The Tech Arms Race Intensifies

Hey everyone! It's Mo, back with another edition of my secret newsletter. As a reminder, you're receiving this exclusive content because you've referred at least one friend, family member, or coworker to Payload. 

If you're in the US, I hope you're getting ready for a wonderful Thanksgiving with friends and family. This post should serve as a spicy app to get you started.

The technology arms race intensifies

It’s not hyperbolic to say that the Sino-American technology arms race is accelerating across every axis of emerging technology, from AI and quantum to 5G networks and (of course) space. 

In the last few months, we’ve seen legislation, rhetoric, and executive action intensify around US semiconductor policy, including what amounts to a virtual overnight kneecapping of China’s chip sector. Although chip decoupling doesn’t have a direct impact on the space industry, it’s a clear preview of what lies ahead. For that reason, I’ve spent some time analyzing recent geopolitical developments and thinking about their possible implications for the space industry.

Driving the news

In early October, the US unveiled a set of new regulations designed to cut off China’s access to advanced chips, designs, employees, and critical chip-making tools. With the new rules, the White House intends to:

• Slowroll China’s AI progress: The US will restrict the sale of high-end chips above a predetermined computational performance level. These chips are designed to be clustered together in data centers or supercomputing facilities to train and run large AI models. 

• Cut off access to US-origin design software: Chinese chip designers will not be able to manufacture advanced semis, even if the software was legally acquired or licensed before the new policy went into effect. 

• Choke of the supply of manufacturing tools: Nearly every chip manufacturing facility in the world uses technology developed or made in the US. Washington is now restricting equipment sales for advanced ships and the export of older equipment. 

• Restrict the sales of U.S.-manufactured chip components: By cutting off access to US-built components, China will have a much more difficult time with short-term domestic semi production. 

China accounts for 60+% of semi demand globally, but only 10% of that demand is produced domestically. The rest is met through imports and foreign firms producing chips in China. 

In the near-term, this will undoubtedly create friction in China’s desire to build a leading domestic-chip industry. However, it will also provide the momentum necessary to fuel President Xi Jinping’s push for technological and supply chain self-sufficiency (a point emphasized at the CCP’s 20th National Congress).

Further implications…an abbreviated list

• China could easily retaliate by restricting exports of rare earth minerals. China enjoys a near-monopoly on the market for rare earth materials, and while that’s changing, it won’t happen overnight. These materials are used in everything from your iPhone to fighter jets—and China is the leading supplier of 16 out of the 29 critical materials imported by the US. 

• US semiconductor companies will see material revenue contraction. $100B of the industry’s revenue came from sales to China.

• Global supply chains will inevitably become even more fragile and unreliable, potentially leading to further parts shortages and price hikes globally.

• We see the potential for a military escalation with Taiwan, based on rhetoric and military saber-rattling. As of 2021, the island—just 100 miles off the coast of mainland China—accounted for a 70% share of Chinese chip consumption. There’s likely no other country so reliant on another for a specific high-value import.

China isn’t sitting on the sidelines

At the beginning of the pandemic, China began accelerating a significant infrastructure campaign known as “New Type Infrastructure.” The campaign is set to put $2.7T to work over five years exclusively for the purpose of switching out analog for digital infrastructure. 

New Type covers the construction of an industrial internet, a national dual gigabit network, a nationally integrated system of big-data centers, and a satellite internet network. Beijing describes the campaign as a pivotal part of China’s effort to win the Fourth Industrial Revolution.

Some of China’s digital transformation so far…

5G networks: The US is “far behind in almost every dimension of 5G while other nations—including China — race ahead.” says Eric Schmidt. He’s not wrong. China has installed over 2.1M 5G base stations vs. the US’s 160,000 (population-adjusted, the coverage is 3x higher in China). The US also does not have a domestic manufacturer of 5G networking equipment (the top three are China’s Huawei, Finland’s Nokia, and Sweden’s Ericsson). 

Quantum sciences: China is leading hack-proof quantum communications networks. The country recently launched its second quantum satellite, Jinan 1, with plans to deploy more soon to enable a new level of secure communications globally. The satellite makes China the first country in the world to achieve real-time, satellite-to-ground quantum key distribution with micro-satellites and ground stations.

Hypersonics: China tested a nuclear-capable hypersonic glide vehicle that circled the world last year. For more on this matter, check out this thread from Hermeus CEO AJ Piplica: 

And last but not least, space! There’s much to discuss here, but allow me to name a few recent wins for Beijing: 

• China became the first country to land a probe on the far side of the Moon, 

• the second nation to land a rover on Mars, 

• the third nation to successfully bring lunar soil back to Earth, 

• built the world’s largest telescope, 

• is second globally for the number of satellites in space (363), 

• and just launched the final module of its space station.

Put it all together, and what do you get? 

Technologically speaking, a decoupling is nigh. The internet is increasingly balkanized across separate 5G networks and submarine cables, and divided among distinct digital app ecosystems and public clouds. That decoupling is already familiar for Western and Chinese space sectors, and the former is now weaning itself off of Russian space hardware

Further complicating matters, the international system is entering an era of economic Cold War. In our view, it’s shaped not by bipolarity but by multipolarity. On Feb. 4, 2022, Russia and China issued a joint statement that “friendship between the two states has no limits, there are no ‘forbidden’ areas of cooperation.” 

13D’s Kiril Sokoloff has written ($) about a transition to a multipolar world extensively. In a paywalled note, he writes:

After Russia invaded Ukraine, the University of Cambridge conducted a study that paints a very troubling picture. 

The first headline takeaway: Among the 1.2B people who inhabit the world’s liberal democracies, not surprisingly, an overwhelming majority hold a negative view of China (77%) and Russia (88%). 

The second? The rest of the world feels very differently. In developing countries, not only are perceptions inverted—i.e., China and Russia are viewed quite favorably—but they’ve got strong upward momentum. 

It’s difficult to predict how this will evolve over time, but what seems to be clear is that as China grows its technological capabilities across all critical domains, it will expand its influence in developing countries and deepen ties with Moscow. 

Last year, China and Russia’s space agencies signed two agreements to establish a shared lunar research center and pursue deep space exploration. According to the US intelligence community’s 2022 Annual Threat Assessment, China and Russia “increasingly see space as a warfighting domain.” The easy prediction to make here is that this relationship will become significantly more deep-rooted over time.

If you’re reading this, you’re likely already quite familiar with the term “Space Race 2.0,” a description commonly used to compare the US-China relationship vs. the US-Soviet era of the 50s and 60s. We sense a meaningful change in the last few months in the relationship between the two countries.

With the new semi regulations, which come on the heels of Congress’ passage of the CHIPS and Science Act, the Biden administration is showcasing an unprecedented level of government action to preserve chokepoint control and actively depress significant segments of the Chinese technology industry. There are likely to be far reaching implications beyond just what we highlighted here today including a deepening partnership between Russia and China in space, but also across energy, commodities, climate, and India/ASEAN allegiances.

Can we learn from space?

Space has historically been an arena with virtually no cooperation between the US and China. This is largely due to the “Wolf Amendment,” a law passed by Congress in 2011 as a one-year limitation on U.S.-Chinese cooperation in space, but has been reaffirmed annually. The law effectively prohibits NASA from cooperating with China or Chinese-owned companies without the FBI’s sign-off that there's no risk of national security-related information leaks. The law was ultimately intended to change China’s human rights policies and slow down their progress in space.

The cynic would point out how the Wolf Amendment is a great example of an 11-year-old law meant to slow down China but had the opposite effect. It helped China’s space program become more autonomous, effective, and dominant. 

Will the recent semiconductor legislation lead to the same outcome? It’s certainly possible, and enough to make you think what we could still learn from what happened in the space industry.

Largest Space VC Deals (October 2022)