The Drone Industry Presents a Compelling Case for Future Investments
Published on 23 May, 2016
Having evolved at an astonishing pace over the last few years, with a myriad of applications ranging from photography to disaster rescue, the drone industry is set to grow at an equally astonishing rate in the years to come.
2016 saw the unveiling of world’s first autonomous passenger drone — the Ehang 184 AAV (Autonomous Aerial Vehicle). Still in its prototyping stage, the 184 is capable of carrying a payload of up to 220 pounds over a distance of 10 miles with top speed of 60 miles an hour.
The Ehang 184 boasts just one of the many capabilities the drone industry promises to offer, a fact corroborated by the heavy investments that PE funds and Wall Street bellwethers are making in drone development programs. In 2015 alone, the investments received by VC backed drone firms located in Europe, China, the US and Israel skyrocketed to register more than 800%* increase in investments compared with 2014.
Last year, Amazon, America’s biggest e-commerce company, announced trials of its drone delivery system under the Prime Air project.
Furthermore, social networking giant Facebook is exploring options to deliver high-bandwidth Internet connectivity through drones.
These and many other developments have led to an increased focus on the drone industry’s market size.
According to Drones Market Shares, Strategies, and Forecasts, Worldwide, 2016 to 2022, the drone industry would be worth USD 36.9 billion by 2022, up from USD 6.8 billion currently. However, this sum looks meager when compared to a total addressable market of more than USD 100.0* billion estimated by Goldman Sachs over the next five years. In the report titled The Age of The Drone(paywall), Goldman Sachs further states that military applications (65%) would drive the drone market in 2020, followed by commercial applications (19.1%), consumer applications (13.4%) and civil applications (2.5%).
The outlook for the drone industry looks positive.
The US Federal Aviation Administration (FAA) expects drone sales in the US to increase from 2.5 million in 2016 to 7.0 million by 2020*. The FAA has projected hobbyist sales (sales for recreational purposes) to rise from 1.9 million to 4.3 million over 2016–20. Business sales are expected to surge from 0.6 million to 2.7 million over this period. According to the Association for Unmanned Vehicle Systems International, the US economy would gain significantly from the drone technology by 2025* in terms of job creation (100,000 jobs) and economic benefits (USD 82.0 billion).
A positive outlook for the drone market has put the spotlight on sectors that stand to benefit from this burgeoning space as well.
A rapidly growing drone industry is expected to benefit four*categories of companies:
- Drone manufacturers
- Drone software developers
- Drone component manufacturers
- Companies involved in services enabled by drones
Among drone manufacturers, the Chinese company DJI is most notable. Often referred as “The Apple of Drones”, DJI sales stand close to USD 1.0 billion, and market analysts already value the company around USD 8.0 billion.
Other major drone manufacturers include Parrot (France) and 3D Robotics (US).
The market for military drones is led by Lockheed Martin, Boeing, and BAE Systems, among others.
At present, the majority of drone software is proprietary in nature, although the use of cross-product solutions is on the rise. Just like the computer revolution gave a boost to companies like Microsoft, Intel and, mobile revolution to Qualcomm, in the same manner component makers of drone are expected to benefit immensely from the rising industry. Moreover, in the services segment, companies like FedEx, UPS, Amazon, and Pizza Hut are already exploring ways to deliver products via drones.
Despite a promising outlook for the drone industry, safety concerns persist over increased drone sightings in the vicinity of aircraft. The FAA reported that between November 2014 and January 2016, more than 1,300 cases* of drone encounters were registered in the US. Reports of drone landings in the White House and other sensitive places have caught the attention of authorities as well.
These concerns forced the FAA to announce regulations for drones in December 2015.
Under the new rules, drone owners are required to register their drones with the FAA if a drone weighs 0.5–55.0 pounds. As per the latest data, about 400,000 drones were registered* with the FAA until mid-March.
Looking forward, it is highly likely that the rules and regulations for drones are going to be more stringent, with other countries establishing their own laws as the drone traffic above their skies thickens. It’s unlikely that such regulations would severely impact sales though, with plenty of legitimate business ventures around the budding drone industry likely to take off.