The balloon affair is a Sputnik moment

As China’s balloon deflates, a new space race is rising.

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

Though on Friday former CIA director Michael Hayden said its threat to the welfare of Americans was vastly inflated, others described the incident as a wake-up call. Former Trump national security adviser H.R. McMaster hopes it will lead to a “sputnik moment,” harkening back to the US space race with the Soviet Union. The Wall Street Journal even warned of a “balloon gap” with China.

The balloon was flying at about 60,000 feet and may have been collecting intelligence. It flew over military sites, and the Pentagon said it was a surveillance balloon, which China’s Ministry of Foreign Affairs denied, saying “it is a civilian airship used for research, mainly meteorological, purposes.” The balloon’s debris are now being recovered and examined to learn more about the Chinese technology.

As the rhetoric around the threat of China hits a hyperbolic pitch, one thing is clear: space is the place — for military contractors and private capital, that is. When I’ve asked military industry experts and investors in recent months about broad trends to watch in the coming year, many have emphasized that space-related technologies, as well as satellites and drones, are a booming industry. Though each of those technologies do different things and operate at different altitudes, they each are arenas of intensive US competition with China — and technologies where artificial intelligence and autonomy will be tested.

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

More than $45.7 billion of private capital was invested in the space industry in 2021. Last year was slower ($21.9 billion), but that might have been a function of 2021 being so fire hot. Despite the tech layoffs of late, companies that have both cutting-edge software and hardware are attracting big investments.

And now balloons will enter the conversation.

A ballooning commercial space industry

Balloons, it turns out, are already part of that US arsenal, with the Pentagon spending $3.8 billion over the past two years on them, 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 most likely to be carrying cameras or radar, in certain situations balloons could field a weapon.

The military contractor and balloon-maker Aerostar put it even more bluntly in a video it posted to social media this week: “Not even the sky is the limit!”

Balloons are an old technology, susceptible to high winds, but their vulnerabilities also translate into advantages, as they fly low enough to avoid detection, says George Nacouzi, a senior engineer at the Rand Corporation. He predicts “some focus on anti-balloon technology,” including “balloon killers.”

Kevin Liu Huang, an entrepreneur who writes the Chiral Defense newsletter about trends in military tech investments and startups, is not concerned about a balloon gap per se, but he sees this episode as emblematic of US-China competition over satellites and drones. “It’s all a very thriving kind of geopolitical competition,” he told me. “It’s also a very thriving industry and market.”

These trends are now likely to be capitalized on by private US technology companies, military contractors, and the researchers who study the space race who are often underwritten by the industry itself. “Beijing is rapidly expanding its government and commercial space sectors,” Kari Bingen of the Center for Strategic and International Studies in a recent congressional hearing. “We must take urgent and purposeful steps to maintain our space advantage.” Last year, Rep. Mike Gallagher, a rising Republican national security figure, argued that the Pentagon should purchase commercial satellite technologies, which he said are moving faster than rigid government purchasing efforts.

One signal of how hot satellite and space startups are is that they’ve become a revolving-door home to retired military and intelligence officials. Satellite imagery provider Planet is one of former Google CEO Eric Schmidt’s big investments. There’s also HawkEye 360, whose constellation of satellites use radio frequency to help military and intelligence clients track goings-on below, to which many former US policymakers have decamped, and Maxar Technologies, a satellite company known for its high-resolution images of Earth.

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

The fund is backed by Schmidt and tech tycoon Peter Thiel, and in its own marketing compares its cutting-edge investments 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, like Hawkeye, as well as drone producers.

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