This article by Nina Xiang originally appeared on China Money Network, the best data intelligence platform tracking China’s tech and venture capital markets (access requires subscription).
Even though private rocket startups in China have only started to emerge in the past three to four years, their nascency is not stopping these companies from dreaming big.
For one, Beijing Deep Blue Aerospace Technology, a startup that was founded in 2017 and secured an angel round led by Shunwei Capital this January, wants to achieve major milestones in less than half the time it took Elon Musk to do so.
The startup wants to successfully launch its first liquid-propellant rocket in 2020, three years after its establishment. Deep Blue Aerospace aims to achieve vertical landing and recovery in two to three years, and to complete re-flight in another one to two years, compared to the total of about six years that Elon Musk’s SpaceX required, from 2002 to 2008.
“We have the advantages of a latecomer. The path toward our goal is there already. We are learning [from those before us], which will be faster,” Huo Liang, the founder of Deep Blue Aerospace told China Money Network in an interview in the company’s Beijing office last week. “In addition, we are standing on the shoulders of a giant: China’s aerospace sector.”
Indeed, the Chinese aerospace industry has achieved major breakthroughs, including the landing of spacecraft Chang’e-4 on the far side of the moon in January, the first nation to do so. In 2018, China launched the most satellites globally, sending 39 satellites into orbit, compared to 31 by the United States. Other ambitious goals in China’s space program include a crewed mission in the 2030s and robotic missions to Mars, Jupiter and Uranus.
Huo, himself a veteran of China’s state-owned aerospace enterprises, believes that private rocket companies will take up perhaps over 50% of the Chinese space launch market in around ten years—up from practically zero right now—because private companies are more efficient, nimble, and innovative. “Since China’s reforms, any sector that has been opened up to private capital has always seen market share of state-owned enterprises decline over time,” said Huo.
It may be reasonable to expect that private companies will eventually play a bigger role in the launch market in China. But in order to fly high, Chinese rocket startups must escape the enormous “gravitational pull” of the highly entrenched state-led aerospace systems in China.
As much as startups can “stand on the shoulders of a giant,” they are equally beholden and constrained by it. A simple example is talent flow. Huo was lucky that he left the state aerospace systems as early as he did. Those after him are finding it harder to be let go.
To leave, or to stay?
A Tsinghua University PhD who majored in material processing engineering, Huo joined China Aerospace Science & Industry Corporation (CASIC), a state-owned enterprise with its roots in the China Aerospace Science and Technology Corporation. During his five-year stint at CASIC, Huo was involved in design and engineering work of various spacecraft. In 2016, he joined one of the earliest Chinese private rocket startups, One Space. A year later, due to differences in growth strategies, he decided to leave and start his own company.
“SpaceX’s success in reusable rockets was a big shock to us,” Huo said, recounting the process he went through before leaving the “iron rice bowl” state space systems. “Its Merlin rocket engines became the world’s most advanced in less than ten years. But it took our country over 20 years to develop one liquid-propellant rocket engine.”
Huo gradually concluded that privately funded companies, not the “planned economy” model of state-led space programs, would be the future of the Chinese launch market. So when One Space’s founder Shu Chang came knocking, it was an easy pitch. Because aerospace is closely linked to defense and national security, leaving the state aerospace sector requires an employee to undergo formal desensitization and approval procedures. Back in 2017, it was a smooth process for Huo.
But policy changes in China can be unexpected and subtle. In 2014, China’s State Council issued a directive that encouraged private capital to participate in the research, production and launch services of commercial satellites. That document opened the doors to the era of the private commercial space sector in China.
Within a short four-year window, over 60 commercial aerospace startups mushroomed in China, with specialties ranging from satellite production to space launch services. In the latter category, around five startups have emerged and secured venture financing. One Space, LandSpace, iSpace, LinkSpace, and Huo’s Deep Blue Aerospace have all received significant financial backing from top-tier venture firms, including Matrix Partners, Gaorong Capital, IDG Capital, Shunwei Capital and Morningside Ventures.
Initially, the startups planned to buy rocket engines from state-owned enterprises and to assemble rockets to provide more economical launch services. The original 2014 directive and 2015 policy concept of “military and civilian integration” did not provide any specific details as to just how much “encouragement” private aerospace companies would receive.
It took nearly three years for startups to conclude that it would be impossible for them to purchase rocket engines from CASIC and the China Aerospace Science and Technology Corporation (CASC), the two state-owned enterprises controlling nearly 100% of the Chinese space launch sector. These giant corporations, both units under the Ministry of Defense in the 1950s, had evolved into state-owned enterprises as China reformed its economy. In 2017, CASIC recorded revenues of $34 billion, while CASC’s last available financials in 2013 showed revenues of $44 billion.
hen, in September 2018, a dispute over the departure of a researcher to join the privately funded LandSpace created an uproar. Zhang Xiaoping, a researcher at Xi’an Aerospace Propulsion Institute (a developer of liquid-propellant rocket engines under CASC), decided to join LandSpace. In doing so, his salary would jump nearly tenfold, triggering the age-old debate about inadequate talent compensation within the Chinese state-led systems.
But the state-owned research institute attempted to make him stay via administrative measures, requiring him to undergo a two-year desensitization period. The related documents were leaked online. An official statement from Xi’an Aerospace Propulsion Institute claiming that Zhang’s departure will “impact our country’s manned moon mission to some extent” as a reason for forcing him to stay was widely ridiculed on social media.
The high-profile case led to Zhang successfully leaving and joining the new company, but it was a reflection of the increasing difficulties that talent encounter when joining the private sector. It is also a reminder of the immense challenges faced by private businesses in China’s state-dominant economy, especially in a critical sector like aerospace. Despite President Xi’s call for “military and civil integration,” private companies have realized that in order to shake off state-led aerospace, they will have to overcome challenges beyond market forces.
“This wave of privately funded commercial rocket startups will end this year,” Huo said. “Rockets are complex and it takes a year to put a team together. With regard to talent, capital, and technology, the existing companies will build significant entry barriers in a year’s time.”
Currently, a majority of the researchers in the private rocket startups come from the state-owned systems—in some companies, the number is as high as 80% to 100%, according to Chinese official media reports. Without that talent supply, it will be impossible to set up a rocket company.
A trillion RMB market
The global aerospace industry, including development and production of aircraft and spacecraft, is worth an estimated $838 billion, according to estimates by the AeroDynamic Advisory and Teal Group Corp. In China, the commercial aerospace sector is currently worth around several hundred billion RMB, and is like to expand to around RMB 1 trillion ($150 billion) in ten years, Huo reckons.
If private sector takes around half of that market, as Huo expects, it means this segment will be valued at around $75 billion. Because of the industry’s high capital investment, long development cycle, and scarce talent supply, no more than five private companies are likely to enjoy the ultimate reward.
“We looked through all the second-batch commercial launch startups and saw that Deep Blue Aerospace had the best team and technology capacity,” said Meng Xing, VP and entrepreneur-in-residence at Shunwei Capital; he differentiates between first-batch startups—LandSpace, OneSpace and LinkSpace, all founded in 2015—and the second batch of companies, founded in 2017. “We clearly see great growth potential in the private commercial launch sector in China.”
But in order to compete with the state-owned systems, the challenges are enormous. China’s state-owned enterprises receive massive fiscal allocations for national projects such as the landing on the far side of the moon and future crewed missions, as well as commercial launch services. Chinese state-owned enterprises are already known for providing launch services that are much more economical than international players.
CASIC’s Kuaizhou-1 orbital launch vehicles cost around $20,000 per kilogram, and could be reduced to $10,000 per kilogram, Huo has said in previous interviews. Compare that to $25,000 to $40,000 per kilogram by international launch service providers. Some industry observers say the potential for private commercial launch companies to further decrease prices is limited.
But Huo disagrees. The core competence of private space launch companies goes beyond serving as a low-price alternative. Private companies will be able to move faster, and be more flexible and nimble in meeting market needs. Their research and development will be more efficient. In the future, it will be easier for private companies to grow internationally for overseas expansion.
State-owned enterprises are spending taxpayer money and don’t have to worry about funding. People often overlook the costs behind China’s achievements in space. That is the fundamental difference that Huo and his peers believe will allow them to overcome all the insurmountable challenges.