Commercial drone sector takes off

California startups busy trying to catch new sales wave

BERKELEY, Calif. -- As the largest American maker of consumer drones, 3D Robotics Inc. sees big opportunities in selling mini-helicopters with cameras, sensors and whirling propellers that buzz like angry hornets.

The Berkeley company expects to sell thousands of the pizza-size drones -- for about $1,000 each -- at home and abroad this year. Tech-savvy customers want them for capturing wave-shredding surfing runs in the Pacific, monitoring oil and gas pipelines in remote regions, and other uses.

3D Robotics is out in front of dozens of California companies jumping into the nascent business of selling drones to consumers and commercial enterprises, just as companies in the state did earlier when the drone market consisted largely of one customer: the Pentagon.

Although military drones were born in Southern California and are still built there, 3D's drones will be built outside the country.

So far, many commercial and civilian drones are being designed in California but made abroad, creating high-tech engineering jobs in the U.S. while the manufacturing is completed in China and Mexico.

The epicenter of the fast-growing commercial drone business is in Silicon Valley, and the new players are quite different from the giant contractors that dominate the military drone market, such as Northrop Grumman Corp. or General Atomics Aeronautical Systems Inc.

They're more like the classic Silicon Valley stereotype: geeks working in garages.

"The aerospace industry isn't relevant here," said Chris Anderson, 3D Robotics' chief executive. "What we do is more like a smartphone with wings rather than a pilot and a plane."

Competition from Chinese manufacturers has already pushed 3D Robotics and some other American drone companies to make their hardware in other countries. Anderson's company has an engineering center in San Diego but manufactures its drones in Tijuana, Mexico, and Shenzhen, China, where labor is cheap.

The strategy mirrors that of Apple, which designs its iPhones in California but manufactures them in China and other countries.

3D Robotics' main competition is Chinese company SZ DJI Technology Co., the largest commercial drone manufacturer in the world. The company makes the red-and-white quadcopter called the Phantom, which recently gained fame when one landed on the White House lawn.

"We're California. We're a high-cost state," said Colin Snow, a drone industry analyst. "Capital goes where it gets the highest return."

The makers of military drones also see huge potential in commercial sales.

"We think the commercial market has a chance to be much larger," said Steven Gitlin, a spokesman for AeroVironment Inc., the largest supplier of small drones to the military.

The company, which makes drones in California, has seen sales decline as the military withdrew from Iraq and Afghanistan, and is looking to commercial drones for growth.

How fast the drone business will grow could depend on when and how regulations are loosened.

It is still illegal to fly a drone for commercial purposes without a permit. Almost daily, pilots have reported drones flying dangerously close to their aircraft, and the Federal Aviation Administration has said its priority is keeping the nation's skies safe.

While the FAA continues to debate new rules for the operation of commercial drones that it proposed in February, the agency is issuing an increasing number of permits to companies that have shown regulators they can fly safely. So far, the FAA has issued 548 permits, including to companies using drones to film commercials and movies, along with more industrial tasks.

San Diego Gas & Electric Co. flies drones to help inspect high-voltage power lines throughout its network. U.S. farmers can now use 207-pound Yamaha helicopter drones to spray crops with pesticides -- the same aerial spraying system that Japanese farmers have used for years.

Sales are already climbing among hobbyists, foreign users and companies that have gained exemptions to fly. Global sales of drones to consumers and companies are estimated to be $4.5 billion this year, up from $3.3 billion last year, according to Frost & Sullivan, a market research firm.

Commercial sales are expected to increase so fast that they could surpass those to the military in about five years, according to the firm's analysis. By 2020, global consumer and commercial sales could be $11 billion, it said.

Silicon Valley's deep-pocketed venture capitalists are pouring cash into drone startups. So far this year, venture capitalists have invested $172 million in drone companies, according to CB Insights. That's up from $107 million for all of 2014.

Jon Callaghan, chief executive officer of True Ventures, an investment firm in San Francisco, said his company has provided more than $100 million in early capital for companies involved with drones.

"Once you see a larger number of these vehicles allowed into U.S. airspace, that will unlock a huge wave of investment," Callaghan said.

Business on 07/03/2015

Upcoming Events