Chinese sanctions hit US drone maker supplying Ukraine

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Skydio, the US’s largest drone maker and a supplier to Ukraine’s military, faces a supply chain crisis after Beijing imposed sanctions on the company, including banning Chinese groups from providing it with critical components.

Skydio is rushing to find alternative suppliers after Beijing’s move, which also blocks battery supplies from its sole provider, said people familiar with the situation.

The drone-maker has sought help from the Biden administration. Chief executive Adam Bry last week met US deputy secretary of state Kurt Campbell and held discussions with senior officials at the White House.

American officials are concerned about China disrupting US supply chains and provision to Ukraine of drones used in intelligence gathering.

“This is a clarifying moment for the drone industry,” Bry wrote in a note to customers obtained by the Financial Times. “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,” he added.

The crisis for Skydio underscores the risks facing US companies that rely on China and comes amid concern among foreign businesses about Beijing’s use of security laws to detain their local employees and carry out corporate raids in the country.

China’s sanctions, imposed on October 11, hit several US groups, including privately held Skydio, in retaliation for Washington’s approval of the sale of attack drones to Taiwan. Skydio had recently won a contract with Taiwan’s fire agency.

Beijing imposed the sanctions before Skydio had succeeded in finding alternative suppliers.

One person familiar with the situation said Chinese authorities visited Skydio’s suppliers, including Dongguan Poweramp — a subsidiary of Japan’s TDK that makes drone batteries — and ordered them to sever ties.

Skydio on Wednesday told its customers it was rationing the number of batteries supplied with drones because of the Chinese move and that it did not expect to have new suppliers until spring.

Skydio is talking to companies in Asia, including Taiwan. One person familiar with the situation said US officials had contacted Asian allies to discuss ways to help the company. Skydio has also been in touch with Taiwan’s vice-president Hsiao Bi-khim about the issue.

The San Mateo-headquartered group sells to corporate and government customers, including the US military. It said it had sent more than 1,000 drones to Ukraine for intelligence gathering and reconnaissance purposes. The drones have also been used to help document Russian war crimes.

Skydio said its latest model, the X10, was the first US drone to pass Ukrainian electronic warfare tests — meaning they are hard to jam — and that Kyiv had requested thousands of them.

The Chinese action came as US Congress considers legislation that would ban Americans from flying drones made by DJI, the Shenzhen-based company that dominates the global commercial drone industry.

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

US officials said they hoped the Skydio crisis would also raise awareness in the private sector about the danger of having supply chains concentrated in China.

China has in the past restricted supplies of rare earths to try to pressure other countries and recently warned Japan it would block shipments of critical minerals if Tokyo adopted export controls pushed by Washington.

Beijing has in recent years placed sanctions on several US defence companies, including Lockheed Martin, Raytheon, Boeing and Anduril Industries, which makes some of the attack drones going to Taiwan.

“While China’s sanctions today target defence and drone manufacturers, tomorrow they will almost certainly expand to other sectors as US-China relations worsen,” said Craig Singleton at the Foundation for Defense of Democracies. “Batteries and rare earths are just the canary in the coal mine.”

The White House and state department declined to comment. TDK also declined to comment.

Additional reporting by David Keohane in Tokyo