China's sanctions forced Skydio to rebuild its supply chain

Transcript

Transcribed by machine (Whisper) from the episode’s audio, so a word may be off here and there.

1. 7:07

   I don't know, production in the course of a year, what are the biggest like challenges and pain points that come along with that? So the single biggest, I think it's different for different companies in different situations. The single biggest challenge that we face is in our supply chain. So, you know, we started talking about competition with TGI. There's a huge geopolitical backdrop to this industry. When we started the company, we started manufacturing our drones in house from day one, which was very counter trend at the time, like conventional wisdom in Silicon Valley at the time was like, one, don't touch hardware. And two, if you're going to touch hardware at all, make sure you outsource all of it to China and do as little yourself.

2. 7:44

   And that's just not the path that we chose. You know, we felt like having manufacturing close to R&D was how we were going to get the best products the fastest, maybe not the most cost effectively, but definitely the best and the fastest was what we were focused on. So we've always manufactured our drones in-house. like everybody else, we were getting components from China with our first generation of drones in the 2010s. As we expanded to serve government customers and as geopolitical tensions with China rose, it became clear that that was not a sustainable future for us. And so we made a lot of investments to get our supply chain out of China. But two years ago, we were sanctioned by the Chinese government. I was sanctioned personally, the company was sanctioned. The The day that they announced the sanctions, they showed up at our battery factory in China

3. 8:29

   and shut it down and it was a supplier that we were working with. They seized all their equipment, said they couldn't keep doing business with us. So it was a very aggressive targeted action to try to kill the company, basically. So over the last two years, we've had to basically rebuild huge swaths of the supply chain to get down to zero China dependence, which is still a kind of fragile endeavor because for a lot of what we do, the historical component supply has all been in China.

4. 8:56

   And we're in the position now of being a big enough company that we can be a great anchor customer for a new battery vendor or a motor vendor or a camera vendor to help them get started serving this industry, which we are happy to do. We're actually going to spend about a billion dollars with US suppliers over the next five years, specifically aimed at building up the supply base here, but it's still fragile.

5. 9:16

   And so when you talk about doubling production, the biggest risk and the biggest challenge for us is upstream with our suppliers and putting ourselves and them in a position to do that and deliver that. And so we're getting more and more deeply integrated with all the companies that we partner with to help them get to the scale that we need. I've noticed a number of my friends are getting sanctioned like earlier and earlier and blacklisted.

6. 9:39

   You must have some interesting friends. Yeah. Well, if they haven't even gone to China to set up their supply chains, it's a little bit easier. Yeah. But if you're like 12 years into the company and suddenly your entire supply chain gets fucked, what does that feel like just in that moment? You know, I kind of like the fight and there's different ways companies can react to this. There are certainly different perspectives within Skydio.

7. 10:03

   You know, there's one school of thought of like, let's see if we can work with the US government to get some relief here and maybe broker some kind of deal. My perspective is the other side of it. I think this is the right direction. I think. So it's like game on, you know, like let's this is this is a forcing function for us to do what we knew to be right anyways. And so let's accelerate it. You know, there's nothing like burning the boats to motivate you to like to solve some hard, important problems.

8. 10:27

   And and that's basically like the approach that that we've taken. And I think it's worked out well for us. I mean, it has not been pain free. Like at that moment, we basically had to go into a mode where we were rationing batteries. We had, fortunately, a healthy chunk on the shelf, but we had to cut down to shipping one battery per drone, which was painful for us, super painful for our customers.

9. 10:51

   We're lucky that they came along with us on that journey, and our internal teams did an incredible job of standing up new cells and new pack manufacturing in just a truly insane time frame to close the gap. Were you flying around and meeting with a bunch of suppliers to just build relationships with the Earth? Yeah, well, scouring the free world, you know, the U.S. and our allies around the world to find all the ingredients that it takes to build a battery that performs at the level that we need for these systems.

10. 11:22

    And look, we came out of it the other side with better performance, which was surprising even to me. Like we picked up a couple of minutes in flight time going with a different cell and a different pack.