A surge of domestic drone companies in Ukraine has outpaced what the government budget can support, leading many companies to increasingly seek international partnerships or face consolidation.
Drones have become a transformative part of Ukraine’s military strategy. The country’s ability to mass produce these cheap and effective weapons has led to the creation of more than 200 domestic drone companies, but experts in Ukraine’s drone industry agree that factors including increased competition mean many of the smaller firms are unlikely to survive.
While there are strategic incentives for large, decentralized drone production, an economic reality underpins the situation: the Ukrainian government cannot afford to financially support the industry’s full production capacity.
Additionally, Ukraine restricts exports of goods that can serve a military purpose, including drones, which means that Ukrainian companies can’t access international markets to cover this gap.
A member of the Falcon unit launches a Ukrainian-made Leleka drone in Kostiantynivka, Ukraine on April 18, 2023. (Oleksandr Magula/Global Images Ukraine via Getty Images)
“While waiting for contracts, we are burning through our working capital,” said Ukrainian tech investor and AeroDrone partner Dmytro Shymkiv.
AeroDrone, founded in 2018 as an agricultural drone company, has developed two higher-payload drones approved for military use by the Defense Ministry and received a government contract in March. Smaller companies will not be so lucky, Shymkiv said.
“First, we will see the death of small companies, because the government cannot contract them,” Shymkiv predicts. “Second, we will see acquisitions or movement of Ukrainian companies internationally. And third, there will be consolidation in the Ukrainian market.”
Of more than 200, only 58 domestic drone companies had secured government contracts, Ukraine’s Defense Ministry said in February.
A 10-billion-dollar shortfall
Overall, Ukraine’s defense industry is capable of producing $20 billion worth of defense products in 2024, but Ukraine can only fund half that amount, according to Minister of Strategic Industries Alexander Kamyshin. About $6 billion has already been funded, while the government expects to find funding sources for another $4 billion by the end of the year.
Funding within Ukraine comes from multiple channels including the Defense Ministry, Digital Transformation Ministry, local authorities, individual brigades, NGOs, and the National Guard.
Around one-third of the $6 billion under contract is dedicated to drone production, Kamyshin told the Kyiv Independent in an interview, with the rest funding other defense needs such as ammunition.
The $10 billion Ukraine can’t afford, Kamyshin hopes to raise by the end of the year through Ukraine’s new Zbroyari initiative, which encourages foreign partners to directly fund Ukraine’s domestic defense industry.