China hits leading US drone-maker with sanctions

You might recall a few months back, China vowed to take “forceful measures” to protect its sovereignty after the US approved the sale of $360M in drones and missiles to Taiwan.

Well, China now appears to have made good on that promise in the form of sanctions on a range of US companies including Skydio, the largest US drone manufacturer.

Skydio is a California-based dronemaker founded in 2014 by three friends from MIT. It started out focusing on consumer drones to capture videos cool enough to earn you some sweet sweet likes on Instagram. 

But in 2023, Skydio pivoted, retiring its entire consumer business to focus instead on enterprise and public customers (i.e., the US government). Today, the firm’s drones fly for every branch of the US military plus over 200 public safety agencies. 

The company really drew international attention, however, on the frontlines in Ukraine, where Skydio’s small and easily manoeuvrable drones help mostly with intelligence gathering and reconnaissance missions. Its latest model (the X10) was apparently the first US drone to pass Ukraine’s electronic warfare testing (ie, to resist Russian jamming).

So, why did Skydio end up getting sanctioned by China? The answer to this question, just like any properly made lasagne, has many layers. 

The first crispy cheese layer of explanation, according to Skydio CEO Adam Bry in a note to customers, is that Skydio supplies drones to Taiwan. That made it an obvious target, though Skydio is quick to note its only Taiwanese customer is the National Fire Agency.

But in the middle of a tit-for-tat trade war (the US imposed sanctions on Chinese drone parts manufacturers just a few days later) this rationale doesn’t seem to count for much. 

Dig a little further into the lasagne, and you’ll see the US is already in a long-running quarrel with Skydio’s China-based competitor DJI, the world’s largest drone-maker.

The Pentagon classified DJI as a Chinese military company back in 2022, then just last month, DJI lawyered up, arguing the Pentagon was stigmatising it because DJI “is neither owned nor controlled by the Chinese military” and “sells only consumer and commercial – not military – drones” (both Russia and Ukraine have still used them).

So interestingly, both the US and China’s top drone-makers have now effectively used the same argument (“chill, they’re not military drones”). And both Washington and Beijing are responding with the same scepticism.

Dig a smidge further into that lasagne, and there’s the fact Skydio is a drone supplier for Ukraine. And that raises the question: does the Moscow-Beijing ‘no limits’ partnership extend to China actively torpedoing US firms helping Ukraine as a favour to Russia, like how Putin reportedly asked Elon Musk to block Starlink in Taiwan as a favour to Xi?

Then dig right down to the bottom of the dish, and there’s the fact that DJI and Skydio are also just competitors in the fast-growing $35B global drone market, though that competition is limited by a) DJI’s global market dominance, and b) the fact Skydio already exited the consumer drone sector (in part due to DJI’s dominance).

Still, Skydio’s CEO has had to deny claims it’s been lobbying Washington to ban competitors like DJI rather than compete on product and price. And either way, as the US seeks to reduce its reliance on critical Chinese inputs, Beijing may well see value in kneecapping America’s largest drone-maker from the outset.

So what do the sanctions mean for Skydio?

The firm assembles its drones in the US, but its batteries come from a single supplier in China. These new sanctions mean Skydio no longer has access to that battery supply.

So you’ll see in the CEO’s note above, the company is now working to find new suppliers, but that’ll take time (at least until Q2 next year), and it’ll be hard to match Skydio’s last supplier on product or price any time soon (China mostly leads the world in batteries). In the meantime, Skydio says it’s got stockpiles it can use, though they’re limited: it’s already rationing batteries to one per drone.

INTRIGUE’S TAKE

This is 100% intriguing, and 0% surprising. China’s leadership in (and dominance of) the global battery sector is well documented. In fact, way back in 2022 (remember then?) we wrote that “any country not in Beijing’s good graces might find it hard to secure the batteries they need”. And now that’s what’s happening.

So the only surprising bit of this story is the fact that America’s leading drone-maker, with NatSec clients in the US, was still somehow entirely reliant on a country that those very same US clients are openly calling a threat. Israel’s pager attack on Hezbollah was a reminder just how much damage you can do via a supply chain vulnerability.

Anyway, the Skydio CEO argues that “if there was ever any doubt, this action makes clear that the Chinese government will use supply chains as a weapon to advance their interests over ours.” We’d just add that if there was ever a story to encapsulate the general vibe of current US-China ties, this is it.

Also worth noting:

• A bipartisan US ban on DJI drones seems likely at this point (it’s already passed the House), though various DJI-dependent public safety agencies have raised objections.