclusive domain of government. Private investors compete to pick the darling startups, with former US national security leaders joining advisory boards to provide strategic insight into the geopolitical landscape.

More than $45.7 billion of private capital was invested in the aerospace industry in 2021. Last year was slow ($21.9 billion), but it could be a very hot 2021. Despite the tech slowdown of late, companies with both sophisticated software and hardware are attracting big investments.

And now the balloon will enter the conversation.

A ballooning commercial space industry

As it turns out, balloons are already part of that US arsenal, costing the Pentagon $3.8 billion over the past two years, according to Politico. As industry expert George Howell posted on LinkedIn, “High-altitude balloons are actually a pretty smart thing to invest in, they’re cheap, easy to transport, can be fielded in large numbers, and are payload agnostic,” meaning that while they’re likely cameras or radar Carried, in some situations the balloon can be a weapon field.

Military contractor and balloon-maker Aerostar put it more bluntly in a video posted on social media this week: “Even the sky’s the limit!”

Balloons are an old technology, sensitive to high winds, but their weaknesses also translate into advantages, because they fly low enough to avoid detection, said George Nakuzzi, a senior engineer at the RAND Corporation. He predicted “some focus on anti-balloon technology,” including “balloon killers.”

Kevin Liu Huang, an entrepreneur who writes the Chiral Defense newsletter about military technology investment and startup trends, isn’t concerned about the balloon gap per se, but he sees the episode as emblematic of the U.S.-China competition over satellites and drones. “It’s all a geopolitical contest,” he told me. “It’s also a very rich industry and market.”

These trends are now driven by private US technology companies, military contractors and researchers studying the space race, often underwritten by industry itself. “Beijing is rapidly expanding its government and commercial space sector,” Kari Bingen of the Center for Strategic and International Studies told a recent congressional hearing. “We must take urgent and purposeful action to maintain our space advantage.” Last year, Rep. Mike Gallagher, a rising Republican national security figure, has argued that the Pentagon should buy commercial satellite technology, which he said is moving faster than strict government procurement efforts.

One sign of how hot satellite and space startups are is that they’ve become a revolving door of retired military and intelligence officers. Satellite imagery provider Planet is one of former Google CEO Eric Schmidt’s major investments There’s also HawkEye 360, whose constellation uses radio frequencies to help military and intelligence clients track the move-on below, which many former US policymakers have resigned from, and Maxar Technologies, a satellite company known for high-resolution images of Earth.

The impact of the balloon incident for the space and satellite industry won’t be felt immediately, but a sense of what might happen was evident at an event last week — before the balloon news broke — in midtown Manhattan hosted by Silicon Valley Bank. A member of America’s Frontier Fund, a venture group, spoke on a panel and offered rare clarity on the benefits of investing in advanced technology to counter China. “If the China/Taiwan situation happens, some of our investments could grow 10 times overnight,” a representative of America’s Frontier Fund said at the event.

The fund is backed by Schmidt and tech tycoon Peter Thiel, and likens its sophisticated investments in its own marketing to the urgency of the US-Soviet space race. McMaster, for his part, serves on the fund’s board of directors and as a board member of Shield Capital, another military-focused investment group whose portfolio companies include satellite companies, such as Hawkeye, as well as drone manufacturers.

“Remember 1957 with the Soviet satellites,” McMaster said. “Maybe this is a wake-up call that, hey, we have to compete more effectively against the CCP, the Chinese Community Party and its actions against us.”