China imposes sanctions on US drone supplier to Ukraine

Skydio, the largest US drone manufacturer and supplier to the Ukrainian defence forces, has faced a supply chain crisis after China imposed sanctions banning Chinese companies from providing critical components to the firm.

Source: Financial Times

Details: Sources familiar with the situation said that Skydio is currently looking for alternative suppliers because of the sanctions, which have also blocked the supply of batteries from the company's sole supplier.

The company has asked the Biden administration for help. Last week, CEO Adam Bry met with Kurt Campbell, US Deputy Secretary of State, and held conversations with other senior White House officials.

US officials are concerned that China could undermine US supply chains and make it harder to supply drones used for intelligence gathering in Ukraine.

Quote from Bry’s note to customers: "This is a clarifying moment for the drone industry. 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. This is an attempt to eliminate the leading American drone company and deepen the world’s dependence on Chinese drone suppliers."

More details: Skydio's crisis highlights the risks faced by US companies dependent on China and comes as foreign businesses worry about China's use of security laws to detain local workers and conduct corporate raids.

On 11 October, China imposed sanctions on several US companies, including Skydio which is a private company, in response to Washington's approval of the sale of combat drones to Taiwan. Skydio was recently awarded a contract with Taiwan’s National Fire Agency.  

The sanctions were imposed before Skydio could find alternative suppliers.

One of the sources said that the Chinese authorities had visited Skydio's suppliers, including Dongguan Poweramp, a subsidiary of Japan's TDK that makes batteries for drones, and ordered them to stop working with Skydio.

On 30 October, Skydio notified its customers that it was limiting the number of batteries it ships with its drones due to Chinese sanctions and warned that new suppliers are not expected to come on stream until spring.

Skydio is discussing the situation with companies in Asia, particularly in Taiwan. One source said that US officials had reached out to Asian allies to discuss ways to support the company. Skydio has also been in contact with Taiwan's Vice President Hsiao Bi-khim on the issue.

The San Mateo-based company serves corporate and government clients, including the US military. It said it has sent more than 1,000 drones to Ukraine to gather intelligence and help record Russia's war crimes.

Skydio said its newest model, the X10, was the first US drone to pass Ukraine's electronic warfare tests, which makes it harder to jam, and Kyiv has ordered thousands of such drones.

China's actions come as the US Congress is considering a bill to ban Americans from using drones made by DJI, the Chinese company that dominates the global commercial drone market.

Quote from a US official: "We suspect Skydio was targeted by Beijing because it is likely seen as a competitor to DJI. If there is a silver lining, we can use this episode to accelerate our work to diversify drone supply chains away from . . . China."

Background:

• In the first 10 months of 2024, the Ministry of Defence of Ukraine, together with the Ministry of Digital Transformation, concluded contracts for the supply of 1.6 million drones of various types for a total of over 114 billion hryvnias (about US$2.7 billion). 
• In 2023, the state overpaid almost 600 million hryvnias (US$16.6 million) when purchasing Autel EVO MAX 4T drones for the needs of the Armed Forces of Ukraine as part of the Army of Drones project.
• China has tightened export controls on drones that could be used for military purposes in response to growing criticism from the US and its allies over its support for Russia in the war in Ukraine. 

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