The U.S. Department of Defense, along with several other federal and state government agencies, is tightening policies on the purchase or use of foreign drones from “covered” foreign entities–that is, drones made in countries that are not on good terms with the United States at the moment. So far, these restrictions apply only to government organizations (e.g. Departments of Defense, Homeland Security, some law enforcement agencies). At the moment, there are no restrictions on commercial organizations purchasing or operating drones from covered foreign entities, and any predictions on such a restriction would be merely conjecture.

The basic reasoning for this restriction is two-fold:

1. There are security concerns involving exported U.S. data (such as imagery) being stored and exploited by foreign entities.
2. China, in particular, dominates the global commercial drone manufacturing market, which has stifled the growth of American companies wishing to compete in this space.

In this article, I do not intend to present detailed analysis of the policy. I also will not offer personal opinions on the matter, nor will I attempt to persuade readers to agree or disagree with the policy. I will simply present basic facts as I understand them, to present some context for future industry articles. My hope is that this article will help investors make more educated decisions.

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The restrictions on foreign drones have been somewhat very polarizing within the drone community. While it originated as internal guidance for the Department of Defense, the simple fact that the series of events took place during a particularly divisive Presidential administration convoluted an issue that would otherwise have been nearly unnoticeable to the general public. 

Proponents for the restrictions are labeled as xenophobes. Opponents to the restrictions are labeled as anti-American. These labels are not healthy, and they incite emotions that have no place in business or investment decisions. If you are perpetuating the conflict, please refrain from doing so.

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Assuming that Federal restrictions on foreign drones will maintain or increase the level of severity, let us look at which commercial entities stand to win or lose in the long term.

WINNERS:

• U.S. and European drone manufacturers
• U.S. drone operators who are currently using non-foreign drones

LOSERS:

• Covered foreign entity drone manufacturers
• U.S. drone operators who are currently using covered foreign drones

As I have followed this development over the last several years, I observed that the majority of the editorials have come from drone operators who fall into the ~70% of the market share owned by a single Chinese company (another 10-20% of the market share belongs to other Chinese companies). They have every right to be upset, because (a) their supplier of choice may face future import restrictions or price increases, and (b) they now cannot fly their drones to support Federal and some state government agencies.

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Many editorials I have encountered on this topic cite “baseless claims” made by the U.S. government regarding security risks, and correctly observe that there is no evidence that any security breach has happened. As an individual that has been a Federal employee for a number of years, I feel compelled to raise two counter-arguments.

1. The words “security risk” mean that it might happen, not did happen. It is, in fact, entirely plausible that a hostile government could harness and exploit information collected on American citizens and facilities by a commercial entity–that is called intelligence. If it had already happened, the Department of Defense would instead be using phrases such as “remote intelligence collections on U.S. citizens”, rather than “security risk”.
2. There is some information that the government obtains that it can publicize, and state exactly how it obtained the information. There is a second category of information that the government obtains, but it cannot state how it obtained the information. Finally, there is a third category of information that the government obtains, but cannot even acknowledge that the information exists–to do so would jeopardize the source of that information. I would offer that the “baseless claims” made by the U.S. government may be in the second or third categories–the government knows something, but it can’t tell the general public exactly what they know or how it was obtained.

A casual observer would see little harm in foreign intelligence officers scrolling through drone hobbyist photos of beaches and real estate properties, and they are probably right. But would they feel the same way about oil pipeline inspection imagery? Or construction site survey data for a large sporting complex? How about perimeter photographs of a secure military installation? Information like this would be a treasure trove of data in the hands of an intelligence officer, and I believe is more representative of the risks that the Department of Defense is trying to mitigate. Intelligence agencies around the globe work tirelessly to collect information about other nations’ critical infrastructure, and commercial drones in the hands of unknowing operators could provide that information without launching a single satellite or buying a single airplane ticket.

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As U.S. policy with foreign industry continues to evolve, our domestic markets will reflect the news. For our purposes, we are monitoring the U.S. Drone Industry, which includes both Suppliers and Operators. Some of our companies are in the Winners group, while others are in the Losers group.

Over the long term, the U.S. drone manufacturing industry will catch up to its foreign counterparts, and perhaps even surpass them. Those companies will then become the suppliers to the operators, who will have an opportunity to “Buy American” at affordable prices. That is the industry growth that I am hoping to help you capitalize on.