When I read about technology risk today, or speak with other risk managers, software disruptions dominate the discussion. However, there are also many hardware ideas around that could cause radical economic disruption, and risk managers should be alert to the ones that could affect their institutions.
Let’s now focus on four innovations that are backed by multiple start-up companies beyond the drawing board, into the operating phase. In all four areas, there are also projects underway at large established companies, but I suspect the biggest disruptions will be from nimble start-ups that are able to attract the most innovative scientists, without legacy businesses to protect.
While none of these ideas are likely to be major direct economic forces in the next few years, if they prove successful, they could cause large financial swings in 2025 or 2026.
A Nuclear Alternative
First on the list of hardware innovation is off-grid nuclear power. Everyone knows we must rebuild electrical power grids, but this is a 50-year project. Until that happens, there’s great value in moving energy-intensive applications next to power generators, with no need for a grid.
Aaron Brown
Much of the safety concerns about nuclear power can be mitigated by locating the plants far from human residences or vulnerable environmental sites. Moreover, many energy-intensive applications require both electricity and heat. That’s ideally suited for nuclear, because reactors produce lots of heat that on-grid reactors must take extensive and environmentally destructive measures to dissipate.
Remote clusters of nuclear power plants hosting nearby data centers and heavy industry will not represent significant shares of global energy production for several years. But using the power to produce fuels — either hydrogen or synthetic replacements for gasoline and jet fuel — could have a major effect on energy markets as soon as it enters even small-scale operation.
For example, Valar Atomics, one start-up in this space, is already building plants that it projects will produce synthetic fuels at half the cost of oil today. The technology is carbon-neutral — it extracts carbon from the atmosphere to turn into fuel that releases the carbon when burned.
If Valar and other start-ups in this space begin selling fuel, even in tiny quantities, it should cause oil producers to cut prices to sell their oil as quickly as possible, knowing that the existence of carbon-neutral cheap alternatives will make the future value of reserves much lower. (There are uses for crude oil other than producing fuel, such as for fertilizer and chemical production, but the economic value is much reduced without the fuel application.) This could cause economic disruption as large or larger than the oil crisis of the mid-1970s, which worked in the opposite direction.
Weather Control
A hardware idea that has been a staple of science fiction is weather control. For the last 50 years people have been focused on climate (e.g., 20-year global averages), but that is an abstraction that requires enormous resources even to estimate.
Weather is immediate and obvious, affecting people in both the short-term and medium-term. Weather control — draining power from storms; alleviating droughts, heat waves and cold snaps; fighting wildfires, etc. — would have major impacts on agriculture and insurance. It could mitigate the most obvious harms from climate change.
Rainmaker is one example of a company currently modifying weather for profit. It employs large numbers of AI-connected, weatherproof drones to seed clouds, either to defang storms or deliver rain for farmers and utilities.
It could take many years before these technologies are in widespread general use. If they prove successful in the next year or two, however, they could have major impacts on land values, construction and insurance. Moreover, they would touch off regulatory, diplomatic and scientific controversies with hard-to-predict consequences.
Airships
Transportation is yet another sector where we’re seeing hardware advancements. Companies like Airship are building modern dirigibles to compete with traditional air, land and sea transportation. These low-carbon-emission flying ships can load and unload cargo while hovering, and therefore do not require airports or roads.
Potentially, they offer the speed of air transport, without the environmental problems, at lower cost, with near door-to-door service. Indeed, they could radically restructure globally supply chains via bypassing congested ports, airports, roads and rail lines.
If these modern dirigibles gain traction, manufacturing would no longer require proximity to major transportation infrastructure. That would change land values and industrial organization, not to mention geopolitics.
Zero-Gravity
When thinking about the next wave of hardware risks and opportunities, we should also consider zero-gravity manufacturing. Varda Space Industries is one company currently producing pharmaceuticals in space, where the lack of gravity can improve quality by enough to justify the cost of launch and re-entry.
Next-generation chip manufacturing might well require zero-gravity as well. There are other advantages to making things in space: solar energy is available 24 hours per day, all seasons of the year, without attenuation or interruption by atmosphere, clouds or haze; panel layouts don’t need real estate or support structures to combat gravity or weatherproofing; and toxic emissions harm no one, because a vacuum eliminates sources of contamination.
This is a little different from the three previously mentioned areas. In those, even mild success of a few path blazers could cause immediate changes to spot and futures prices in the markets, requiring major economic sectors to prepare for restructuring.
Space manufacturing is more of a critical mass situation. However, three different technological trends (focused on pricing, robotics/automation and synergy) may progress enough – perhaps in the next year or two – to catalyze a quantum leap for space factories.
The most straightforward change is declining cost of putting a kilogram in space, which has decreased from around $100,000 in the 1960s, to $10,000 before SpaceX, to around $1,000 today. These are ballpark figures – the actual cost, of course, depends on factors like the delicacy of the cargo, the desired height of an orbit, and the amount to be delivered. But the price is seemingly headed for $100, and maybe even $10, in the foreseeable future.
The second change is progress in robotics and AI, which make automated manufacturing practical without human oversight.
Lastly, we can expect advancements in synergy. Currently, space projects must pay to get the cargo into space, and a similar amount to bring it down. But as more space manufacturing takes place, more processes can get their inputs and send their outputs to other space factories.
At some point in the future, maybe two years, maybe 20, maybe longer, it seems likely the three factors (pricing/automation/synergy) will combine, fueling a massive effort to move a substantial portion of manufacturing to space.
The change could seem sudden, but it will be the predictable result of steady progress in three areas. I’m not saying 10% of global GDP will be produced in space anytime soon, but the massive economic and technological projects to move it there could have a substantial impact in the short run.
From Software to Hardware
One of the reasons that software technology remains top-of-mind for many of my colleagues is that people remember the dramatic economic and social changes from the Internet and social media; the impact of understanding and manipulating DNA; the disasters from hacking; and the opportunities and dangers from crypto technology. They see sectors like retail, entertainment media, advertising, financial services, postal services, publishing, news media and others that have been hollowed out or radically restructured due to software innovations, most of which were initiated by obscure researchers or tiny start-ups.
This thinking is so common that people may forget, or younger risk managers may never have learned, that it’s unusual in human history. The famous “three age” system for human prehistory — Stone Age, Bronze Age, Iron Age — was based entirely on hardware. It was followed by the Industrial Age and Nuclear Age (still hardware) and, only in the last few decades, the Computer Age. (The latter was driven by software but named for hardware.)
Science fiction writers of the past populated their stories with hardware innovations — spaceships, flying cars, teleporters, ray guns, time machines, force fields, human-like robots, etc. — and seldom thought much about changes wrought by software.
That’s not to say software innovation was not important. Language, writing, religion and art had effects at least equal to hardware innovations. But with a few exceptions — e.g., the 7th century explosion of Islam and the printing press — these evolved more slowly and quietly than firearms, steal and other noisy hardware innovations.
In many ways, the last 55 years have seen hardware retreats. In 1969, we went to the moon and a launched a commercial supersonic airplane. Nuclear power plant construction was in full swing. Polyester fabrics were replacing natural fibers in clothing. In the 1970s and 1980s, however, those technologies fell out of favor, and economic energies were absorbed by software research.
Future historians might pick the 2002 founding of SpaceX as the symbolic point when the pendulum began to swing back toward hardware innovation as a source of economic change. SpaceX created a network of former employees in the Los Angeles area working on hardware to transform the economy and society.
Parting Thoughts
Markets-altering innovations in hardware technology are clearly on the horizon. We’ve discussed just four sectors to watch, but I could have picked several others. There are even more transformative ideas still on the drawing board, without operating companies — yet.
I think it’s more likely than not that in the near future we will see more and bigger economic disruptions from hardware than software, so risk managers should make sure they have at least an eye on hardware.
Aaron Brown worked on Wall Street since the early 1980s as a trader, portfolio manager, head of mortgage securities and risk manager for several global financial institutions. Most recently he served for 10 years as chief risk officer of the large hedge fund AQR Capital Management. He was named the 2011 GARP Risk Manager of the Year. His books on risk management include The Poker Face of Wall Street, Red-Blooded Risk, Financial Risk Management for Dummies and A World of Chance (with Reuven and Gabriel Brenner). He currently teaches finance and mathematics as an adjunct and writes columns for Bloomberg.
Topics: Innovation
