Fight or flight

Dealing with a noisy neighbour

Chinese tech firms are now all too familiar with being blocked in the US on national security concerns. Articles on this topic – particularly those involving the telecoms equipment makers Huawei and ZTE – have received so many newspaper column inches that they’ve likely decimated whole forests.

The narrative could shift a little if Washington bans a leading Chinese company from exporting to America over patent infringement. This could happen next year should the world’s biggest drone manufacturer, China’s DJI, lose a case at the US International Trade Commission (ITC).

But all is not as it appears. DJI isn’t being challenged on cyber security concerns, although the US military banned its personnel from using DJI drones in 2017 on just such grounds.

Nor is the culprit the growing Sino-US trade friction over tariffs. In this case, the opposition is coming from DJI’s smaller Chinese rival Daotong Intelligent Aviation, which hopes to play the US legal system to its own advantage.

Daotong wants to block its Shenzhen neighbour’s exports to the US on the grounds that the latter has infringed its patents under section 337 of the US Tariff Act 1930. In its complaint, Daotong also highlights that such a ban would “likely improve the competitive environment by providing opportunities for other groups” including its US subsidiary, Autel Robotics.

And it may well win. Only last month, Qualcomm scored a victory against Apple after the ITC ruled that the electronics giant had infringed one of the chip designer’s patents. Its opinions are not binding, but judges often follow them.

Where DJI is concerned, Daotong claims that it has infringed patents relating to flight path technology, rotor assembly and battery packs. But as Netease Finance points out, Daotong only purchased the patents in question a few months before it launched its ITC complaint.

Chinese netizens have reacted with dismay to the news, with some branding Daotong “a traitor” for undermining a major Chinese tech firm amid an escalating trade war with the Americans. “What a terrible shame that two Chinese companies are at each other’s throats in the US,” said one commentator, reflecting the views of many.

But the two have also been battling each other in the Chinese courts and in this case it was DJI that fired the first shot in 2015. It lost the case and also an appeal, after alleging that Daotong had infringed its patents.

Losing the action in US would be particularly damaging for DJI given its 70% global market share of consumer drones and its ambitious plans to consolidate its commercial grip on the sector. ITC cases typically take at least one year to process, which could delay DJI’s plans to go public during 2019.

Only a few months ago the group created headlines with its latest pre-IPO fundraising round. As we reported in WiC406, DJI took full advantage of the recent private equity bubble to secure the highest possible valuation. Instead of conducting the normal one-on-one discussions with potential suitors, it channelled them into a series of auctions, which went through four rounds before the company came out the other end with $1 billion in fresh capital and a rumoured valuation of $19.2 billion, according to Sina Finance.

This represented an $11 billion jump from DJI’s previous fundraising round in 2015. But founder, Frank Wang, is nothing if not ambitious and Sina Finance reports that DJI hopes to raise revenues from Rmb17.6 billion ($2.8 billion) in 2017 to Rmb170 billion in 2022.

The majority of this growth will come from the fast expanding drone market. IDC forecasts that the overall market will expand by 30% per annum over the next five years, with commercial drones becoming increasingly important. DJI currently records 85% of its sales from consumer drones.

DJI also plans to use its technological expertise to expand into three new areas: medical imaging, AI-related educational tools and robotics. It hopes that roughly a quarter of its revenues will come from these new businesses by 2022.

Investors say DJI hopes to achieve a $100 billion to $150 billion valuation by then. “If it can, then of course we can tolerate a few difficulties wondering how to exit our investment,” one source said.

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