Вікторія Горбік War 13 December 2024, 10:00

China is tightening the screws, restricting the sale of components to the US and Europe. What does this threaten for Ukrainian drone manufacturers and how to protect yourself. Analysis

Since September, China has once again tightened sanctions and made changes to exports of drones and their parts. And this cannot but affect drone manufacturers in Ukraine, some of the components for which come from the country of the «center of the universe.»

Four representatives of Ukrainian drone manufacturers shared with dev.ua their observations on whether they face restrictions, how they overcome the situation, and what sanctions threaten Ukraine.

About sanctions

China introduced one of the first restrictions on September 1, introducing stricter checks on export shipments. Although it was initially noted that the changes to the list of goods prohibited from transportation in standard postal parcels did not apply to commercial cargo.

According to a message from Meest, the following items are prohibited for delivery in standard postal parcels:

carbon frame for a quadcopter;
carbon beam for quadcopter;
quadcopter;
quadcopter motor;
set of components for a quadcopter;
set of frames for quadcopters;
navigation camera for quadcopter;
flight controller for quadcopter;
landing gear for a quadcopter;
propeller for a quadcopter;
quadcopter frame;
signal amplifier for the quadcopter remote control;
digital data transmission system for quadcopter;
digital radio communication detector;
radio system;
radio station;
portable radio;
video signal transmission system via radio channel;
electronic warfare systems;
hunting knives.

Almost a month later, on October 10, China announced a decision to take countermeasures against US military companies and senior management. Three companies were sanctioned, including Skydio, a developer of small reconnaissance drones that supplies drones to Ukraine. This was the country’s response to the provision of military aid to Taiwan, which was announced in the United States. Skydio sought help from the Biden administration and has already begun planning contracting with Taiwan. On December 5, China added 13 more US companies to its sanctions list for similar reasons.

And now, the next step in the restrictions has been a ban on the export of drone components from Beijing, which is expected to be announced in January. China’s statement for the first time states that the trade restrictions apply to Chinese goods — or goods with Chinese parts — sold by suppliers in the country and abroad, indicating an attempt to replicate the extraterritorial impact of US and European sanctions. Blocking the sale of key components used to create drones, in particular, Chinese manufacturers of engines, batteries and flight controllers have limited or stopped their supplies altogether.

Chinese components still constitute a significant share of the cheap components used by Ukrainian drone manufacturers.

China restricts sales of drone components to the US and Europe. Will this affect Ukraine?

Have Ukrainian producers faced restrictions?

Dronerium, citing partners in China, reported that by 2025 the restrictions will be tightened, and export inspections will begin in a few weeks. «Violations are punishable by fines or criminal liability (de facto). According to the report, the ban includes major components for drones, in particular components for large drones (over 15 kg), thermal imaging systems and infrared equipment. Currently, these restrictions apply de jure mainly to the USA, but de facto to the USA, the EU, and Ukraine. China continues to trade with Russia. They say that small drones and fiber-optic systems are not yet subject to restrictions, but they will soon be,» the report says.

Even in the first year of Russia’s full-scale invasion, it was clear that China would sooner or later begin to complicate the situation for Ukraine with components for drones and related infrastructure, says Yuriy Dombrovsky, director of the Spets Aero UAV Operator Training Center and the Ukraine Robotics manufacturing enterprise. «China is a strategic player that plays its own game and has its own interests. In particular, its interest is a certain confrontation with Western countries, and therefore, the supply of components or, conversely, a ban on such supplies to Ukraine is an instrument of global power,» he emphasizes.

Manufacturers say that restrictions exist, but not everyone has encountered them. Rudolf Hakobyan, deputy director for strategic communications at the Center for Unmanned Systems Research, noted that his team has not recently encountered obstacles in purchasing components from China, but only because they have been reformatted for Ukrainian manufacturers.

«Frames, radio communication systems, engines, flight controllers — all this is already made in Ukraine,» noted Rudolf Hakobyan.

According to him, the chips have to be purchased in China, but the deputy director for strategic communications is sure that this is only an option for now. «I don’t see any problems with making them in Ukraine,» he notes.

Maxim Subotin, co-founder of Armadrone, noted that manufacturers use Chinese components in two of the five products in the line. For the next three, the company began R&D six months ago with the intention of not using Chinese components.

«Because we anticipated this blockage,» the company’s co-founder explained.

According to Maksym Subbotin, Armadrone has not yet encountered a blocking of the purchase of Chinese components. «While they are selling officially, we must understand that there is a certain transition period,» he believes.

In addition, Maksym Subbotin is confident that the gray market and smuggling market in China are working and will continue to work, but for Ukrainian companies that work with government orders, this will not be a solution.

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Is there an alternative to China?

Sanctions are already quite active in China itself. Rudolf Hakobyan confirmed that the country is prosecuting government officials or company executives and even opening criminal cases regarding the export of dual-use goods.

In addition, China’s leading component manufacturers are already moving their production capacity to other countries, including Taiwan, Hong Kong, Singapore and even Vietnam. In particular, Hana Micron, a South Korean firm specializing in semiconductor assembly, test and packaging (ATP), is expanding its presence in Vietnam after some of its customers asked the company to move production out of China. Major chip manufacturers — Amkor Technology, Hana Micron and Intel — have poured billions of dollars into Vietnam to expand their production capacity.

As an alternative, it would be possible and necessary to establish systematic procurement of electronics for drones at the state level in South Korea, Turkey, EU countries, the USA, and Canada. Yuriy Dombrovsky emphasizes this.

«Of course, in the listed countries the cost of products is higher than in China,» he emphasizes.

But the head of Ukraine Robotics is confident that for such large volumes that are needed in Ukraine, it was possible to negotiate with factories and factories, and the governments of these countries, about a loyal pricing policy. «This way, now we would have alternative options, proven technical solutions and a simplified scheme for purchasing such electronics. Such a model should have been built over the years and on a scale so that it would be an effective solution for, including, small manufacturing companies in Ukraine,» he adds.

Yuriy Dombrovsky asks the right questions:

Is there anything similar in Ukraine?
Has the state created any similar opportunities for producers?

«If there is such a thing, it would be worth announcing it and making it available to all manufacturers. It seems that such a model has not been built,» he adds.

In addition, another alternative to Chinese components may be components, the production of which is already gradually being established in Ukraine.

«Some components, such as flight controllers, propellers, navigation systems, etc., are already produced in Ukraine. But everything related to microelectronics and the component base, Ukraine still does not produce itself, but imports everything from China,» says Yuriy Dombrovsky. According to him, there will still be certain workarounds. «Because China also needs sales,» he is sure.

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What awaits Ukrainian producers?

Manufacturers who are already fulfilling or are going to work with government orders will find themselves in a risk zone, says Maksym Subbotin. He explained that for a government contract it is necessary to provide technical conditions and fully disclose the specifications. «That is, to provide a complete set of what your drone consists of,» he explains. And, according to him, manufacturers do not have the right to change the specifications during the fulfillment of a government order according to the law. According to the resolution of the Cabinet of Ministers, there are possibilities to clarify the specifications, this is provided for, but it takes time. Accordingly, because of this alone, manufacturers reduce the terms of order fulfillment by a month or two, and sometimes this is very critical, notes the co-founder of Armadrone.

«They simply will not fulfill the state order, they will miss all the timings, because they will not be able to get these components in the required volumes and buy them in bulk at the lowest price,» Maksym Subbotin emphasized. He added that yes, there are manufacturers from Singapore, Hong Kong or Taiwan, but all alternatives will definitely be more expensive than Chinese components.

Small producers will also face difficulties and increased risks, Yuriy Dombrovsky is sure.

«Large corporations that have large government contracts, of course, have the resources to independently search for manufacturers and necessary components around the world. They are also able to form logistics with China in such a way as to bypass all kinds of prohibitions or limits. Alternatively, large volumes of orders themselves stimulate the heads of manufacturing factories in China to look for workarounds for exporting electronics. This is done both through Hong Kong, which has specific jurisdiction, and through shell companies in third countries, etc. Or our large manufacturers themselves can organize everything in such a way that components are purchased in China from other third countries for which China has no export bans. And then this product simply goes to Ukraine. Some simply moved production to EU countries and thereby solved these problems. But what is left for small manufacturers?» he notes.

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Is it possible to be safe?

Manufacturers believe that the news of restrictions on exports from China is not a surprise and could have been prepared for in advance.

According to Yuriy Dombrovsky, certain steps should have been taken strategically at the state policy level. In particular, according to him, it would have been possible to:

to form a pool of manufacturers and their needs for components;
determine the nomenclature of key components,
to form a specialized fund and purchase all components in large quantities.

In addition, it would be possible , with the involvement of foreign intelligence services, the Ministry of Defense of Ukraine, and the government:

organize strategic procurement,
create a single «green corridor» at customs and generally work out a single logistics system.

«This would make it possible to form a strategic reserve of components and simplify tasks for manufacturers,» explains Yuriy Dombrovsky.

The head of Ukraine Robotics emphasizes that there are components that are already manufactured in Ukraine, but there are also those that are still impossible to manufacture here, in particular, microelectronics. He believes that in the worst case, manufacturers will have to change the component base on the fly and look for everything from suppliers from EU countries. Then, of course, the cost of the final product, drones/unmanned aerial vehicles, will increase significantly. «The war will become even more difficult for Ukraine financially. Many manufacturers will go bankrupt and close down. The lack of a systematic strategic state policy in the direction of supporting and developing the unmanned systems production industry weakens our country. In general, we have a bad state strategy in Ukraine. They are almost absent,» he adds.

But, according to Yuriy Dombrovsky, there is good news: our Ukrainian ability to self-organize and cope with complex challenges through human efforts is still there. «I am sure we will come up with something,» he says optimistically.

Some Ukrainian manufacturers have already restructured their processes, taking into account the unstable situation with China. For example, Maxim Subbotin’s company. Armadrone is already reinvesting money in Ukrainian components, so China’s sanctions do not affect them.

He advises other Ukrainian manufacturers to reorient themselves to European markets. «Still, the volume of orders is not yet millions of pieces per unit of a certain product, if we are talking about drones, unfortunately. Therefore, it would be quite logical to think about developing your ecosystem, partnering with other manufacturers, unifying the component base in such a way that the manufacturers who create it have commercial orders from drone manufacturers,» he explains.

According to Subbotin, many components are manufactured in Poland, the Czech Republic, Denmark, Britain and others. «Sanctions are not a business decision, but a political one. Chinese business is ready to trade with the devil, they have no sentiment. But China is a totalitarian country, and they will not do this under pain of death penalty, because they can be multiplied by zero in one day,» he noted.

For components that are difficult to replace, such as chips, you will have to reformat purchases. In particular, Maksym Subbotin advises paying attention to manufacturers from Taiwan, because, according to him, the quality of chips produced in India is low. However, the production volumes in Taiwan are much smaller than in China and they do not make enough chips for everyone.

«Therefore, if you want to get into the production queue of, for example, a Taiwanese manufacturer, you have to place a long order for large volumes there and make a prepayment. If you are not able to pay for a long order in large volumes with a prepayment before Taiwan, you will be in the lowest priority and the queue may never reach you at all,» explains the Armadrone co-founder.

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