Winning the droid market will require ability to scale drones

What if you knew the next big market China will dominate?

And what if you could act right now to prevent losing it to China?

The next big thing is droids. There are two key drivers for droids. The first is artificial intelligence (AI),  where the U.S. leads in research, chip and systems design, and software applications. AI turns dumb robots into intelligent actors able to perform simple and even complex tasks. Droids will transform our lives and businesses.

The second driver is a problem: Droids require scale-efficient manufacturing of the type the U.S. no longer does. Droids are the natural evolution of robots, both consumer and industrial, and drones which the U.S. also does not make at scale.

Robots, drones, and droids (DRD) exist on a continuum of size, complexity, and capability with similar inputs. They will be critical to defense, manufacturing, and consumer goods and services with China supporting the industry with significant funding of at least $2.8 billion. These products have similar inputs, the need for scale manufacturing, and the lowest possible cost. China’s early humanoid droids from companies worldwide showcase vim and vigor among startups and established companies for creating functional and useful robots. So far, these are “dumb” robots compared to expected capabilities from embedding recent advances in AI; a few examples and Tesla’s.

Twitter highlights how far China’s deep supply chain drives a robust industry across a gaggle of companies as seen from the list at the recent 2024 China Robot Show. Holiday drone shows display advance swarming capability. Robot policemen roll. Per Tphuang, “we are really entering new territory here and here.”

Just imagine the unreleased, classified stuff.

The U.S. must quickly create a set of sticks and carrots to make investing in drones, robots, and droids and their supply chains easy and attractive. Free market investment, targeted government policy, DoD programs and Inflation Reduction Act and Infrastructure Investment and Jobs Act (Acts) monies, which can be allocated to serve dual use supply chains, to serve the needs of our military-industrial complex and help revitalize our industrial base. These efforts should include nearshore/friendshore options since the U.S. may not be the best place for every input. Any policy would naturally cut across multiple government departments, including Defense, Energy, Commerce, Homeland Security, and the EPA. Luckily, many, if not all, of the supply chain components for drones, robots, and droids are also used in part or whole in the initiatives funded by the Acts. As the new Administration and Congress reassess the Acts, increasing the attractiveness of investing in these supply chains should be top-of-mind rather than picking EV “winners.”

For drones, the urgent DoD Replicator Initiative effort accelerates the demand side with the Drone Security Act (and the Countering CCP Drones and Supporting Drones for Law Enforcement Act)  limiting Chinese imports.  However, the U.S. is behind on making the parts that go inside DRD, and executing the scale manufacturing required to produce these goods efficiently. China excels in all these areas.  And, China is now preventing the export of dual-use drone components. Almost all drone components are made in China with Taiwan supplying many of the semiconductors.

Despite its impressive Replicator Initiative, the DoD is shooting behind, not ahead of the “drone” duck.

What boggles the mind is not jumping on the four million drone demand signal sent from Ukraine.  As Ukraine entrepenuers and fighters rapidly evolve warfare in real time, the U.S. appears to be missing the opportunity to drive its own supply chain to supply parts, gain experience, and drive the scale needed for low cost production. Building capability to serve Ukraine is a golden opportunity to stand up scale U.S. and allied suppliers for consumer, commercial, and military markets.

Initially via DIU contracts, a number of new defense companies now or soon will supply advanced technology platforms to the DoD, including Anduril, Dzyne, Shield AI, and Saraonic. These companies are likely still dependent on China and, according to an industry leader of a drone company, “no more dependent on computer chips / GPUs from Taiwan than any other common military system.” The DoD Replicator project, plus the real-world experience of Ukraine and Israel, highlight the importance of scale drone production at low cost. What will drive future advantage in the droid market overlaps with what drives advantage in drones, all types, and robots, used for manufacturing at scale and proliferating across commercial, industrial, and consumer applications.

China is currently using robots to manufacture missiles, and the U.S. is in the process of adopting robots in missile production, but it is apparently behind. U.S. manufacturing overall is less robot-intensive than China’s manufacturing. Following its “import, build, and then replace” model of industrial policy, China foreign imports of robots is now declining. Robot adoption is not driven by the relationship of employee cost and robot cost. Based on manufacturing wages, China has 12.5x more robots than expected; the U.S. has 70% of expected.

Beyond its broad supply chain enabling companies small and large to manufacuter drones, robots, and droids, China has already released industry-wide standard definitions, a data sharing initiative, and sponsored innovation centers promoting responsible humanoid robot development. The IEEE, representing the U.S. effort, launched a study group in June with the goal to “develop a standards roadmap that Standards Development Organizations can follow that both address the gaps as well as mitigate the potential roadblocks.”  As evident with 6G standards development, the country with the manufacturing wins.

The “free market,” represented by our current state of affairs, is not on a path to produce scale and cost-competitive drones, robots, or droids. For success, the U.S. requires research, workplace skills, parts, commodity and specialty components, scale manufacturing capabilities, and inputs, including rare earths, magnets, batteries, semiconductors, motors, actuators, materials, sensors, and many more, including and especially scale manufacturing. Capabilities in these areas at scale are key to rebuilding the U.S. defense and industrial base.

While Japan, the EU, India, and others all have roles to play, only the U.S. has the wherewithal to lead this effort. The inputs and manufacturing capabilities for drones, robots, and droids support the development of multiple adjacent markets, consumer goods, phones, EVs, and many climate solutions. Without action both different and beyond what is currently underway, the U.S. will fail in the drone market, not be competitive in robots, miss the droid market, and continue to lose international goods competitiveness, limited by high-cost manufacturing and our relative inability to integrate software/AI leadership into scale manufactured products, which China is already doing at scale.

Addressing the scope of effort requires rethinking how industrial policy is executed, including who, what, where, and how. Current industrial policy occurs across multiple departments with limited authorities and without apparent coordination. Federal departments lead narrow efforts, focused on specific inputs or outputs, with limited authorities. Policies and efforts do not cover the scope of effort required to generate investment across the full value chain to build world-competitive industries. Encouraging free market investment with broad government policy is required to support the needs of our military-industrial complex and revitalize our industrial base. These efforts should include nearshore and friendshore options since the U.S. may not be the best place for every input.

Any policy would naturally cut across multiple government departments, including Defense, Energy, Commerce, Homeland Security, and the EPA. It could include carrots such as tax credits, tax rebates, purchase incentives, capital gains relief, grants, loans, tariffs, minimum purchase prices (for when China lowers price to put competitors out of business)[1], workforce training credits, and sticks such as restrictions on buybacks, dividends, and excessive ROI.

The DoD has shown an inability to reduce its dependence on China and does not appear to be acting with urgency today. Despite much talk and funding for Replicator, recipients of funds are the drone makers, not the upstream supply chain companies, many of which are in China or Taiwan.  Further, DoD authorities extend only grants, loans, and purchase agreements, not a wider scope of incentives such as tax credits, R&D incentives, minimum purchase prices for China affected commodities, and the like. The Chips Act, overseen by the Commerce Department, addresses only a narrow slice of the manufacturing chain, likewise the DOE’s and DoD’s efforts on the rare earth supply chain. A single government group with broad authorities reporting directly to the President is needed to define and execute policy to develop the put in place broad incentives for the development of a drone, robot, and droid industrial base and further areas, such as communications.

Drones, robots, and droids should urgently become the backbone of a major U.S. effort. Our defense depends on it. Our manufacturing depends on it. And, in the not-far future, droids will likely be a market larger than displays, solar, wind, and EVs combined. The U.S. should create a set of sticks and carrots to make investing in drones, robots, and droids and their supply chains monetarily attractive.

Without significant change, the U.S. will be unable to stop importing Chinese drones. And the U.S. will miss the next large market, droids.

Mark Rosenblatt runs Rationalwave Capital Partners, which invests in public and private technology companies.

SUPPORT TRUTHFUL JOURNALISM. MAKE A DONATION TO THE NONPROFIT WND NEWS CENTER. THANK YOU!