On July 4th, the US announced its plans to restrict Chinese companies from accessing cloud computing services like Amazon and Microsoft1. This comes directly after China announced a ban on exports of gallium and geranium – two metals essential for semiconductor production. These bans are the most recent in an ongoing trade battle between the two economic giants and have further stoked competition in the global drone and semiconductor markets.
Drones
The global commercial drone market was estimated at $33 billion in 2022 and is anticipated to expand at a CAGR of 9.4% from 2023 to 20262. In 2022, the media & entertainment segment accounted for the largest market share of the global commercial drone market at 23.0% and the market in APAC represented the fastest growing market with an expected CAGR of 40.0% from 2023 to 2030. In March 2023, multiple US states passed bills restricting government agencies’ use of Chinese manufactured drones due to growing suspicions of drone monitoring and ethics concerns surrounding DJI. Before the ban, the Chinese drone manufacturer held 76% of the US market, a $4.79 billion dollar industry. As a result of DJI’s exit, drone OEMs will look to reduce their reliance on China and source manufacturing elsewhere. Alternatively, we could see a shift away from drones being used as a mobile solution, and an increase in the adoption of co-bots and other alternative forms of technology for monitoring in warehouse operations and agriculture. Both scenarios are dependent on how effectively drone manufacturing companies in the US can respond and continue to price drones as the market demands.
Semiconductors
Over the last decade, East Asia has emerged as a manufacturing hub for semiconductors, which has fueled a rapidly growing $500 billion industry that is expected to almost double in size by 2030. Semiconductors have now become a critical technological vulnerability for both the US and China, which rely heavily on imports of semiconductors. Last year, the United States stepped up its competition with China in the semiconductor industry. In August of 2022, the Biden-Harris administration signed the CHIPS and Science Act, a $52.7 billion policy that aimed to enhance supply chain resiliency, revitalize in-house semiconductor manufacturing, and strengthen US-based semiconductor research. Similar legislation has come in the form of restrictions and has introduced complications and risks that will likely require an entire remodeling of a very ‘codependent’ semiconductor industry. This has had negative effects on the global semiconductor market, as the top 10 global chip companies’ combined market capitalization is down 34% from November 2022.
These new complications are also likely to increase freight, transportation, and logistics costs, and thus will increase the pricing of end products. Enterprises will now need proper licensing to export semiconductors, as the US is also blocking foreign-made chips manufactured with American technology from being sold in Chinese markets. These semiconductor bans have implications both on the semiconductor market and the labor market. OEMs who use semiconductors for devices will seek new foreign sources or may reconsider localization of semiconductor manufacturing. A reduction of global dependence on China could result in semiconductor shortages, leading to a shortage of devices, compelling enterprise buyers to keep outdated devices for longer or invest in rugged devices. OEMs are still overstocked with inventory, so the effect of possible shortages may not be felt until mid-to-late 2024.
VDC View
As US-China tensions rise, the landscape of the drone and semiconductor markets continues to adapt. In the drone market, DJI and other major global drone manufacturers will shift their sales away from US markets and pursue emerging opportunities in tandem with China’s Belt and Road Initiative. US based customers will seek alternative forms of technology for solutions and look to the drone market outside of China. In the semiconductor market, US based manufacturers have already made significant investments to outsource production to different countries to curtail anticipated shortage effects and reduce reliance on the Chinese manufacturing market. We will certainly see a shift away from Chinese manufacturers in both markets because of this ongoing tech battle.
1U.S. Looks to Restrict China’s Access to Cloud Computing to Protect Advanced Technology - WSJ