Drones Take Center Stage in U.S.-China War on Data Harvesting

(Bloomberg) -- In video reviews of the latest drone models to his 80,000 YouTube subscribers, Indiana college student Carson Miller doesn’t seem like an unwitting tool of Chinese spies. 

Yet that’s how the U.S. is increasingly viewing him and thousands of other Americans who purchase drones built by Shenzhen-based SZ DJI Technology Co., the world’s top producer of unmanned aerial vehicles. Miller, who bought his first DJI model in 2016 for $500 and now owns six of them, shows why the company controls more than half of the U.S. drone market. 

“If tomorrow DJI were completely banned,” the 21-year-old said, “I would be pretty frightened.” 

The DJI Spark gesture-controlled drone at a launch event in New York in 2017. Photographer: Mark Kauzlarich/Bloomberg

Critics of DJI warn the dronemaker may be channeling reams of sensitive data to Chinese intelligence agencies on everything from critical infrastructure like bridges and dams to personal information such as heart rates and facial recognition. But to Miller, consumers face plenty of bigger threats to the privacy of their data. “There are apps that track you on your smartphone 24/7,” he said.

That attitude is a problem for American officials who are seeking to end DJI’s dominance in the U.S. On Thursday, the Biden administration blocked American investment in the company, a year after President Donald Trump prohibited it from sourcing U.S. parts. Now, lawmakers from both parties are weighing a bill that would ban federal purchases of DJI drones, while a member of the Federal Communications Commission wants its products taken off the market in the U.S. altogether. 

In many ways, DJI has become the poster child of a much wider national security threat: The Chinese government’s ability to obtain sensitive data on millions of Americans. In recent weeks, former top officials in both the Obama and Trump administrations have warned that Beijing could be scooping up personal information on the citizens of rival nations, while walling off data on China’s 1.4 billion people. 

“Each new piece of information, by itself, is relatively unimportant,” Oona Hathaway, a professor at Yale Law School who served in the Pentagon under President Barack Obama, wrote in Foreign Affairs, referring to surveillance and monitoring technologies. “But combined, the pieces can give foreign adversaries unprecedented insight into the personal lives of most Americans.”

Chinese President Xi Jinping has been far ahead of the West in realizing the importance of data in gaining both an economic and military advantage, according to Matt Pottinger, a former deputy national security adviser in the Trump Administration. “If Washington and its allies don’t organize a strong response, Mr. Xi will succeed in commanding the heights of future global power,” he wrote in a co-authored New York Times op-ed last month.  

The data battle strikes at the heart of the U.S.-China strategic competition, and has the potential to reshape the world economy over the coming decades — particularly as everything from cars to yoga mats to toilets are now transmitting data. Harnessing that information is both key to dominating technologies like artificial intelligence that will drive the modern economy, and crucial for exploiting weaknesses in strategic foes.

Concerns related to data security “will be a defining issue for the next decade” as technological advances lead to “explosive demand” for ever more bits of information, according to Paul Triolo, a former U.S. government official who specializes in global technology policy at risk consultancy Eurasia Group. The result, he added, is likely an almost complete bifurcation of the internet, reflecting the values of competing political systems. 

“The democratic and authoritarian digital worlds will be built on largely different hardware, with different standards, and limited points of connection,” Triolo said. “This will drive up costs for businesses operating across these two spheres, reduce innovation, and lead to geopolitical tensions, reduced trade, and a much more complex world for companies to operate within. Other countries will be forced to choose sides in this divide, and this will be painful and costly.”

Already, data security concerns are starting to balkanize manufacturing supply chains and financial markets amid fears that governments will weaponize information gleaned from smartphone apps, medical devices and consumer products like drones. Policy makers in both the U.S. and China are rushing to implement more measures to protect their citizens’ data.

Beijing has acted more swiftly, passing laws this year aimed at preventing user data from seeping into the wrong hands while strengthening the government’s ability to control information held by private firms, part of a wider crackdown on its biggest tech companies. Xi mandated cybersecurity reviews for all Chinese companies that want to list on foreign exchanges, effectively prompting ride-hailing giant Didi Global Inc. to delist in the U.S. and head to Hong Kong after just five months. 

The Trump administration homed in on data in 2020, moving to ban two of China’s most widely used apps, ByteDance Ltd.’s TikTok and Tencent Holdings Ltd.’s WeChat, while urging allies to embrace a so-called Clean Network with communications networks free from Chinese companies and equipment. 

But the Clean Network never took off, as U.S. security partners in Asia that rely on China for trade balked at dividing the world into competing data blocs. President Joe Biden then revoked the bans on TikTok and WeChat while ordering a sweeping review seeking recommendations on actions to protect sensitive American data. His administration has yet to release the results or articulate a clear policy on what data constitutes a national security threat. 

Despite that, U.S. policy makers are zeroing in on some companies in the data space that dominate their field. In the drone world, no firm is more prolific than DJI: The Chinese company commands more than 50% of the U.S. drone market, the FCC said in October, and research firm DroneAnalyst estimates it sells about 95% of the unmanned aerial vehicles, or UAVs, priced between $350 and $2,000 targeted at consumers.

In 2019, Trump signed a bill prohibiting the military from purchasing Chinese-made drones and drone components. A year later, the Commerce Department put DJI on its Entity List, which bars U.S. suppliers from selling to it without an exemption. Republicans with presidential ambitions like Senators Tom Cotton and Marco Rubio have co-sponsored the bipartisan American Security Drone Act, which would ban all federal purchases of DJI’s drones. The Senate’s top Democrat, Majority Leader Chuck Schumer, has pushed similar legislation via a separate bill.

And DJI could face more trouble soon.

Brendan Carr, one of four FCC commissioners, said in October that the regulatory body should consider a ban on approvals of DJI’s equipment, citing the “vast amounts of sensitive data” collected by its drones. In an FCC statement, Carr warned DJI may be a “Huawei on Wings,” referring to the Chinese telecommunications giant the U.S. has sought to hobble with sanctions over spying concerns.

FCC Chairwoman Jessica Rosenworcel declined through a spokesman to comment on Carr’s call for restrictions on DJI. 

Any moves by the FCC to stop approvals of DJI’s equipment would cripple the company’s operations in the U.S., according to Conor Healy, government director for the Pennsylvania-based surveillance research group IPVM. 

“Eventually they just wouldn’t have anything left to sell in the U.S.,” Healy said. “We’re creating this situation where the Chinese can’t sell gear to the world, and vice versa.”

China has regularly blasted moves to block its firms from access to certain technology and markets, accusing the U.S. of abusing the concept of national security “to hobble Chinese companies.” At the same time, policy makers in Beijing have stressed the need to become self-reliant on key technology like advanced chips to end dependence on the West.

DJI didn’t answer questions from Bloomberg News about its data policies or marketing strategies. The company also didn’t comment on last week’s blacklisting by the U.S. DJI spokesman Adam Lisberg referred to a 2020 statement from when the Commerce Department put DJI on its list of companies prohibited from purchasing from American suppliers without an exemption.

“DJI has done nothing to justify being placed on the Entity List,'' the company said then. “We have always focused on building products that save lives and benefit society. DJI and its employees remain committed to providing our customers with the industry’s most innovative technology. We are evaluating options to ensure our customers, partners, and suppliers are treated fairly.”

The company has already reduced its reliance on foreign suppliers of semiconductors, motors and cameras, said David Benowitz, head of research at DroneAnalyst and a former DJI employee. 

“They saw the writing on the wall,” he said. “They’ve really isolated themselves. DJI is in its own space where it owns most of the things it relies on.”

And whether being added to the Treasury Department’s blacklist barring U.S. investment has much impact on the closely held company is up for debate.

In August, DJI told investors — which have included venture capital firms Sequoia Capital China and Accel Partners LP — that getting added to the Entity List had no material impact on sales and operations in North America, according to a person familiar with the situation who didn’t want to be named discussing a private matter. DJI earned $914 million in 2020 on revenue of $3.25 billion, the person said.

As a private company in a competitive industry, DJI doesn’t disclose details about its financial and market performance, spokesman Lisberg said in response to a request for comment on the communication with investors and last year’s earnings. 

Frank Wang, DJI’s billionaire founder who started the company in 2006 as a university student in Hong Kong, rarely speaks to the media. Its president, Roger Luo, said that the dronemaker was in no rush to go public, Bloomberg Businessweek reported in March 2020. “Investors will pay attention to profit,” he said. “We want to avoid restrictions and focus on our passions.”

Amid rising concerns about Chinese surveillance, in 2019 DJI introduced its Government Edition drones, designed to ensure that photos, video and other data never leave the device. The information, it said, “therefore can never be shared with unauthorized parties including DJI.” 

The company has since expanded on those efforts, offering users a Local Data Mode that prevents the transmission of all drone data over the internet. “DJI is committed to protecting drone user data, which is why we design our systems so drone users have control of whether they share any data with us,” it said in a July 2020 statement.

Klon Kitchen, a security expert at the American Enterprise Institute in Washington, says despite DJI pledges, the devices aren't secure.

“These drones are one update from being non-compliant,” Kitchen said in an interview. Information could flow through drone-control apps that suck data out of users' mobile phones, he said.

But DJI and other Chinese companies face an even bigger hurdle: Few Western governments trust Beijing. China’s National Intelligence Law requires organizations to assist in espionage — and keep those activities secret.

Generations of the Phantom drone at DJI’s headquarters in Shenzhen. Photographer: Qilai Shen/Bloomberg

Governments should assume that Chinese spy agencies will find value in information gathered by DJI’s drones, according to Andrew Shelley, director of Aviation Safety Management Systems Ltd., an advisory company based on the North Island of New Zealand that works with government clients.

“For the average recreational user who might be taking selfies on the beach, it’s probably true that DJI is not interested in their data,” he said. “But collectively, the Chinese government is interested in our data. We don’t understand just how much of a threat that is.”

The barrage of concern over security risks from DJI’s drones is starting to hurt, mostly in the lucrative market for corporate customers. The company’s share of the $2 billion global commercial drone sector dropped to 54% in the first half of 2021, down from 74% in 2018, according to DroneAnalyst.

DJI’s fightback strategy is fairly simple: Insulate the company from sanctions, build products that are better and more affordable than anything on the market, and win over the next generation of users.  

Last year, DJI started a new education division, offering a small drone priced at just $240 as well as software to help schoolteachers instruct young students on basic coding. In October, the company enlisted cinematographers — including three Oscar winners — to promote a drone with new stabilization technology and a range of other advanced features. Other devices include one that can stay in the air for as long as 46 minutes and another for cropdusting that “can cover 40 acres in an hour.”

A DJI drone during a demonstration for the Los Angeles Fire Department in 2019. Photographer: Robyn Beck/AFP/Getty Images

Even DJI’s rivals are impressed. 

“They’re totally killer at what they do,” said George Matus, founder of Salt Lake City-based Teal Drones Inc., a subsidiary of Nasdaq-listed Red Cat Holdings Inc., which sells UAVs for reconnaissance, public safety and inspections to the U.S. Defense Department. DJI has “a huge workforce of engineers that makes sure every piece of hardware on their drones is perfect.”

At the same time, Matus appreciates U.S. actions against DJI. A Teal drone was among five approved by the Pentagon for military and federal use, and the company is now seeking to double its some 20-person workforce and ramp up production capacity, he said. 

“Originally it was super-hard competing against DJI: It became a race to the bottom on price and they just totally obliterated most of the market,” said Matus, who founded the company in 2014 when he was 17. Now, government support has “allowed companies like Teal to survive and thrive. American companies have some room to grow.”

Most of DJI’s U.S. rivals are now smaller companies like Teal after larger competitors like GoPro Inc. and 3D Robotics Inc. exited the market. The Pentagon’s Defense Innovation Unit in October announced a new round of 11 approved vendors for UAVs, most of them American and two from Switzerland.

The lack of similar alternatives to DJI is a concern for local police departments that receive some funding from Washington and could be hindered by rules banning federal spending on DJI equipment, said Luke Goldberg, president of Chatsworth, California-based Enterprise UAS, owner of several drone distributors. Most U.S.-made commercial drones, he said, could cost as much as 30% more and offer fewer features. 

Defenders of DJI — such as Kay Wackwitz, chief executive officer of Drone Industry Insights — say the U.S. attacks on DJI are more about protecting the country’s ability to make drones than fears about data.

Worries about DJI drones transmitting images of air bases or power plants to Chinese intelligence are unrealistic, said Wackwitz, whose consulting firm is based in Hamburg, Germany. “The amount of data is way too big, so where is the actual harm?” he said. “To me, it appears to be a reason to push the Chinese manufacturers out of the market.” 

Still, U.S. policy makers from both major parties are becoming more convinced of the DJI threat. Their popularity among ordinary consumers only adds to the danger, according to Nazak Nikakhtar, a partner and co-chair of the national security practice at Washington-based law firm Wiley Rein LLP who served in the Commerce Department from 2018 to 2021.

“The consensus is that more likely than not our information is being collected by these Chinese drones,” Nikakhtar said. “People are also flying these things in their own homes,” she added. “You add these factors up together and it’s pretty scary.”

But Miller, the YouTube drone reviewer from Indiana, is confident DJI will be able to withstand the latest assault from Washington, as consumers just want the “best product for the best price possible,” he said.

“I don’t see DJI going anywhere anytime soon even with these blacklist placements,” Miller said. “Unless Washington cracks down on consumers from purchasing the drones in the first place.”