LESSONS FROM DJI IN

THE DRONE INDUSTRY

Insights for Small Robotics, Autonomous Vehicles, New

Generation Sensor Platforms, and Related Artificial Intelligence

MAY 24, 2017

DAVE LITWILLER

Notice: All images, designs and trademarks are the property of their respective owners

HISTORICAL

VTOL SUAS, 2012

Price

Pe

rfo

rma

nce

Consumer

• Total Global Market: ~US$150M

• ASP generally <US$500

Professional, Military & First Responder

• Total Global Market: ~US$30M

• ASP generally >US$25K

SUAS MARKET SIZE

AND GROWTH

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$4,000

$4,500

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

sVTOL

sFixedWingUS$M

TIMELINE

• 2006: Da-Jiang Innovations founded by Frank (Tao) Wang

• 2010: Sales just over US$1M , mainly selling flight controllers, 50 y/e staff

• 2012: $26M sales, y/e 330 employees, launched Flamewheel protean drone

• 2013: Launched Phantom 1 consumer drone in Jan., sales $131M, 1,240 y/e employees

• 2014: Sales $480M, 2,800 y/e employees

• 2015: Accel Partners Investment of $75M, 4,000 y/e employees

• 2016: Sales $1.47B, merchant value nearly US$2B, 6000 y/e employees

• 2017: 8,000 employees (Apr), 2,000 of them in R&D

• Total Capitalization prior to 2015: <US$200K

• Comparable first decade of growth and capital efficiency to the historical fast start stand-outs of ICT: nVidia, Cisco, Apple and DEC

MARKET SHARE

2016 Global:

• Consumer VTOL sUASs: >80%, by units and $

• Professional VTOL sUASs: >60%, by units and $

NOTABLE ACHIEVEMENTS

• Impressive concentration of product offerings

• Global innovation from Shenzhen, not imitation

• No significant government financial support

• Absence of accusations of misappropriating technologies

developed elsewhere

QUESTIONS TO ANSWER

• How did DJI largely create the mass drone market

spanning consumer, prosumer, enterprise and

professional applications?

• How did it consistently exceed the innovation output of

both Chinese and international competitors to become

dominant?

• What lessons can be learned about the changing

character of innovation in robotics and related

technologies?

• How can the distinctive traits of the new wave of Chinese

innovation be leveraged for global advantage by domestic

and international technology producers?

BEYOND DJI AND DRONES

Inside China’s Plans for World Robot DominationBloomberg News April 24, 2017, 5:00 PM EDT

• Some 800 robot makers seek scale as Chinese industry automates

OVERVIEW

Individual Contributions

Emergent and Combined Effects

Looking to the Future

Inferences for Western Technology Companies

INDIVIDUAL CONTRIBUTIONS

VOLUME FOCUS TO

SET THE FOUNDATION

• Conviction view that:

1. sUAS could move from a niche to a mass, consumer-led market

2. Consumers would pay the price of an entry level DSLR for a high quality drone

3. VTOL would predominate over fixed wing

• Early adopters, tinkerers, DIY’ers -> mainstream consumer and professional market

• Technical requirements:

• Robust

• Simple to use; fast time to value and “wow factor”

• Turn-key

• Regulatory:

• Significant early priority on consumer uses and weight class with the least regulatory impediments

• Applications:

• Remote piloting novelty quickly gave way to: photography, videography, broadcast and cinematography early emphases, with simplest re-use of existing workflows and infrastructures

• Performance:

• World class. Not second rate.

COST DOWN,

PERFORMANCE UP

• Internalized design of traditional high cost components to greatly reduce cost, at same time as improving application-matched performance and quality

• Masters of lean value in technical design

• Applied to:

• Flight controllers

• Wireless datacom links

• Propulsion motors

• Payload gimbals

• Propellers

• Cameras

• And lately, antennas

TECHNOLOGY

LEADERSHIP

• Technology leadership intrinsically related to cost

reduction; two sides of the same coin

• First or early to market with new capabilities which deliver

high value for customers

• Active efforts to reduce cost through sophisticated design,

not just relying on cost improvements as a passive

byproduct of volume or experience curves

• Company is far enough ahead of the curve technologically

that even if its launch timelines slip somewhat, it is still

ahead of the rest of the pack

COMPLETE

PORTFOLIO

Phantom

Inspire

Mavic

Spark

Matrice 100/200

S900/1000-Matrice 600

• Price-Performance Breadth

• <$500 to >$50K system price (w/ camera)

• Similar span of payloads and other options

• Few gaps for competitors to gain a good, uncontested foothold

Time

Pe

rfo

rma

nce

INDUSTRY

PACESETTING

• Faster pace of advancement than any competitor can sustainably match

• Annual generational model change for consumer flagship Phantom

• Bi-annual generational model change for professional flagship Inspire

• Sub-generational enhancements more frequently

• Periodic price reductions

• Simply better performing next generation safety and autonomy features

• No Fear of Cannibalization

• “We’ve never been a company that worries about cannibalization….We are the innovation company and we don’t care if a new product makes an old one [of DJI’s] look outdated.” – Adam Lisberg of DJI, Techcrunch, Nov. 11/’16

Shenzhen Speed

SHENZHEN SPEED

• Designated Special Economic Zone in 1980

• Premised upon embrace of global markets and competition

• In 36 years, population grew from <500K to >20M, annual GDP growth ~30%

• City of migrants, both blue and white collar; valorization of migrant workers; ongoing ingress of workers

• Little social safety net -> High work ethic

• Ethos of personal betterment through subservience as key to upward mobility, personal transformation, and freedom of livelihood

• Embodiment of “To Get Rich is Glorious” – Deng Xiaoping

• Time is $, efficiency is life; economic values shape nearly all other values

• High technology is 60% of industrial output

ENERGETIC DEFENSE OF

THE HIGH VOLUME PART

OF THE MARKET

• Lowered prices for mature products

• "It's no fun watching prices fall by 70 percent in 9 months," [Chris] Anderson [3D Robotics CEO] said, referring to DJI's price-cutting. – Reuters,

Nov. 15, 2016

•

• Recent introduction of Mavic and soon Spark

FAST ISSUE

RESOLUTION

• DJI has not been immune to the complexities of volume

production and usage of small robotic aircraft:

• Flyaways, airframe cracking, software incidents and the

emergent need for geofencing among them

• The company is notable for how quickly it conceives,

develops, tests and releases fixes and enhancements to

both hardware and software, usually in just days or weeks

• Competitors struggle to match this speed of issue

resolution, particularly for hardware shortcomings

COMPANY FIRST

• Individual goals of employees and managers are

subordinate to the enterprise

• Work life is all consuming to achieve speed, and

integration of activities across the organization

• Integration is particularly demanding in what is necessarily

such a tightly technically coupled product as a small UAS

• Success is measured by milestone attainment, volume

sales and customer success

• Little cool engineering or technical elegance for their own

sakes

RELENTLESS R&D

• Competitive internal development teams

• "Pitting teams against each other and having one win is

how product development works inside of DJI." - Frank Wang,

DJI CEO, The Verge, Sept. 27, 2016

• Intense work environment

• “Individual competition to be the best employee is fierce” –Eric Cheng, formerly of DJI, Oct. ’15

• "We work six days a week…10am to 10pm.” – DJI Product

Manager Paul Pan, Wired, Mar. 9, 2016

• "Very aggressive people are concentrated here” - Frank Wang,

DJI CEO, The Verge, Sept. 27, 2016

PUT CASH TO WORK

• Buy, not build, some technology

• Hasselblad Investment – high performance digital still photography

• Transaction history:

• Minority stake and board seat for DJI Nov. ’15

• Control transaction reported Jan. ’17 – Luminous Landscape

• Technologies:

• High dynamic range image capture and digital image reconstruction

• Precision optics and mechanics

• Optionality:

• Drones

• Terrestrial Cameras

METICULOUS

APPLICATION FOCUS

• Apply as much effort uncovering value drivers and pain

points for users, in each targeted application, as in

component and manufacturing innovation

• Consumer: DJI has nailed it, and continues to do so

• Professional: Application-specific solutions which are

practical, and with ever-present concurrent priority for low

cost and high performance

• Search and Rescue and First Responder public examples

• Less publicized work in power line inspection,

construction, roof inspections, policing, fire fighting, and

other industrial applications

• Considering services business model

RISK MANAGEMENT

• Example: Consumer or Regulatory Backlash Scenario

• Publicized investments and success stories in public safety

applications, to pre-emptively show public good from

drones

• Rapid response to potential misuse through geofencing

• Lobbying and direct participation in regulatory dialog

• Stakes in terrestrial photography

• Growing portfolio of lighter, inherently safer, sUASs

• Upcoming: geographic registration and enforced

jurisdictional flight safety limits

ORIGINAL AND PROTECTED

INTELLECTUAL PROPERTY

Leader, Not Follower

• DJI did not invent the multi-rotor UAS, but has led technologically in the recent advancement of the art

• Commanding body of patent-protected IP, both utility and design

• At Oct. ’16:• 400 patents granted globally

• 1,500 patent applications

• At May ’17: • 91 US patents granted, 33 US patent applications laid open (www.uspto.gov,

Assignee SZ DJI)

• 3,458 total global patent applications to date (http://news.qq.com/a/20170426/037328.htm?t=1493707169590)

• DJI patenting at approximately 10* the rate of their nearest competitor

• Financial resources to be flexible for both offensive and defensive use of its patent portfolio

• IP infringement actions initiated against alleged transgressors in China and the US

CONSTRUCTIVE

PARANOIA

• Unwavering pursuit of driving down cost, while driving up performance, reliability, and application diversity, to expand market share, win customer and partner allegiance, and reduce competitor opportunity

• Cultural drive to win and execute. Any complacency is expunged.

• CEO providing cultural engine, forestalling institutional hubris

• Competitive intensity of domestic setting, particularly in Shenzhen, provides a constant reminder of how quickly adept imitators can catch up if there are any slips

• As many as 20,000 drone R&D staff in Shenzhen presently, among hundreds of companies

• Precedent of prolific imitation of consumer R/C helicopter companies in Shenzhen in late 2000’s, among other industries

EMERGENT AND COMBINED

EFFECTS

DISCRETE BECOMES

QUALITATIVE

• Competitors are struggling to keep up, both on cost and performance

• More difficult is for competitors to try to get ahead, especially with so many fronts of rapid progress both technologically and in market development

• DJI is now shaping the expectations of the market, putting competitors in an increasingly untenable position of having to try to out-anticipate DJI, but from a position generally of slower product development cycles and less market penetration and insight

• Many competitors are finding themselves in rearguard actions as DJI’s cycles of decision and action are decisively faster than others

STEADY MARCHING BUILDING

INSTITUTIONAL RESILIENCE

• Even as DJI has widely outstripped its nearest

competitors, it has internalized and retained a relentless

pace of product development

• Such execution tempo at scale gives the company a

greater likelihood of exploiting future opportunity, and

recovering from any setbacks

TECHNOLOGY LEADERSHIP

REINFORCING CYCLE

• DJI’s next generation sUASs are of such advanced price-performance as to create a time window of nearly competition-free operation

• Many of DJI’s new products become must-haves for customers

• Recently launched offerings become de facto industry standards

• Higher pricing and profits are derived from these products in their early lives

• As products get older, prices are lowered to build volume, lower unit costs, and fend off later arriving competitors, to capture the majority of the life cycle profits

• These profits are reinvested in the next generation of sUASs to create the next competition-free zone

CONSUMER SECTOR DOMINANCE

AS THE BASIS FOR ENTERPRISE

SUCCESS

Consumer

Success:• Volume

• Performance

• Cost reductions

• Mfg.

• Supply chain

• R&D depth

• Brand equity

• Usage familiarity

• Wide distribution

Early Enterprise

Success:• Simple and pre-existing

workflows

• Prosumer• Wedding and event

photography

• Real estate photography

• Emergency first

response

• Insurance claim roof

inspections

• Cinematography

• Broadcast news

• Small scale experiments

in drone usage in large

enterprises and

government• Informational

advantages from early

application access

Large Scale Enterprise:

• Strong start

• Vibrant and growing

ecosystem of

complementary 3rd

party SaaS providers

and drone services

providers

• Time will tell• Agriculture imaging

• Electric Utilities

• Petro-chemical

• Surveying

• Security

• Construction

• Architecture

• Building inspections

• Mining

• Wireless Telecom/Data

• Wide body aircraft

inspection

CONSUMER LEADERSHIP ->

ENTERPRISE CROSSOVER

Apr. ’17: 84% of drone mapping and modeling is occurring on drone models that cost $1500 or less - DroneDeploy

CONSUMER LEADERSHIP ->

ENTERPRISE CROSSOVER

77%

12%

3%

3%1%

1% 1% 1% 1%1%

Announced or Completed US Law Enforcement sUAS Deployments from Jan 1 to Dec 15 2016,

N=138

DJI Manufacturer not Disclosed

Competitor A Competitor B

Competitor C Competitor D

Competitor E Competitor F

Competitor G Competitor H

Dec. ’16: 77% of US law enforcement agency 2016 drone deployments won by DJI

Source:

FAA, agency

media releases

SIMULTANEOUS PURSUIT OF MASS MARKET,

AND, HIGHER COST PERFORMANCE-DRIVEN

SECTORS

Technology View:

• Bracket both the high volume consumer segment, and, performance-driven professional applications

• Volume applications drive lean value design, yield engineering, reliability, and economies of scale and scope

• Performance-driven applications drive insights into next generation technical capabilities to proliferate throughout product line

• Being predominant at both ends of the performance spectrum makes it difficult for competitors

• Smaller players struggle to equal the unit economics at the low end

• With advancing requirements for compulsory system capabilities, smaller players from all parts of the performance spectrum are being increasingly challenged

• Performance leadership of traditional high end players is being increasingly threatened by DJI

PREPARING FOR THE MATURATION

OF CONSUMER APPLICATIONS

• As growth of the consumer sector is

expected to slow down…

• …on to enterprise and government

applications

API, SDK, AND 3RD

PARTY SOFTWARE

• Accel Partners investment in 2015, in part to build ecosystem

• Hired Darren Liccardo in 2015, formerly of Tesla’s autopilot

project and BMW’s, to build Si-Valley team

• A partial sample of enterprise software partners to date:

Strategic Issue for 3rd Party Developers: • We haven’t seen the degree of foundation technology concentration DJI has built

for H/W & OS since the heyday of the desktop PC era for Intel and Microsoft

BVLOS

Human Labour Cost Hurdle for much wider scale Commercial

Operations

Requirements for BVLoS Operation:

• Longer flight times – power source and aircraft

architecture

• Longer distance base station to aircraft communication

links

• Greater vehicle autonomy

• Regulatory access

LONGER FLIGHT

TIMES

• Up 30 minutes for latest Phantom, and 35 minutes for

Matrice 200

• But,

• Considerable scale advantages to work on power sources

other than Li-Po batteries

• Ability to work on alternative airframe architectures to

pure VTOL, such as hybrid fixed wing-VTOL

LONG RANGE

COMMUNICATIONS

Tracktenna – Launched Apr. ’17

10Mbps up to 2km, with range out to 10km

GREATER VEHICLE

AUTONOMY

Today:

• 5 outward looking cameras plus ultrasound (radar on ag device)

• Ability to operate in GPS-impaired environments

• Camera-based object detection out to 30m

• Automatic braking, hover, or avoidance within 15m

Tomorrow – Possibilities:

• Learning high skill piloting and trouble avoidance techniques

• Database of complex and near-miss flight situations to train machine learners

• Application of Chinese R&D style to the labour-intensivecoding for exceptions as a crux issue in machine learning

INFERENCES FOR WESTERN

ROBOTICS COMPANIES

IF THERE’S A MASS

MARKET, GO GET IT

• The days when high performance technology leaders were separated from mass market are increasingly breaking down

• With high performance demands in mass markets, the winners in high volume segments have a strong technology-, manufacturing and distribution base to alter and likely diminish the formerly segregated high end

• The stakes are highest where the total cost of ownership is dominated by the cost of the up front device purchase

• Corollary: Where there’s a mass market, cannibalization of earlier generation products should be of little concern for the tempo of new product development

ACCESS THE VITALITY OF

SUPPLY BASE IN SHENZHEN

• To go from niche to mainstream requires radically lowering the cost of components and subsystems

• Redesign to reduce cost will only go part way

• Accessing the depth and competitive intensity of supply chains in China, especially Shenzhen, is often necessary to gain both low cost and increasingly high performance

• To do this well requires resident engineers at suppliers, and if not resident, then rotating visiting engineers

• Share in proprietary know-how

• Speed communication

• Tighten technical links between functional design, and design for manufacturing

• Better options for second sourcing if needed

• The good news: Foreigners are more accepted in China

REEXAMINE ASSUMPTIONS

ABOUT CUSTOMER CLOSENESS

• Leading Chinese companies are using the favourable cost

and scale of technical staffing to get close to customers

globally

• Detailed first hand observation is used to precisely

optimize product cost and performance

• Western companies will not be able to rely on their

proximity to customers as a source of lasting advantage

as much as in the past

LEAN VALUE NEEDS TO

RETURN TO THE FORE

• Vestiges of presumed technical superiority based on

better science and engineering will come under increasing

stress as further Chinese global champions emerge

• Lean value in design:

• Design simple products; avoid feature inflation

• Nail a very specific, widespread need

• Rededicate to deep, cross-functional technical expertise to

solve performance challenges most effectively

• Design out cost drivers which burden conventional

approaches

APPLICATION SOFTWARE AND

ARTIFICIAL INTELLIGENCE

• The retreat of many Western technology companies to

application software and AI may prove to be a false hope

as a defense against the competitiveness of Far East

robotics manufacturers

• The same scale R&D skills which China is mastering for

global innovation are applicable to creating and coding

large sale training sets, often the crucial technical

capability in unstructured data AI & machine learning

• Especially for coding and training the exceptions to the

exceptions which drive up the labour intensity of most AI

efforts, a leading issue in autonomous vehicle

development

VR -> AR

?

?

FURTHER READING

Brandt and Thun, The Fight for the Middle: Upgrading, Competition and Industrial

Development in China, (World Development vo. 38 no. 11, Elsevier, 2010)

http://isapapers.pitt.edu/76/1/2009-04_Brandt.pdf

Yip and McKern, China’s Next Strategic Advantage: From Imitation to Innovation,

(MIT Press, Cambridge, 2015)

UPCOMING SEMINARS

Fall 2017

• Intellectual Property:

• Commercial Considerations in Patent Strategy and

Licensing for Growth Stage Technology Companies

• High Output R&D:

• Driving Up Productivity and Quality in Multi-Disciplinary

R&D at Scale

FURTHER

DISCUSSION

For arrange further private discussion of any of today’s

topics or related matters:

dave.litwiller@communitech.ca

ADDITIONAL DJI TEST CASE

VTOL UAV FOR PESTICIDE

APPLICATION IN AGRICULTURE

Issue: Rural labour shortage in China with exodus of young to cities

MG-1

• Unveiled late 2015, DJI’s first agricultural pesticide

application UAV

• Similar to flying camera UAVs

• DJI did not pioneer category

• DJI drove down cost, drove up quality & performance

• One difference: Optimized for Chinese domestic market

and other Asian mkts

• Commanded 2/3 of Chinese market in first year of sales,

representing US$40M revenue from this new line

• Challenged market share leading incumbent in agricultural

pesticide application UAVs in year 1, Yamaha

MG-1S

• No Fear of Cannibalization: Nine months after first volume shipments of MG-1, DJI announced successor MG-1S

• Cost Reduction: Marketed at less than half the price of the original

• Rapid Technology Advancement:

• Significant performance and reliability enhancements spanning many major subsystems.

• Clear evidence of meticulous understanding of the weak areas of the first generation

• Economies of Scope: Leverage of flight controller used in Matrice600 cinematography/industrial UAV

• Putting Cash to Work: Building out service and support network, as well as providing financing and insurance to further expand adoption

• Over time: Reverse innovation potential as the MG-1 family developed with a first view for China comes to have impact and export internationally?