Maroc - EURASIAREVIEW.COM - A la une - 06/Aug 18:49

The Rising Ukrainian Drone Industry: A Force To Be Reckoned With – Analysis

By Zhou Chao The Russia-Ukraine conflict remains in a stalemate, and while the F-16 fighter jets promised by the West have not yet officially entered combat, both sides deploy their key weapon, i.e., drones. The Ukrainian military has effectively used drones to search for and locate Russian forces for attacks, which has achieved good results. Additionally, Ukrainian forces have conducted cross-border strikes with drones, targeting key facilities such as refineries within Russian territory, and these actions have also proven to be significantly effective. Along with the impressive performance on the battlefield, Ukraine's drone industry is rapidly growing and expanding amidst the conflict. In December last year, Ukrainian President Volodymyr Zelensky announced that Ukraine's annual drone production target for 2024 was set at 1 million units. In March of this year, Hanna Hvozdiar, the Deputy Minister of Strategic Industries of Ukraine, stated that the monthly production of Ukrainian drones had reached 150,000 units, with a goal to achieve an annual production target of 2 million units this year. However, many commentators consider this target to be difficult to achieve. Moreover, in January and February of this year, the monthly production of Ukrainian drones had stalled, and Western commentators even speculated that Ukraine might lose the "drone battlefield" in the Russia-Ukraine conflict. However, according to a recent Foreign Policy (FP) report, Ukraine's drone industry experienced another surge in the second quarter of this year. The report states that Ukraine now has over 200 registered drone manufacturers, and if small companies and volunteer groups operating from garages are included, the total number of drone producers in Ukraine exceeds 500. FP also believes that the monthly production of Ukrainian drones has likely surpassed 200,000 units. Since June, the increase in the number, scale, and destructive power of Ukrainian drone attacks on Russia suggests that there has been a substantial improvement in both the scale and quality of Ukrainian drone production. FP notes that before the Russia-Ukraine conflict, Ukraine's drone industry was virtually nonexistent. Over the past two years, the rapid rise of this industry has been driven not only by the immense demand created by the war but also by proactive policy improvements by the Ukrainian government. Firstly, there has been deregulation. To promote the development of the drone industry, the Ukrainian government has made dozens of amendments to relevant laws, simplifying the application and approval processes. Customs duties have been waived on most drone components, including value-added tax and import duties. The most significant change has been the substantial simplification of the steps required for companies to obtain military sales certification. Alex Bornyakov, Deputy Minister of Digital Transformation of Ukraine, stated that the Ukrainian government believes the most critical driver of industry development lies in innovative entrepreneurs and businesses, and thus they have chosen to place their bets on them. Previously, starting a high-tech enterprise in the defense sector required three to five years for application and approval processes, and sometimes even influential connections were needed. Now, this process only takes two to three months. Secondly, Ukraine has abolished the Soviet-era cap on defense profits. Under the previous planned economy, weapon manufacturers were considered illegal if their annual profits exceeded 3%. Valerii Iakovenko, co-founder of DroneUA, one of Ukraine’s largest drone manufacturers, stated that these past regulations greatly hindered innovation, as the 3% profit limit left companies with insufficient funds for research and development. Now, the profit cap has been raised to 25%. Suddenly, investing in military technology has become profitable, sparking a revolution in the drone industry. Next is the innovation in tax policies and financial tools. Diia.City, a subsidiary of the Ministry of Digital Transformation, offers tax incentives to a range of IT companies, including those in defense technology. Member companies pay only half the corporate tax rate of other Ukrainian companies: 9% instead of 18%. Employees of these companies only need to pay 5% income tax, which is less than a third of the normal rate. Additionally, the government has adopted financing tools used by Silicon Valley startups—convertible notes—which allow loans to be converted into equity later, in order to attract various types of investment. Over the past two years of the Russia-Ukraine conflict, the combination of entrepreneurial effort and government support has given rise to a dynamic drone industry. The most popular product is the small first-person-view suicide drone, which is 7 to 10 inches long and powered by rotors. Almost every frontline unit uses these drones, and a skilled operator can deploy up to 15 drones per day for missions. The most advanced equipment resembles a small aircraft, with fixed wings extending up to 30 feet. The next frontier is ground-based unmanned devices capable of performing complex tasks such as medical deliveries, mine clearance, and combat operations. It is worth noting that Ukraine's drone industry previously had a significant dependency on China. Last year, the Chinese government introduced regulations that, starting September 1, 2023, restricted the export of drone components. After this regulation took effect, the Ukrainian government expressed concerns about maintaining and expanding its domestic drone production capabilities. Reports indicated that Chinese drone components had consistently accounted for more than 50% of the components used in Ukraine, with DJI Mavic series being particularly popular among Ukrainian forces. The sudden restriction on these supplies caused considerable difficulties for the Ukrainian military. However, FP's report indicates that since October of last year, Ukraine has been steadily enhancing its drone production capabilities through 3D-printed components, exploration of replication by volunteers, and collaboration with other NATO countries and companies in Taiwan. Additionally, according to Forbes, by the end of February this year, the Ukrainian drone company Wild Hornets successfully designed, produced, and assembled its own Flight Controller Module, with the next step being to move toward mass production. At the same time, the increase in production capacity has effectively lowered the production costs of Ukrainian drones. For the most basic rotary-wing drones, the production cost for Ukrainian companies has dropped to USD 335 per unit. Although this cost is still higher than DJI's basic series, which is priced at USD 135, there are plans for a consortium of U.S. and European countries to make long-term, large-scale purchases from Ukrainian companies. However, current Ukrainian production capacity must first meet domestic demand, and existing laws prohibit the export of defense equipment, thus preventing the effective release of Western demand. Once Western demand is fully realized, the production costs of Ukrainian drones are expected to decrease further. Additionally, countries like Mexico could be used to expand production capacity and further lower costs. Meanwhile, Ukrainian drone companies are also rapidly improving their software technology. For DJI, the leading drone manufacturer in China, its main technological advantages lie in the flight systems, positioning systems, data processing capabilities, and power systems. However, these technological advantages are not insurmountable. DJI's greatest strength remains in its manufacturing capabilities. By integrating smartphone components into its drones and leveraging China's industry chain advantages in basic electronic consumer products, DJI has successfully achieved low-cost and high-performance products. Since 2020, DJI's self-sufficiency rate for components has also gradually increased. However, Ukrainian companies are rapidly enhancing their position in the industry chain in both hardware and software domains, and this momentum should not be underestimated. Final analysis conclusion: In July of this year, the United States officially lifted the ban on DJI drones. DJI’s advantages, particularly in the consumer-grade civilian drone market, seem to be unassailable. However, the burgeoning Ukrainian drone industry indicates that serious challenges are gradually emerging. ______________ Zhou Chao is a Research Fellow for Geopolitical Strategy programme at ANBOUND, an independent think tank.