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Flight of the billionaires

SpaceX accelerates private sector space race by putting an electric car into orbit

Wikimedia Commons / Heisenberg Media Elon MuskWikimedia Commons / Heisenberg Media

Nearly 50 years after humans first stepped foot on the moon, the space race has entered a new phase. Instead of rival nations, the main players are now entrepreneurs backed by public investment and venture capital, competing to be the first to send new manned missions to distant locations. On February 6, millions of people witnessed a major milestone in this new era: private company SpaceX successfully launched its Falcon Heavy rocket from the Kennedy Space Center in Cape Canaveral, Florida—the same location that the Apollo missions launched from in the 1960s and 1970s.

Equipped with three Falcon 9 rockets for its first stage, which together generate a thrust equivalent to 18 Boeing 747s, the Falcon Heavy cost US$500 million to build and is the most powerful operational launch vehicle in the world. Three minutes after launch, two of the rockets broke away and returned to the Florida launchpad completely intact, meaning they can be reused in future missions. The plan was for the third Falcon 9 to land on a drone ship in the Atlantic Ocean, but it missed the target and was lost. Rocket reuse is one of key factors in SpaceX’s low-cost operations. Each trip is expected to cost US$90–160 million, compared to an estimated US$1 billion for NASA’s next mission, the SLS.

The Falcon Heavy’s second stage then delivered the payload into orbit. The cargo was not a satellite or a supply module for astronauts, but a sports car with a dummy behind the wheel. The electric car, a Tesla Roadster, should reach the orbit of Mars in 2020, assuming it follows its planned trajectory. The car’s launch into space was live-streamed on the internet, accompanied by the song “Life on Mars?” by David Bowie.

The engineering challenge of the Falcon Heavy’s experimental flight and the marketing spectacle of an electric car traveling through space have cast a spotlight on Elon Musk, the 46-year-old South African billionaire who moved to the US in his 20s to study physics and economics. As CEO and CTO of SpaceX, and CEO of electric car manufacturer Tesla and its subsidiary SolarCity, which specializes in solar energy services, Musk is a visionary entrepreneur with a great aptitude for marketing—he claims he is going to build the first colony on Mars and says that he works with renewable energy because he wants to help combat global warming. Over the past five years, he has launched a series of companies that develop cutting-edge technologies, from boring tunnels, creating new modes of transport, and launching rockets to creating ways for the human brain to interact with machines (see graphic).

NASA The Tesla Roadster, which is expected to reach the orbit of Mars on its planned trajectory: it was launched by reusable rocketsNASA

The South African is renowned for his ability to attract investment by backing the potential of unexplored markets. Part of it comes from public resources—his companies have benefited indirectly from the promotion of basic and applied research by agencies such as NASA and the Department of Energy, which helped him to develop his rocket-launching and energy storage technologies. “The US government has invested in basic and applied research, it has invested in concrete companies such as Tesla, doing what venture capital should be doing if it was really playing the role it claims to play,” Italian-American economist Mariana Mazzucato told the Financial Times in 2017. Mazzucato is the author of The Entrepreneurial State, a book in which she argues that public investment in science plays a crucial role in the production of knowledge, especially when this process involves high costs and risks that are usually avoided by private companies.

According to British investment advisor Alex Graham, one of Musk’s secrets is his ability to use “creative” financing methods. An article by the Los Angeles Times in 2015 estimated that his top three businesses—Tesla, SpaceX, and SolarCity—had so far received US$4.9 billion in government funding. The state of Nevada, for example, granted US$1.3 billion in tax exemptions for the construction of an enormous 5.5-million-square-meter battery factory in the city of Sparks, which Tesla expects to complete by 2020 in partnership with Panasonic. The factory will produce enough batteries to power half a million electric cars per year.

The New York state government, meanwhile, contributed US$750 million to the SolarCity plant in the city of Buffalo. SpaceX has not benefited from any such tax exemption, but the government is its main customer and it has received funding from NASA. Were it not for a US$1.6 billion contract agreed with the space agency in 2008, the company may well have gone under, says Alex Graham. “Although the figures suggest that Musk has received a significant leg-up from the government, reading into them tells a more nuanced story,” the consultant wrote in an essay posted on the Toptal website. “With SpaceX and SolarCity being significant players in renewable energy, government assistance is to be expected. And the Nevada and New York factories are tied to significant performance targets and contain punitive clawbacks.”

Another of Musk’s strategies is that he likes to reduce research and development (R&D) risks by working with partners. In 2014, Tesla announced that it would be giving away its entire patent portfolio in an attempt to encourage R&D activities related to lithium-ion batteries among companies and researchers. The decision was made in response to an announcement by Toyota that it planned to invest in hydrogen-powered cars, which could have reduced efforts to make electric vehicles viable.

Musk also proposed a new mode of transport known as a hyperloop, which is a kind of high-speed train that travels through low-pressure tubes. To promote development of the idea, he started a competition for startups and research groups interested in solving technological challenges. Today, eight companies from several different countries are working on hyperloop prototypes, and Musk is investing in a parallel business: a company that bores tunnels, which will be essential for underground hyperloop tubes.

As well as his more creative methods, Musk’s companies are funded by traditional sources. Tesla and SolarCity are both publicly traded companies, and SpaceX plans to launch an initial public offering after sending its first mission to Mars.

Last year, Tesla’s market value surpassed that of Ford, despite only producing around 100,000 cars in 2017 compared to 6.6 million produced in the US by the centennial automaker. By demonstrating the feasibility of electric cars, Musk’s company has shown investors that its fate could be more promising and sustainable than its combustion engine competitors. But while the future looks bright, Tesla is facing obstacles in the present. One day after the Roadster was launched, the company reported a loss of US$675.4 million for the final quarter of 2017. Revenue for the full year was US$11.9 billion, with a total loss of US$1.9 billion. The company’s poor financial performance is attributed to issues manufacturing batteries for the Model 3 sedan, which Musk sees as an electric car for the middle-class mass market. The base model is priced at US$35,000. Tesla had promised to produce 1,600 cars in the third quarter of 2017, but only 220 were delivered. The Model 3 has a waiting list of 400,000 people who have already paid US$1,000 to reserve one of the cars.

The slow production of batteries at the Tesla plant in Nevada has been blamed on the need to assemble certain parts manually, with the company even having to borrow employees from its suppliers. “There are also doubts about Tesla’s ability to import enough lithium to produce cars on the scale and at the price it promised,” says Roberto Torresi, a professor at the Institute of Chemistry of the University of São Paulo (IQ-USP). The cost of lithium-ion batteries is declining, but significant advances are still needed before they achieve full economic diffusion, especially for automotive use. “This market is expanding rapidly. In 2017, Chinese company BYD built a huge lithium battery farm that stores power generated by wind power plants to ensure a stable electricity supply.”

Mark Spiegel, the administrator of a New York investment fund, is a critic of Musk and has joined the growing chorus of those who believe Tesla is working with impractical prices. “The base model will cost Tesla at least US$40,000 to build. And even if they charge more, they will never come anywhere close to the promised profitability,” he told CNBC news. “If we can send a Roadster to the asteroid belt, we can probably solve Model 3 production,” Musk said when announcing the company’s results.

While Tesla is in the red, most believe that SpaceX is profitable, although it does not report its results. In 2016, it suffered a loss of US$250 million after one of its rockets exploded in Cape Canaveral, but the company holds contracts with NASA worth US$4.2 billion to send cargo and even astronauts to the International Space Station (ISS). NASA has deliberately created this niche, encouraging private partnerships over the last 15 years as a way of reducing the costs of its space program. In 2006, Musk invested US$100 million of his own money into SpaceX after selling his stake in online payments system PayPal, which was complemented by US$396 million in funding from NASA and US$354 million from private investors. Prior to PayPal, Musk founded Zip2, which produced content for newspaper websites.

The fight for dominance in the aerospace market also involves a number of other billionaires, such as Amazon founder Jeff Bezos, who created Blue Origin, a company that has already produced a reusable launcher, and Richard Branson, the owner of Virgin Galactic. “What’s new is that the companies themselves have ambitions beyond government contracts,” Casey Dreier, director of space policy at the US Planetary Society, told British newspaper The Guardian. Both SpaceX and Blue Origin are developing launch vehicles specifically for manned missions. Bezos’s company is now working on the New Glenn rocket, which is slightly larger than the New Shepard it currently uses. SpaceX, meanwhile, is developing the Big Falcon Rocket with the aim of taking people to Mars. Musk’s company recently attracted interest from the Brazilian Defense Ministry, which announced it was negotiating partnerships with SpaceX and Boeing to provide use of the Alcântara launch center in the state of Maranhão. “Since there are waiting lists to launch satellites at many bases, Alcântara could be used as a faster option. Its infrastructure is fully up to date,” says Major-Brigadier Luiz Fernando Aguiar, head of the Brazilian Air Force’s space systems commission.

SpaceX’s prospects are bright. The company has become more competitive in the satellite launch market, even threatening the United Launch Alliance (ULA), a joint venture by Lockheed and Boeing that has also partnered with Blue Origin. It will be a tough battle, with SpaceX charging US$4,653 per kilogram of cargo put into orbit and ULA starting at US$14,000 per kilogram. There is room in the market for several competitors. A Bank of America report predicts that the commercial aerospace industry will grow eightfold over the next three decades, creating a market worth US$2.7 trillion by 2045. “This is an exciting moment in the space age. We are likely to make greater advances over the next few decades than we have previously made in all of history,” the report says.