From Startup to 'Apple of Drones' – DJI's Technology and Product Magic [1/2]

This is the first part of the DJI series, which will focus on the Chinese drone maker DJI’s technology fortress and product evolutions. For its foreseeable risks and possible counterplans, please follow EqualOcean updates.

► DJI’s self-developed drone flight control system makes it a powerful buyer to its upstream suppliers as well as a strong brand to customers.
► Stepping into the integrated drone camera and action camera areas is an efficient profit model.
► The company’s vast potential lies in the technology migration of its flight control system, such as applications for industrial drones and L3/L4 autonomous vehicles.

Recently, media attention has been drawn on the global consumer drone monopolist – Da Jiang Innovation (DJI) – with several rumors about the company’s plans for a Hong Kong IPO and the cybersecurity risks posed to its American users.

Apparently, the China-based unicorn, with a conservative valuation of USD 15 billion, has a significant foothold in the world’s technology landscape. The attempts of the US government to blacklist DJI for potential threats proved the firm’s competitiveness in terms of technology and market position.

The following parts will touch upon the three pillars that supported DJI in becoming the largest non-military drone maker in the world and its potential bottlenecks for future development.

Technology pillar – drone flight control system

A dilemma of two pathways will help illustrate the success of Chinese electronics companies over the past decade: for almost all new players, the question arises of whether one should be R&D-oriented or marketing-oriented. DJI chose the former. Founded in 2006, the company released its very first drone product, ‘Phantom 1,’ six years later in 2012 (the release in the US was in 2013). The first six years of DJI were all about R&D on its signature flight control system. Though the upfront investments seem a bit superfluous for a startup, it turned out to be an essential reason for DJI’s future success. The company’s technology barrier and the most distinguished features mostly lie in its self-developed flight control system.

If we open Taobao – the e-commerce platform of China’s most valuable enterprise Alibaba (BABA:NASDAQ, 09988:HKEX) – and put ‘drone for photographing’ into the search box, hundreds of drones priced at two or three hundred yuan appear on the screen. Resorting to ready-made and open-source flight control systems is the secret of reducing costs.

The estimated average selling price (less than USD 60) of drones that are not made by DJI somewhat implies that the profit margin of the company is relatively high, since all types of DJI consumer drones are priced over USD 300. The technology premium lies in DJI’s self-developed flight control system, which distinguishes the company as a powerful buyer to its upstream suppliers as well as a strong brand for customers.

DJI’s commitment in R&D on the flight control system has not stopped since its first release of a consumer drone; instead the product iteration and improvements have been widening the technology gap between other drone vendors and the company.

Since its inception, DJI has sought to improve the flight control system for to-consumer drones, as multiple scenario models and testing data for future iterations are derived from the research. Unlike the other two Chinese drone makers – Zerotech and XAG, which fell behind in flight system design and consequently were kicked out of the consumer drone market – DJI, quite apparently, knows how the moat should be built.

There are two merits to DJI betting on its self-developed flight control system. First, as the company has the source code and underlying programs of its own software, changes for function improvements can be realized – it in a timely way. The process of overseas flight system providers such as Qualcomm (QCOM:NASDAQ) and APM is to correct an error reported by customers and update the next generation controller  – this takes much longer than DJI’s self-iteration model. Second, as the fruit of the company’s early start and commitment in the control system, DJI consumer level quadcopters have been outperforming its competitors in terms of drone size, stability, image quality and battery life since the release of its Mavic pro series in 2016.

A big step – the action camera

In the consumer-level drone area, the most significant product-level revolution was triggered by DJI breaking away from GoPro (GPRO:NASDAQ) and chipping away its monopoly in the action camera realm through  the releases of ‘Phantom 2 Vision’ as an integrated flight camera and Osmo action camera.

The first and second generation of DJI’s drones could only shoot and present pictures by carrying GoPro cameras and gimbals. At that time, DJI’s products were merely designed and defined as consumer-level unmanned aerial vehicles (UAVs). During 2012 and 2013, DJI and GoPro negotiated on co-creating flight cameras, however the negotiation never came to fruition. Since then the two split – GoPro started to work on drone-making, while DJI was devoted to designing its action cameras.

As addressed in the very beginning, DJI spent its first six years developing its flight controller, which contains an important part for stabilizing the shooting device to better present pictures (as can be generalized as the gimbal system). The R&D accumulation helped DJI develop its own action camera-equipped drone within one year after breaking away from the US company. By contrast, GoPro struggled with its self-designed drone and announced it would shut down the Karma drone business unit in 2018.

With the flight camera embedded in the drone, DJI since then has had a precise marketing position as the dominant aerial photo equipment provider. As a large percentage of the DJI drone customers are shutterbugs, especially at the primary stage, the promotion channels were relatively broad and efficient. When a photographer presents his masterpieces shot by DJI equipment, the presentation itself is a free showcasing for the company.

As DJI’s camera technology became mature, in 2015 the company released its first handheld action camera Osmo, expanding its business scope beyond drones. The expansion to photographic equipment brought the company a wider range of target customer groups by lowering technical requirements and widening application scenarios from the sky to the ground.

At the beginning of 2017, the company acquired a majority stake in Hasselblad, an iconic Swedish camera company, to better develop its camera segment. That DJI attached great importance to the camera-related business was not purely for boosting sales and revenue, since it still is a private company which does not have to reveal earnings. It is more about the camera and image technology’s future application. To be specific, the image technologies that DJI attached great importance to are crucial – not only for drones or action cameras, but also for agriculture, detection, autonomous vehicles and any other forms of application which require precise HD images.

Technology migration – fewer limits

In 2016, Frank Wang, the founder of DJI, projected that the consumer drone market was approaching its full potential, and that DJI’s revenue in this segment would have a ceiling at around USD 3 billion. According to insiders, the company’s revenue had already surpassed this number by the end of 2019.

As the consumer drone market is getting near to saturation (after all the customer base is not that vast), the company has been trying to migrate its core technology – the flight control system – to various application scenarios. One is for industrial usage. Another is for autonomous driving.

Agriculture

Back in 2012, another Chinese drone maker XAG was competing with DJI in the consumer drone market. However, XAG shifted to focus on the agricultural drone market and left the whole consumer market to DJI in 2014 since the performance of XAG drone cannot satisfy the customer needs well. While in 2018, DJI as a latecomer also entered the agriculture drone area with tens of million-yuan subsidies for customers and distributors, threatening XAG’s business.

The subsidy is not the main threat though. What worries XAG is the competitors’ better performance, which for DJI is generated through some adjustments on its well-established control system applied to consumer drones. Ultimately, what really matters is how good the drones fly, rather than where they fly.

L3/L4 drive

In 2016, DJI internally incubated the team Livox, which focuses on the R&D of LiDAR sensors for high-speed self-driving and industrial robotics. As the range and image sensors are essential for drones as well and DJI has been ploughing on these functions for years, the technology migration for the vehicle LiDAR is natural and efficient. Besides, due to the different designs, Livox LiDAR is tens of times cheaper than the ones manufactured by the US-based company Velodyne.

Though DJI has not yet officially announced an intention to enter the autonomous driving area, several signs reveal DJI’s ambition to equip bigger devices, such as having Tesla’s senior engineer as vice president in one of its R&D centers.

To sum up, as a result of DJI’s elaboration on its core technology – the DJI flight controller – the company is capable of dominating the consumer drone market while stretching out to other promising areas.