An in-depth view on the growing market for drones · •The global commercial market for drones was about $700 million last year •Leading applications include surveillance of utility

D E B O R A H W E I N S W I G E x e c u t i v e D i r e c t o r – H e a d o f G l o b a l R e t a i l & T e c h n o l o g y F u n g B u s i n e s s I n t e l l i g e n c e C e n t r e d e b o r a h w e i n s w i g @ f u n g 1 9 3 7 . c o m N e w Y o r k : 6 4 6 . 8 3 9 . 7 0 1 7

April 22, 2015

An in-depth view on the growing market for drones • A drone is a remote-controlled vehicle that rolls or flies. Another term for the flying

variety is unmanned aerial vehicle (UAV)

• The global market for drones was $6.4 billion, the bulk of which (89%) is for military applications and not covered in this report

• The global commercial market for drones was about $700 million last year

• Leading applications include surveillance of utility networks and pipelines, mapping of real estate and industrial sites, and agricultural monitoring of fields, forests, and crops

• Venture capitalists are increasingly investing in drone startups, deploying about $100 million last year, which will drive further innovation

2

Fung Business Intelligence Centre (FBIC) publication: send in the drones Copyright © 2015 The Fung Group, All rights reserved.

April 22, 2015

Send in the Drones! An in-depth view on the growing market for drones

Executive Summary THE DRONES ARE COMING!!! THE DRONES ARE COMING!!! But don’t run to the cellar just yet.

Once confined to the military sphere, drones generated a buzz at the 2010 Consumer Electronics Show and reappeared in headlines in December 2013, when Amazon boasted that it was testing them for residential package delivery. But we don’t think readers expect drones to start dropping packages off on everyone’s rooftop anytime soon, as the media would have us believe. Still, the dropping cost of aerial technology has paved the way for a multitude of new applications, most of which involve aerial surveying and monitoring for the oil and gas, utilities, insurance and real-‐estate industries.

The bulk of the global drone market—which was worth about $6.4 billion last year—was for military applications, which will not be discussed here. The remaining $700 million was for commercial applications, of which the US consumer market comprises about one fifth.

Drones can be used for humanitarian purposes as well. Companies are developing drone-‐based delivery systems to carry vaccines, medicines, even water over extended distances to people in remote regions in developing countries where there is a lack of roads or infrastructure. One startup has developed a 10-‐pound drone that can carry half its weight for miles and was tested in the Dominican Republic and Haiti, following the devastating earthquake in 2010. Alternatively, drones could be used to deliver prescription medicine to elderly patients who are too ill to make it to the corner drugstore.

http://www.zdnet.com/article/drones-for-good-infographic/

3


April 22, 2015

Drones still need to overcome some challenges. The FAA is drafting regulations concerning drones at a glacial pace, in particular determining how fast and how high they can fly. Consumers are concerned about privacy, the use of drones in surveillance, and trespassing across their property. This has led to some drones being shot out of the sky.

Additionally, there are several challenges that have to be solved before we can receive packages in our homes: How do flying drones avoid obstacles such as electrical power lines and telephone poles? Where will they leave the packages outside so that they’re safe from theft, vandalism and the elements?

Still, drones are a lot of fun as curiosities and cool tech toys. There are quadcopters, hexacopters and octocopters, with four, six and eight propellers, respectively. We can attach high-‐definition cameras to them to create breathtaking aerial scenes and mischievously take videos of things we’re not supposed to. Yet a Blade Runner-‐esque future with tons of flying devices filling the sky remains far away.

Finally, there are more cool and useful applications for drones to come. Venture capitalists invested about $100 million in drones last year, and a community of companies has emerged, developing lighter batteries, writing drone operating-‐system software, and designing newer and better drones. The age of drones has just begun.

What Is a Drone? A drone is simply a remote-‐controlled vehicle that rolls or flies. Another term for the flying variety is unmanned aerial vehicle (UAV). Drones include some two-‐wheeled terrestrial vehicles but generally not radio-‐controlled, two-‐wing aircraft and helicopters.

Key Technologies

Most drones share the following hardware: (1) propellers, usually 4, 6 or 8, or any even number. Generally, the higher the number of propellers, the greater the payload the drone can carry; (2) electronic speed controllers, which can change the speed of rotation of each of the propeller motors, enabling it to ascend, descend or move forward; (3) GPS and compass, are used to calculate the drone’s position and altitude. Most consumer drones have a “return home” function; (4) battery, crucial as an energy source but is also a source of weight, reducing the payload; (5) gimbal, a support that enables the rotation of an object (usually a camera) around an axis; and (6) optional video, many drones include a mount and circuitry for controlling a camera and capturing and transmitting high-‐definition video.

History Inventor Nikola Tesla demonstrated a drone in New York in 1898, and drones saw some limited use in World War II. The Firebee I was developed by what is now Teledyne Ryan Aeronautical and first flown in 1951. In more recent times, the General Atomics MQ-‐1 Predator UAV was launched in 1995, becoming the first major drone for military use. The first drone for consumer applications was the Parrot AR.Drone, which was announced at the Consumer Electronics Show in Las Vegas in 2010. (The current shipping model is version 2.0). But the larger public didn’t become aware of drones until Amazon made the audacious announcement in December 2013 that it was testing drones for residential package delivery.

Market The Teal Group, an aerospace and defense research firm, estimates that global spending on drones was $6.4 billion in 2014, of which 89% ($5.7 billion) was for military applications. The Group further estimates that the global market will increase to $11.5 billion over ten years, a CAGR of 6%. The remaining $700 million represents commercial and consumer applications. In Figure 1, we see that North America represents the bulk of the global UAV market, followed by Europe and the Asia-‐Pacific Region. Middle East and North Africa represent just a couple of percent of the global market.

4


April 22, 2015

The Consumer Electronics Association forecasts that the U.S. consumer drone market is worth $130 million in 2015, an increase of 50% from last year, and that approximately 425,000 units will be sold, which corresponds to an average selling price of $305.88. It further estimates that the market could reach $1 billion by 2018 (roughly a 100% compound annual growth rate).

Drone sizes can vary dramatically, from the Cheerson CX-‐10, which can fit in the palm of one’s hand, to the Storm Drone 6 Hexacopter, which sports six propellers.

Applications Despite interest in drones as toys and as means for package delivery, commercial applications are likely to remain their largest market. Commercial Applications

Lux Research estimates that the commercial market for UAVs will grow to $1.7 billion in 2025. Commercial applications include:

• Surveillance of electricity distribution networks, oil and gas pipelines, dams, business sites, and warehouses. Lux Research estimates that utilities could be a $269 million market by 2025, and that the oil and gas market could be worth $247 million.

• Mapping of mines, quarries, real-‐estate projects, etc.

• Agricultural uses, including the monitoring of fields, forests and crops. Lux Research estimates that agriculture could be a $350 million market in 2025, led by precision agriculture.

Consumer Applications

Consumer applications include:

• Delivery: China’s Alibaba beat Amazon to the punch on this, announcing that its Taobao division was using drones to deliver tea to 450 customers living within a one-‐hour quadcopter flight radius of its warehouses in Beijing, Shanghai and Guangzhou. In a PR stunt, Domino’s used a drone to deliver two pizzas in June 2013. Most consumer drones are not suited for package delivery, though, since they can only lift payloads of 400 to 1,000 grams (less than two pounds). However, there are commercial-‐grade drones that can carry payloads of up to 20 kilograms (44 pounds).

• Photography: There have been many stunning aerial photographs taken by drones, including unauthorized photographs of the new ring-‐shaped Apple headquarters and spaceship models from the new Star Wars movie. Many drones are able to work with the popular GoPro line of mobile cameras. The DJI Phantom 2 Vision+, the Parrot AR.Drone 2.0 and the Blade 350 QX quadcopters work particularly well with GoPro cameras. According to a report from The Wall Street Journal, GoPro is considering launching its own line of multi-‐rotor consumer drones with prices ranging from $500 to $1,000 by late 2015.

61% 20%

17% 2%

USA

APAC

Europe

MENA

Figure 1. Regional Breakdown of the Global Commercial and Civilian UAV Market, 2013

Source: INEA Consulting

5


April 22, 2015

Humanitarian Uses • Medicine and Relief: Drones are ideal for traversing or making small deliveries in inaccessible or

remote locations, such as searching for lost hikers and backpackers in wilderness areas, or making deliveries of urgently needed medicines to people in regions that lack roads or are inaccessible due to weather or political instability. Companies are developing drone-‐based delivery systems to carry vaccines, medicines, even water over extended distances to people in remote regions in developing countries where there is a lack of roads or infrastructure. Dominican Republic and Haiti, following the devastating earthquake in 2010. Alternatively, drones could be used to deliver prescription medicine to elderly patients who are too ill to make it to the corner drugstore.

Other Applications

Facebook is working on a project under the code name Aquila that is a solar-‐powered drone that can stay aloft for up to three months at a time, providing high-‐speed Internet access via a laser beam to those on the planet who lack Internet access.

While drones can be used for many applications for good, they can also be used to transport contraband and illegal substances. Drones have crashed en route bringing contraband into prisons and carrying drugs across the US-‐Mexico border, even crashing on the White House lawn in one incident.

Other Business Models

Drone technology is still in its early stages, there is an emerging community of drone-‐related businesses. Airware recently launched operating-‐system software for controlling drones. Another new business model

http://www.zdnet.com/article/drones-for-good-infographic/

6


April 22, 2015

is drones-‐as-‐a-‐service (DaaS), where drones are rented for applications, such as agriculture, that require drones periodically but do not require companies to make the investment in drone ownership.

Major Vendors The three leading consumer drone makers are (in order of decreasing revenues) China’s DJI, France’s Parrot and 3D Robotics from California.

was launched in founder Frank Wang’s college dorm room in 2006. Revenues have grown exponentially, from $4.2 million in 2011 to more than $130 million in 2013, and 2014 revenues are thought to be about $500 million, with $1 billion in sales expected this year. DJI is reportedly seeking to raise funding at a valuation of $10 billion.

is a French technology company that also makes automotive electronics (55% of 2014 sales) and connected audio devices (10% of sales). Drones contributed 34% of sales in 2014, revenues of approximately $110 million (€83.0 million), gross margins in line with the 52.7% corporate average and a 2% operating margin. Its retail drone segment contributed 91% of sales and professional drones represented 9%.

3D Robotics is an open-‐source UAV technology company manufacturing electronics and aerial vehicles. The company has received a total of $85 million in three rounds of venture capital funding. An article in Inc. magazine in June 2014 put 3D Robotics’ full-‐year revenue at $21.6 million.

Additionally, there is a long list of drone vendors, including AirDog, EHang (maker of the Ghost Drone), Hubsan, Torquing, Trace and ZANO.

7


April 22, 2015

A Huge Magnet for Venture Capital

Figure 2. Venture Capital Funding of Drone Makers ($ Millions)

Source: TechCrunch.com

There is a thriving drone ecosystem of companies developing a diverse group of new drone hardware, software, and applications, as depicted in Figure 3, which includes 24 privately held drone companies that have raised a total of more than $250 million in venture funding.

Figure 3. Selected Venture-‐Capital Investments in Drone Startups

Company Description Location Total Funding

($ Mil.) DJI Commercial and recreational drones Shenzhen, China NA

3D Robotics Open-‐source electronics and UAVs San Diego, CA $85

Airware Platform for developing and operating commercial drones

San Francisco, CA 40.4

Spire Satellite-‐powered data company for business challenges

San Francisco, CA 26.6

XAircraft Multi-‐rotor design and manufacturing Guangzhou, China 20

Skycatch Scalable aerial robotics platform San Francisco, CA 19.7

Kespry Reliable drone systems for commercial applications

Menlo Park, CA 12.4

PrecisionHawk UAV for aerial data collection and analysis Raleigh, NC 11

DroneDeploy Smart drone management platform San Francisco, CA 11

Ehang UAVs San Carlos, CA 10

Cyphy UAVs for search and rescue and bridge inspection

Danvers, MA 10

Matternet Networks of small flying vehicles for logistics

Menlo Park, CA 2

CYBERHAWK Innovations Aerial inspection and surveying Livingston, UK 1.9

SkyWard IO Software platform for aerial robotics ecosystem

Portland, OR 1.7

OpenROV Community of remotely operated vehicle (ROV) builders for underwater exploration

Berkeley, CA 1.3

DroneCast Drone-‐based aerial advertising platform Philadelphia, PA 1

$0 $7

$58

$102

0

5

10

15

20

25

30

$0

$20

$40

$60

$80

$100

$120

2011 2012 2013 2014

Amount Raised Number of Deals Venture capital funding for all types of robotics was hot in 2014, with robotics startups (which include drone startups) receiving $341 million, a 36% increase over the prior year, according to Silicon Valley blogger Travis Deyle. Funding for drone makers was especially strong, nearly doubling in 2014, with 24 funding events totaling $102 million.

8


April 22, 2015

16% 16%

61%

3% 2% 3%

0%

10%

20%

30%

40%

50%

60%

70%

I have no concerns about

drones

Safety Privacy/ Surveillance/ Trespassing

Reliability Property damage Other concerns not listed here

Figure 3. Selected Venture-‐Capital Investments in Drone Startups

Company Description Location Total Funding

($ Mil.) Vires Aeronautics Wing design for improved flight

performance Livermore, CA 1

AirDroids Commercial and consumer drones Indianapolis, IN 0.9

SkyRobotic Civil and commercial drones in mini and micro classes

Terni, Italy 0.8

SkySpecs Safe, friendly drones Ann Arbor, MI 0.6

AeroDron Drones for low-‐altitude aerial photography Parma, Italy 0.5

DreamQii Personal robotics Toronto, Canada 0.5

Proxy Technologies Single and multi-‐aircraft cooperative control systems

Reston, VA 0.3

MotionDSP Advanced computer vision and image processing software for drone video

Burlingame, CA NA

Source: Crunchbase and techcrunch.com

Challenges Government Regulation. The Federal Aviation Administration (FAA), the US government agency regulating commercial aviation, released initial guidelines regarding civilian UAVs in February 2015, namely that drones fly below 500 feet and at speeds below 100 miles per hour, and the Agency has faced criticism for being slow to approve requests for the use of drones for commercial purposes. Collisions: Most drones do not have the image-‐processing circuits and intelligence needed to avoid collisions with other objects (including other drones). Delivery: Drone-‐based deliveries face the challenge of protecting packages left in urban areas could be subject to theft and vandalism. Should new buildings be constructed to include droneairports? Anti-‐drone sentiment: A mid-‐2014 poll by the Pittsburgh Post-‐Gazette found that privacy, surveillance and trespassing were respondents’ greatest concerns regarding drones, followed by safety. In some areas of the US, drones have been shot out of the sky using firearms.

Figure 4. What Is Your Biggest Concern, If Any, About Drone Technology Being Used More for Commercial and Personal Recreation Purposes?

Source: Pittsburgh Post-‐Gazette

9


April 22, 2015

Conclusion For consumers, drones are an intriguing tech toy, however they are unlikely to be dropping off packages on our rooftop droneairports anytime soon. There are numerous new applications in other industries, such as surveying all kinds of properties, including oil and gas pipelines, electrical lines, real estate, and drones are particularly suited to making deliveries in remote locations, such as undeveloped or wilderness areas. Still, the flood of venture-‐capital investment flowing into drone startups is also likely to generate a slew of previously undreamt-‐of applications. While our cities may become the one depicted in the movie Blade Runner, we should still prepare ourselves for a swarm of drones taking photographs, performing measurements, and dropping off lightweight items.

Deborah Weinswig, CPA Executive Director—Head of Global Retail & Technology Fung Business Intelligence Centre New York: 917.655.6790 Hong Kong: +852 6119 1779 [email protected] Marie Driscoll, CFA [email protected] John Harmon, CFA [email protected] Amy Hedrick [email protected] Aragorn Ho [email protected] John Mercer [email protected] Charlie Poon [email protected] Stephanie Reilly [email protected] Lan Rosengard [email protected] Jing Wang [email protected]

Documents

An in-depth view on the growing market for drones · •The global commercial market for drones was about $700 million last year •Leading applications include surveillance of utility