Currents of Disruption: Rise of the Drones Provides Tailwind for Component Makers

 In Market and Investment Insights

Drones are quickly expanding beyond their traditional strongholds of the hobbyist and the military, with new applications creating a beneficial environment for component suppliers, say Brad Slingerlend and Denny Fish, co-portfolio managers of the US-based Janus Henderson Global Technology strategy.

Key Takeaways

  • Commercial applications are driving growth in drones, which will create a $100 billion market by 2020, according to Goldman Sachs.
  • Makers of semiconductors, sensors and components such as machine vision should benefit from years-long growth in the sector.
  • Advances in artificial intelligence, machine learning, cloud computing and mobile connectivity may further boost growth rates.

While advances in sensors, data processing, artificial intelligence and mobile connectivity have already driven the development of non-military drones beyond the realm of the hobbyist, the growing list of applications for the technology will likely continue to provide significant long-term tailwinds for component makers.

A number of US cities are working on ways that unmanned aerial vehicles (UAVs) can improve public safety. Using drones to quickly get eyes on emergency situations may not be new, but delivering defibrillators, blood, EpiPens or other vital medical supplies well before first responders can reach a scene, would be. That’s the idea behind start-up Flirtey’s pilot program (should that be unpiloted program?) with Reno, Nevada, announced in May.

The tie up is one of 10 nationwide three-year programs aimed at accelerating the safe integration of drones into US national airspace. The Federal Aviation Administration (FAA) and Department of Transportation received 149 proposals for the Drone Integration Pilot Program.

Market Growth

Such initiatives indicate that the market for drones is likely to expand exponentially in coming years. Goldman Sachs estimates that industries such as construction, agriculture and insurance will spend $13 billion on commercial drones between 2016 and 2020, creating a $100 billion overall market, while the FAA expects more than 400,000 commercial drones to be in use by 2021. The addressable market for services provided by drones, such as deliveries, is estimated at $127.3 billion by PriceWaterhouseCoopers. The potential market for this technology could therefore be much greater than many currently expect.

Last year, in the wake of hurricanes Harvey, Irma and Maria, fire departments and county inspectors in Texas, Florida and Puerto Rico used drones to examine key infrastructure and to triage repair priorities. Telecoms companies dispatched UAVs to inspect mobile-phone towers, insurers assessed property damage, energy and chemical companies reviewed refineries, pipelines and power lines, and ranchers searched for cattle dispersed by flood waters.

Beyond emergencies and natural disasters, drones are disrupting myriad industries because of their still largely untapped ability to perform certain functions more efficiently and more cheaply.

Farmers can target a single, parched plant with precise irrigation and reduce water and pesticide use while improving yields through drone-driven soil analysis, disease detection and weeding.

A company called Aerones uses drones to clean and defrost wind turbine blades, while Siemens AG sends UAVs to inspect offshore electricity generators. As drone and 3D printing technologies advance, UAVs will also be able to carry out repairs.

Boost for Chips

While many drone makers are closely held, the market creates a sizable opportunity for component producers such as Amphenol and TE Connectivity, which supply small, lightweight interconnectors and various sensors used in drones. Makers of data gathering and processing chips, microcontrollers and power management and vision systems, such as Texas Instruments, Xilinx and Microchip Technology, are also benefiting as demand and capabilities expand.

Intel is among the semiconductor companies betting on the space. In January 2016 it acquired Ascending Technologies, a German designer of drones with auto-pilot software, while later that year its Movidius unit, which makes artificial intelligence (AI) and computer vision semiconductors, released the Myriad X chip, which allows drones to learn from their surroundings in real time. Airbus has cut inspection times to as little as 10 minutes from two hours by using drones equipped with Intel’s RealSense camera to create highly detailed three-dimensional models of aircraft.

5G, AI

The use case is likely to accelerate with the advent of 5G mobile communications, which will dramatically expand data transmission capacity and capability. This should help feed a virtuous loop of drones collecting and sending data to the cloud for analysis before receiving back instructions, taking action and generating further data.

This continuous process, enhanced by AI and machine learning, opens up opportunities in countless sectors such as the military, law enforcement, security, search and rescue, conservation, news media, movies, TV, engineering, construction and entertainment – one dazzling recent example being the world record set by Chinese city Xi’an in May when 1,374 drones lit up its night sky in a synchronized show.

All of which likely creates significant tailwinds for suppliers to UAV manufacturers, even before perhaps the biggest boost of all becomes reality — the capability of drones to fly and perform tasks autonomously.

Disruption is creating compelling investment opportunities for those who know where to look. Learn how to harness the power of disruption in your portfolio.

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