Indian Council of World Affairs

Abstract: The paper analyses the aspects of China’s sanctions on Skydio, the US’ largest drone manufacturing company. The paper has further discussed the possible implications and way ahead for India. 

Introduction 

On 11 October 2024, the Chinese government imposed sanctions on the US’ largest drone manufacturing company, Skydio, due to their sale of drones to Taiwan.[i] The sanction has prohibited Chinese companies from supplying vital critical components, including drone batteries, to Skydio, a significant supplier of Ukraine. The sanctions have disrupted the critical supply chain for the US and left Skydio scrambling to find and diversify partners to supply critical components. 

Currently, Skydio is a major defence partner in Ukraine’s military campaign against Russia. However, Chinese sanctions came as a result of Skydio’s drone contract with Taiwan’s National Fire Agency.[ii] China has accused the US of providing military equipment, including drones, to Taiwan. Chinese sanctions have not only created a supply chain issue for Skydio but also have future implications. 

What Triggers China? 

Chinese sanctions have come as a result of the US government’s green signal to the sale of military equipment, including combat drones, to Taiwan. In September, the Ministry of Foreign Affairs, Republic of China (Taiwan), confirmed the US State Department’s approval of $228 million in military spare parts and reshipment of equipment for Taiwan,[iii] escalating tensions between Washington and Beijing.[iv] Consequently, China identified US defence firms extending military support to Taiwan. In September 2024, Beijing held nine US arms companies accountable for supplying arms to Taiwan and intensified sanctions against them. These firms are S-3 Aerospace, Cubic Corporation, ACT-1 Federal, Planate Management Group, Exovera, TextOre Inc., TCOM Partnership Limited, Stick Ruder Enterprises and Siera Nevada Corporation.[v] Later, in October 2024, the US Congress notified the potential sale of three National Advanced Surface-to-Air Missile Systems (NASAMS) with 123 missiles worth $1.16 billion and $828 million for AN/TPS-77 and AN/TPS-78 radar systems.[vi]

China has accused the US government of violating the One-China principle, harming Beijing’s sovereignty and security interests in the region. Condemning the US for intervening in its internal affairs, the Chinese Foreign Ministry demanded Washington stop conniving and supporting “Taiwan’s independence” and stop undermining peace and stability in the Taiwan Strait.[vii]

Not only does China’s sanction on Skydio represent their worry regarding the geopolitics involving Taiwan, but the sanctions could also be examined from the lens of drone competition between the US and China. In response to China’s sanctions, the US has alleged that Beijing’s sanctions are motivated to avoid drone competition and to maintain its edge in the international drone market. Notably, China produces DJI drones and holds a dominant position in the commercial drone market. DJI, with its multiple variants, high-resolution camera and small size, are highly recognised worldwide, and the success of X10 could potentially affect the market of DJI drones.

A Glimpse of China’s Dominance 

Manufacturing modern military systems, including missile systems and drones, involves vital critical components, such as rare earth and semiconductors. These rare earth elements are used to manufacture chips, batteries and other components. China has a stronghold in rare earth production, reprocessing facilities and a global supply chain. China is currently the largest producer of rare earth elements, contributing more than 60 per cent of the worldwide production and processing more than 90 per cent, which is a nearly monopolistic capability.[viii] Also, China is the leading global supplier of rare earth elements, which gives it an edge over almost every country in defence technology and innovation. Consequently, defence manufacturers from the US, Russia and other countries depend on China. 

In his blog post, Skydio’s CEO, Adam Bry, said, “We are proud to support Taiwan, and we are undeterred.”[ix] However, he accused that “this action makes clear that the Chinese government will use supply chains as a weapon to advance their interests over ours.”[x] He also informed its customers that the company doesn’t expect new supply sources to come until the spring of next year. It is pretty concerning that if the US, a leader in technology and innovation in the defence sector, depends on China for the critical components, then where do other countries stand? These remarks and the US dependence on China show Beijing’s dominance and potential in the global rare earth supply chain. 

India’s Position and the Way Ahead 

India should look at these US-China dynamics from two perspectives: the US as a strong competitor to China in the drone sector and Beijing’s mercantilist approach to safeguarding its domestic industry by avoiding global competition. However, India is also cautious about the risks associated with using Chinese products, mainly in defence equipment. Earlier, India’s Ministry of Defence (MoD) took steps to curtail Chinese influence in the Indian defence market. 

On 25 June 2024, India’s Department of Defence Production (DPP) issued a formal advisory to major defence industrial bodies, such as the Associated Chambers of Commerce and Industry of India (ASSOCHAM), the Federation of Indian Chambers of Commerce and Industry (FICCI) and the Society of Indian Defence Manufacturers (SIDM), urging them to regulate their members from using Chinese components in their products.[xi] The letter warned about the risks of using Chinese components and aimed towards curtailing, in a phased manner, Chinese influence in India’s defence manufacturing and ecosystem. The advisory has stressed that drones equipped with Chinese components could compromise military operations in radio transmission, communication, camera function, cyber security and software security.[xii]

However, some challenges need to be figured out as a priority. According to “The Print” report, the Indian army, in September 2024, ordered 700 Trinetra drones from AeroArc, an Indian defence technology entity. The objective behind the contract was to enhance surveillance and reconnaissance in the forested and high-altitude terrain in Jammu and Kashmir and the northern borders along Pakistan. The founder and managing director of AeroArc informed that the Trinetra drone, developed by a Coimbatore-based local facility, is an indigenised and Indianised version of the drones manufactured by Skydio.[xiii] Here, the primary concern is that if Skydio is dependent on components made by China, where did the AeroArc source batteries and other components from?

Earlier, the MoD put a hold on the order of 200 drones from Chennai-based Daksha Unmanned System Pvt. Ltd. for using Chinese components in their drones.[xiv] Garuda Aerospace Pvt. Ltd. and Sky Industries have faced similar accusations of using Chinese components in their defence products. However, the firms rejected such accusations and were assured they would comply with government regulations in their defence manufacturing. 

Dependence on China and the associated cost of products is yet another significant challenge, mainly for start-ups and emerging defence players. The problem of Chinese dependence and associated costs becomes more grievous for the private sector, primarily small firms with limited funding sources, when we talk about avoiding Chinese components and products. Some defence start-ups have acknowledged that around 70 per cent of the goods in the supply chain are sourced from China, and transiting to the non-Chinese components could increase the costs of the products, which is a significant challenge for the domestic drone manufacturers.[xv]

Besides the defence sector, disruption in the supply chain of batteries and other critical components could also impact India’s drone aspiration in the commercial and civilian sectors. As drones are dual-use technology, Chinese components imported to be used in the civilian sector could also be diverted into the defence sector, which is against the guidelines of the Ministry of Defence.

In such circumstances, India should be prepared to meet the future challenges. India needs to reduce its dependency on China and diversify its sources to ensure an uninterrupted supply chain of critical components. India could look towards Taiwan, Japan, South Korea, Australia, and several African countries, other major sources of rare earth and critical components besides China, to diversify its supply partners. The Make in India and Aatmanirbhar Bharat are key initiatives in making India self-reliant by reducing foreign dependency. However, the indigenisation of drone manufacturing is complex due to its utilisation in defence and civilian sectors. India needs to take a flexible approach to meet the challenges of the uninterrupted critical mineral supply chain and reduce Chinese dependency.

Conclusion

The expansion of the sanction war between the US and China represents geopolitics and competition for drone manufacturing. While China has cited the US sale of armed drones to Taiwan as a matter of national security for them, the US has raised China’s fear of drone competition behind the sanctions. India should closely observe the sanction row. On the one hand, the DDP advisory represents caution against the Chinese inroads into India’s defence market and effort to enhance national security; it also signifies, on the other hand, India’s efforts of becoming self-reliant in defence manufacturing under the Aatmanirbhar Bharat initiative. India needs to smoothly manage sourcing from China and the associated cost factor in defence manufacturing.

*****

*Mukesh Kumar, Research Associate, Indian Council of World Affairs, New Delhi.
Disclaimer: Views expressed are personal.

Endnotes 

[i] Chen, Kelvin. “China Sanctions US Drone Firm in Response to Taiwan Arms Deal.” Taiwan Times, November 2024. https://taiwannews.com.tw/news/5963953.

[ii] McMorrow, Ryan, Demetri Sevastopulo, and Kathrin Hille. “Chinese Sanctions Hit US Drone Maker Supplying Ukraine.” Financial Times, October 31, 2024.

[iii] Ministry of Foreign Affairs, Republic of China (Taiwan). “MinistryofForeignAffairs,RepublicofChina(Taiwan),” September 18, 2024. https://en.mofa.gov.tw/https%3a%2f%2fen.mofa.gov.tw%2fNews_Content.aspx%3fn%3d1329%26s%3d118067%26Create%3d1.

[iv] affairs, Zhao Yusha Global Times reporter covering international, politics, and society Zhao Yusha. “China Warns of Resolute Countermeasures after US Approval of $2 Billion Arms Sales to Taiwan Region - Global Times.” Accessed November 11, 2024. https://www.globaltimes.cn/page/202410/1321951.shtml.

[v] Al Jazeera. “China Sanctions US Defence Firms over Arms Sales to Taiwan.” Accessed November 11, 2024. https://www.aljazeera.com/news/2024/9/18/china-sanctions-us-defence-firms-for-arms-sales-to-taiwan.

[vi] Forum on the Arms Trade. “US Arms Sales to Taiwan.” Accessed November 20, 2024. https://www.forumarmstrade.org/ustaiwan.html.

[vii] “Foreign Ministry Spokesperson Mao Ning’s Regular Press Conference on October 11, 2024.” Accessed November 20, 2024. http://za.china-embassy.gov.cn/eng/fyrth/202410/t20241011_11505651.htm.

[viii] Baskaran, Gracelin. “What China’s Ban on Rare Earths Processing Technology Exports Means,” January 8, 2024. https://www.csis.org/analysis/what-chinas-ban-rare-earths-processing-technology-exports-means.

[ix] “China’s Sanctions on Skydio.” Accessed November 11, 2024. https://www.skydio.com/blog/chinas-sanctions-on-skydio/.

[x] Ibid.

[xi] Singh, Dalip. “Defence Ministry Cautions Firms Using Chinese Parts for Drones.” BusinessLine, August 28, 2024. https://www.thehindubusinessline.com/news/national/defence-ministry-cautions-firms-using-chinese-parts-for-drones/article68573070.ece.

[xii] Ibid.

[xiii] Philip, Snehesh Alex. “Army Inducts Drones in Use with Ukrainian Military. Trinetra to Boost Surveillance.” ThePrint, September 27, 2024. https://theprint.in/defence/army-inducts-drones-in-use-with-ukrainian-military-trinetra-to-boost-surveillance/2287038/.

[xiv] Singh, Dalip. “Army Puts on Hold Acquisition of 200 Drones from Dhaksha Unmanned Systems.” BusinessLine, August 28, 2024. https://www.thehindubusinessline.com/news/army-puts-on-hold-acquisition-of-200-drones-from-dhaksha-unmanned-systems/article68577549.ece.

[xv] The Economic Times. “Defence Ministry Cautions against Use of Chinese Parts in Indian Military Drones.” August 30, 2024. https://economictimes.indiatimes.com/news/defence/defence-ministry-cautions-against-use-of-chinese-parts-in-indian-military-drones/articleshow/112899688.cms?from=mdr.