Musk faces conundrum over SpaceX contract with Pentagon

Facing pressure from hawkish members of US Congress to make SpaceX’s Starshield satellite network available to American forces in Taiwan, billionaire Elon Musk is risking his business relationship with China – but does he care?

Eve Smith, co-founder of custom print-on-demand products service PrintKK, readily admits that her company has been navigating the fine line between fulfilling government contracts and maintaining international business relationships.

“Once, we faced a dilemma when a product line potentially conflicted with the regulations of a country we operated in. The decision wasn’t easy. We had to weigh our ethical obligations against our business interests – much like Elon Musk might be doing now,” Smith told Cybernews.

The slight difference here being that the conundrum around Musk involves military satellites, a consistently more belligerent China, and the safety of US forces in Taiwan rather than a cute little print business.

As first reported by Forbes, a group of US lawmakers have called on Musk to make SpaceX’s Starshield military-specific satellite communications network available to US defense forces in Taiwan.

For years, SpaceX has refused to do business in Taipei. According to critics, that’s because Musk has close ties with China, which views self-governed Taiwan as part of its territory and is ever more loudly demanding control of the island.

But in a letter to Musk, Mike Gallagher, a Republican member of US Congress, reminded the businessman of SpaceX’s contractual obligation to provide the Pentagon with “global access” to Starshield.

The system uses low-Earth orbit satellites to provide communications and observational imagery to the military. In the case of Taiwan, Starshield could back up the island’s communications if China cut the undersea cables connecting it to the rest of the world.

“I understand that SpaceX is possibly withholding broadband internet services in and around Taiwan – possibly in breach of SpaceX’s contractual obligations with the US government,” Gallagher, who is chair of the Select Committee on the Chinese Communist Party, wrote in the letter.

Elon Musk. Image by Shutterstock.

What is Musk to do? On the one hand, his business interests in China are very real – Tesla has a major manufacturing plant in the country, for example, where more than half of its vehicles were built in 2022. About 20% of Tesla’s revenue comes from China.

Besides, the billionaire has more than once suggested that Taiwan should be at least partly controlled by the Chinese government in Beijing. Presumably, this is how Musk imagines tensions could be de-escalated.

However, government military contracts are vital to SpaceX, so Musk certainly has a difficult choice to make – even if the Congressman’s letter to the billionaire is mostly political. The US has only deployed between 100 and 200 troops to Taiwan.

Talks collapsed in 2022

The total number of undersea cables is 14, and they’re all that stands between Taiwan and probably a total internet blackout in the event of a war with China.

No wonder Taiwan has been attempting to strengthen the island’s communications. As Bloomberg reported last year, officials have been traveling the world to find a low-orbit satellite system that could back up connections in case the tensions one day explode.

SpaceX and its Starlink network – Starshield is used solely for national security purposes – seemed like an obvious solution, and exploratory talks began in 2019.

However, talks collapsed in 2022 over a Taiwanese requirement that the government owns a majority share of any telecommunications companies doing business on the island.

What’s more, Musk was resolved to retain full ownership of Starlink operations in Taiwan – SpaceX simply said that was how he does business. That’s actually true: in Shanghai, Tesla wholly owns the gigafactory, even though other foreign automakers must have local partners in China.

Still, the whole argument signaled to Taiwan that it was time to look elsewhere – or to begin developing a satellite system of its own.

Satellite dishes in Taipei. Image by Shutterstock.

“Of course, the Taiwanese government notices Musk's attitude towards China, too. Therefore, the Taiwan government tried to work with the United Kingdom for the satellite internet service as a backup plan,” Austin Horng-En Want, assistant professor of political science at the University of Nevada Las Vegas, told Cybernews.

Indeed, the Taiwanese media reported in late 2023 that Chunghwa Telecom, Taiwan's largest telecoms service provider, is collaborating with UK-based OneWeb to launch a low-earth orbit satellite network for the island and has already submitted applications for frequency-use permits. It is expected to be rolled out in 2024.

Back then, the Taiwan Space Agency said that Taiwan would need more than 120 satellites to create a satellite-based internet infrastructure, which far exceeds domestic launch capabilities.

Dependence on China decreasing

Of course, Starshield is a different matter. Last year, Starshield won a $70 million award from the military to provide communications services to the Pentagon and dozens of its partners.

Naturally, China hawks in the US Congress claim the services should cover US military personnel, including troops in Taiwan. An obvious fear is to leave American soldiers defenseless in case military conflict over or on the island begins.

However, an important part of the puzzle that might increase tensions even more is the fact that China holds Taiwan to be part of its territory – and its tight controls on communications and data render illegal any use of foreign-owned satellites within the country.

Thus, Musk might be careful precisely about the possibility of escalating tensions between the US and China. In February 2023, CIA director William Burns said that Chinese President Xi Jinping had ordered the People’s Liberation Army to be prepared for an invasion of Taiwan by 2027.

However, Wang told Cybernews he thought Musk’s dependence on Chinese money is exaggerated. According to him, his companies are actually decreasing their reliance on Beijing.

In February 2023, CIA director William Burns said that Chinese President Xi Jinping had ordered the People’s Liberation Army to be prepared for an invasion of Taiwan by 2027.

“Musk's revenue in China is declining. Recently, he mentioned that China uses subsidies to lower the price of electric cars, which implies that he can no longer lower the price of Tesla, and his profit is limited. This implication reflects on the stock market of TSLA,” said Wang.

“Meanwhile, Tesla is investing in the mining of rare materials, so he may gradually decrease their reliance on China. If the US government increases the purchase of electric cars, Tesla will be more profitable in the US.”

California is indeed planning to make the state gas-free by 2035 – Governor Gavin Newsom announced in 2023 that the state will develop regulations to mandate that 100% of in-state sales of new passenger cars and trucks are zero-emission.

“This long-term factor will make Musk less friendly to China. However, China may be more aggressive before 2027 because Xi will seek another reelection that year, so we cannot be sure if the long-term change is quick enough or not,” Wang told Cybernews.

Balancing incentives

Still, if hell really breaks loose over Taiwan, and if Musk keeps hesitating, there’s another way for the US government to deal with SpaceX, Irina Tsukerman, a geopolitical analyst and president of Scarab Rising, a security and geopolitical advisory, told Cybernews.

The option is the Defense Authorization Act. In a situation of an emergency, this important provision could compel private American companies to, in essence, drop everything else they’re doing and provide the technology to the state.

“If analysis indicates that China is looking to move in on Taiwan, and there is a good chance of US military having to get involved in any capacity whatsoever, under such circumstances, DAA could be used to compel Musk to produce Starshield for the US government which could then be transferred to Taiwan regardless of Musk's wishes,” said Tsukerman.

She added that Washington could also create stringent obligations between recipients of its investments and the delivery of products and services of its choice.

According to Tsukerman, the smart thing for the government would, of course, have been to invest in alternative products in order to not be too dependent on Musk. That would look like reversing the pressure flow onto the billionaire because, at the end of the day, he mostly cares about his businesses.

“Given that in the past, Musk was perfectly willing to negotiate his pricing and induce additional military-grade contracts, it occurs to me that he is less principled about avoiding wars and more likely leveraging his unique position in the market to get additional financial concessions from the US government,” said Tsukerman.

In fact, this is what happened in Ukraine, where the country’s troops that are trying to fight off invading Russian soldiers are using Starlink. Musk sent the terminals to Ukraine once the war began but then demanded the Pentagon pay for them – and it did.

Nevertheless, the government should be cautious, Tsukerman thinks – China, for example, could present Musk with a thick financial incentive if Washington runs out of patience and decides to shun his products for good.

“China would simply match whatever profit he loses from the US given that China's strategy is to prioritize technology advantage, particularly in telecommunications and weapons,” Tsukerman told Cybernews.

“So the government needs to figure out a way of balancing positive and negative incentives to make Musk an offer he simply cannot refuse – and focus on diversifying these essential products and services as soon as possible.”

The latter part is key, the analyst says. That’s because “no funding or other resources should be spared towards becoming independent of mercurial and calculating figures such as Musk when it comes to essential security and foreign policy functions.”