Will Elon's exit undermine the state's Spacelaw leadership?

Space Exploration Technologies Corp. ("SpaceX"), arguably the world's most successful private spacecraft manufacturer and launch services provider, has been inextricably linked to California in the minds of the public. The company has been headquartered in Hawthorne, CA since its formation in 2002 on a one-million square foot campus, where it employs more than 7,000 people. Its success has helped propel California to the forefront of the NewSpace industry. In July 2024, Elon Musk, the company's founder, announced that he would be relocating SpaceX to Brownsville, Texas. This announcement has left many Californians wondering if this high-profile exit will undermine California's leadership role in this important market. While California has many advantages in this area, the state would do well to foster an environment that makes a departure like this the exception rather than the rule.

As a threshold matter, it should be noted that it is unclear exactly what this relocation will entail. SpaceX currently accounts for 16% of all jobs in Hawthorne. It would certainly be a blow to the local and state economy if all of those jobs, many of which are high-paying engineering roles, relocate to Texas. Ultimately, however, that is unlikely to happen. Given the company's sizable footprint in the state and what has happened with Musk's previous relocation of Tesla, it is unlikely that there will be a complete relocation. What seems more likely is that the corporate function and certain jobs will relocate to Texas, where SpaceX already has a sizeable footprint, and Musk focuses future growth opportunities there. But even that shift should only be ignored by California at its own peril.

So, what are California's natural advantages that help protect it from a departure like SpaceX?

First and foremost, California has a deep history with aerospace and defense, of which NewSpace is a submarket, which is currently unmatched by any other state. Rising to prominence during World War 2 with companies like Hughes Aerospace, Collins Aerospace and Northrop Grumman Corp, California - and particularly Southern California - has been a hotbed of development and production of complex air structures for decades and is home to more aerospace engineers than any other state. And while individual companies may come and go, the knowledge base of the people who work in this industry largely remains intact. So, while some SpaceX workers will certainly relocate to Texas, it seems likely that the majority will elect to take jobs with other NewSpace or aerospace and defense companies in the area instead, retaining the majority of California's knowledge base and making it difficult for Texas to replicate (at least in the short term).

Another natural advantage that California offers is its historical track record in developing successful startups. Given the massive capital expenditures that can be required in NewSpace and the launch industry's historical dominance by prime contractors, it may seem counterintuitive to cite venture capital culture as a competitive edge. However, in recent years, the government has shown an increasing willingness to partner with non-traditional defense tech players and others to help foster innovation at an accelerated pace. Silicon Valley, with its deep pockets and proven playbooks for growth, has not ignored this trend. Accordingly, venture capital investment in NewSpace business in California is at all-time highs. Los Angeles alone is home to Rocket Lab, Relativity Space and The Aerospace Corporation, among others. It seems likely that well-heeled venture capital firms will continue to invest in companies in their own backyard.

The California government is also throwing its weight behind making sure that California remains at the vanguard of the NewSpace industry. Aerospace and defense have long been a focus of the State's Office of Business and Economic Development, something that has allowed the state to capture over 10% of all defense spending. The state has realized the importance of NewSpace to growing California's economy as well, launching a New Space Task Force in August 2022. This Task Force is geared at attracting NewSpace businesses to the state, expanding California's existing space businesses, working with the state's universities to develop career paths for the industry and increasing testing and launch capabilities. As part of these activities, the state has awarded millions in state tax credits to these businesses. In this regard, it is interesting to note that in his decision to relocate SpaceX, Musk did not cite government support of the business decision, but instead some of the state's social policies.

Ultimately, the exit of one company, even one as successful as SpaceX, will not undermine California's place at the vanguard of the NewSpace industry. The state's robust aerospace and defense talent base, strong startup culture and government support will allow it to persevere through this departure. Given the importance of this industry, including the number of high-paying jobs it brings to the area, California cannot afford to rest on its historical reputation as a bastion of A&D innovation to ensure it retains its leadership role, however. The state needs to continue and expand its efforts to create a climate that allows these important companies to thrive.