Drone makers looking to steer clear of China fear Beijing’s Wrath

Summary
U.S. companies see risks in working with Taiwan as it tries to build a “democratic supply chain.”China dominates the global market for the small, inexpensive drones that have transformed the world’s battlefields—and Beijing hasn’t been shy about keeping the industry under its thumb.
For U.S. companies, dependence on China has become untenable, particularly as Beijing shows it is willing to cut off their access to essential supplies.
In Taiwan, that spells opportunity. Vice Premier Cheng Li-chiun, who heads a government program to develop the island’s drone sector, said in a recent interview that the development of a “democratic supply chain" starring Taiwan is an inevitability.
However, recent examples of Beijing punishing companies for their ties to Taiwan have made U.S. businesses cautious in their efforts to avoid China in the production of drones, an industry where commercial ambitions and national security intersect.
American companies also worry they will find themselves in the crossfire of any rising tensions between the U.S. and China after President-elect Donald Trump takes office.
“It’s not just let’s swap out of China and go to Taiwan," said Mike Sims, co-founder and chief executive of U.S. startup Empirium, a marketplace that helps companies including drone makers find China-free parts and services. “It’s essentially just a delicate business environment."
The delicacy of working with Taiwan is a challenge to Taiwan’s aspirations to become a powerhouse drone-parts supplier and build a drone army to defend itself against a potential invasion by China, which claims the island as its own.
U.S. drone maker Skydio experienced the perils of relying on Chinese supply in October, when Beijing blacklisted the company.
Skydio had found itself cut off from the Chinese batteries it needed.
China’s government said it was responding to Skydio’s sales in Taiwan, where the company’s drones are used by the National Fire Agency. The company has also delivered drones to Ukraine for use in its war with Russia.
“This action makes clear that the Chinese government will use supply chains as a weapon to advance their interests over ours," Skydio Chief Executive Adam Bry wrote in an October blog post. “No Western drone manufacturer is safe," he added.
The company approached the Taiwan government, and Taipei saw an opening. Taiwan officials connected Skydio with local battery suppliers, according to Cheng and other people familiar with the matter.
Skydio is in talks with these suppliers, which are part of a government-backed coalition to bolster Taiwan’s domestic drone industry. It has also approached other Taiwanese suppliers about filling the gap left by China.
The company hasn’t settled on a new battery supplier and is speaking with manufacturers in other countries. It said it expects to have a full stock of batteries in the spring. China’s sanctions forced it to scale back the number of batteries on its drones from three to one. Limiting batteries curtails the drones’ performance.
Skydio, meanwhile, has been outspoken with policymakers and regulators about the risk of the U.S. being so dependent on Chinese drones, including those of Shenzhen DJI Technology, the world’s largest small-drone manufacturer. The U.S. government has declared DJI to be a national security threat.
Many U.S. drone companies will likely buy sparingly from Taiwan’s suppliers and source their parts from around the globe, having paid the price for their singular reliance on China.
Working with Taiwan comes with some unquantifiable costs, companies say. Chiefly, that Beijing will punish any company that does business there or, in a more drastic scenario, will seize the island and take ownership of its industries.
Taiwan, and its boosters, are undaunted.
“You kind of have to find the natural substitute to China, and it’s Taiwan," said Sims. “We see this as a gold rush in a way. I think it’s going to be a boomtown."
Taipei has plans to invest at least $1.35 billion over four years in its effort to foster domestic drone capacity and cut out China.
“This ‘non-red’ trend, it’s a huge potential business opportunity for Taiwan," Cheng said, using another term for the shift away from China. “We’ll be keeping a close eye on the requirements from key partners like the U.S., especially around requests for excluding Chinese components," Cheng said.
Taiwan is bracing for further shifts in the tense relationship between Beijing and Washington, with Trump threatening tariffs on China from the moment his term in the White House begins on Monday.
Beijing is finding ways to strike back. China’s Ministry of Foreign Affairs said last month that it was imposing sanctions on more than a dozen additional U.S. drone-technology companies, including some that supply drones to Ukraine in its war with Russia. Many of the companies had already moved to suppliers outside of China.
China dominates the world’s supply of batteries, motors, sensors and rare-earth materials that are vital to parts of the defense industry. Nearly all the components in first-person-view drones—those that use real-time video feeds, the type widely used in Ukraine—are manufactured in China, even though many were invented in the U.S., according to a study by Massachusetts Institute of Technology researchers Edlyn Levine and Fiona Murray.
“It is the absolute dominance of the supply chain," said Murray.
Taiwan sees its expertise in making advanced semiconductors and other tech products as the groundwork for a competitive drone industry. This year the government is putting at least $10 million into research and development for drone chips, Cheng said.
Cybersecurity is another critical area where her government is working to ensure Taiwanese-made drones meet Western standards, she said.
Taiwanese supplies tend to be slightly more expensive than their Chinese counterparts, but cost less than supplies from tech hubs in other democracies such as South Korea and Japan.
Seattle-based BRINC Drones gets critical components from Taiwan, and is leaning on a mix of Taiwanese, American and other allied suppliers to stay clear of China, executives said.
China’s dominance, however, remains daunting. China has a grip on the ingredients for many of the components used in drones and other defense-related products. China supplies more than 90% of the magnets needed for motors. Batteries are built with minerals that come from China or are processed in China.
Manufacturers around the world are nervous to do business with a company blacklisted by China for fear of retaliation from Beijing.
“China intends to weaponize its control over drone components," said Craig Singleton, senior China fellow at the Foundation for Defense of Democracies, a Washington think tank. “The Chinese understand our supply chains better than we do."
China has blocked the export of certain critical minerals to the U.S., including gallium, which is used in equipment needed by the U.S. military.
There are also some essential drone parts that Taiwan manufacturers are finding too costly to assemble, such as the gimbal system, which combines an optical lens with thermal sensors and stabilizers. Taiwan produces the parts, but most are shipped to China for assembly.
Taiwanese suppliers could produce entire batteries domestically to ensure supply-chain security, as long as keeping costs low isn’t the main priority, said Joe Chiu, who co-leads an Economy Ministry-backed consortium to explore export opportunities.
However, Chiu, an executive of Aerospace Industrial Development Corporation, which makes jet fighters for the Taiwanese Air Force, said suppliers also fear retaliation from Beijing, given some still have business ties or operations in China.
“They also have to think about geopolitical tensions," Chiu said. “They want to do business with both sides, but they just can’t afford to risk offending either one."
Chiu noted that Taiwanese suppliers who are in talks with their American counterparts would want to keep a low profile.
“If a company has nothing to do with China," he said, “they really wouldn’t have to worry about this at all."
Write to Joyu Wang at joyu.wang@wsj.com and Heather Somerville at heather.somerville@wsj.com