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With DJI hobbled, Skydio makes its move in DC

Skydio's new head of policy affairs Brendan Groves hopes to help push regulators to allow the most advanced use cases the California drone startup is plotting.

Skydio 2 drone

With the release of its Skydio 2 drone last fall, the company made strides on its vision for autonomous drones. Now it's hired a head of policy to advocate for its most ambitious use cases.

Image: Courtesy of Skydio

Brendan Groves, Skydio's new man on the ground in D.C., said that the company wasn't on his radar during his three years working on the Department of Justice's drone programs. That makes sense: Chinese manufacturer DJI is a titan that all but owns the U.S. consumer drone market, and Skydio is a small, if ambitious, Redwood City startup that's only recently started shipping respectable products.

But in Skydio, Groves saw something he'd desperately missed from the market during his time in government. Skydio, he said, has built a drone that allows users to "focus on the mission and let the drone focus on the flying."

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Skydio calls itself an "autonomous drone company" because it aspires to a level of push-button operation for its compact drones that goes beyond what you can get from top competitors like DJI. It's enlisted Groves as head of regulatory and policy affairs to ensure that first responders and other potential customers for its most ambitious ideas can legally take advantage of them.

It couldn't come at a better time for the 6-year-old company: The U.S. government is looking to buy more drones, and it doesn't want to buy from China. If Skydio can crack making truly autonomous drones — as well as help convince U.S. regulators that its technology is safe to use by just about anyone — it might have a chance to truly compete with the big players, especially for government and law enforcement contracts.

Baby steps toward regulation changes

Groves joined Skydio in January, and one of his first missions at the company will be to help change regulation about what small unmanned aircraft can do in the United States. Right now, U.S. regulations are clear about a few things: You can't fly over people, and you can't fly beyond the line of sight of the person operating the drone.

There are waivers you can get from the FAA, but that's a slow process, and Groves said this makes it tough to use drones in emergency situations. "If you're a fire department and you respond to a scene of a large warehouse fire and the fire is on the other side, you can't send the truck, and you really don't want to send the firefighter," he said. Ideally, a drone would help the firefighters ascertain the extent of the fire, without putting anyone's life in danger, but current FAA regulations wouldn't allow it.

He envisions a permission system for first responders to be able to fly drones beyond line-of-sight, at low altitudes, to aid in safety operations. He sees commercial applications, too, such as using autonomous drones in the direct aftermath of a hurricane to determine the damage to the area.

"The hope is to work closely with regulators and partners to receive approval to conduct these missions in advance, to conduct certain classes of operation that can be done safely within a set of risk-management parameters," Groves said. "So if you're following the same protocol, then every time you fall into a situation that's inherently dangerous, you will have the authority to fly a drone beyond visual line of sight, maybe within a thousand feet of the operator up behind some trees."

And it shouldn't be too difficult to at least get his foot in the door. Previously holding the lengthy title of associate deputy attorney general at the Department of Justice, Groves' work revolved around increasing the department's use of drones across all its divisions.

Groves sat on the FAA's Unmanned Aircraft Systems Executive Committee for the last three years, an inter-agency group that advises the FAA on integrating drones into the national airspace.

After proving drones are safe in specific situations, the task will be to expand where they can operate. Groves argues that its autonomy software represents a new way of thinking about regulating flying machines and that drones shouldn't necessarily be judged against the same paradigms as other aircraft. "The interesting thing about the aviation regulatory system is that it's based on the idea of a pilot in command," Groves said. "But what if it were safer, in some circumstances, to have a computer in command?"

It's going to be a tough task, but Groves is optimistic about the future of autonomous drones. "I think in 10 years' time that won't be novel or unique," Groves said of what Skydio's drones do today. "It's going to stretch the regulatory framework in ways it's never been stretched — but this is a good stretch, it's like yoga for the regulatory system."

Skydio will be spending much of 2020 attempting to show that its drones can be used safely by governments and commercial partners. It's been working with the Chula Vista Police Department near San Diego in an FAA-sanctioned pilot program that puts drones in the trunks of cruisers "to facilitate situational awareness across a city," the company said at the time.

In response to questions about the Chula Vista project, the FAA said, "The vehicle currently has no onboard technology to detect and avoid other aircraft. Therefore, the FAA would only approve flights beyond visual line of sight (BVLOS) with the use of visual observers."

"The FAA has no immediate plans to issue 'blanket' approval for BVLOS flights," it added.

Still, Groves hinted that you can expect more such projects in the future. "You're going to see us work with public-safety agencies who are already starting to use Skydio to conduct low-level tactical awareness, in a way that's going to help de-escalate situations," he said.

Skydio is hardly the only company working to move FAA policy; DJI has itself been working for years on lobbying D.C. regulators. It brought drone-advocacy lawyer Brendan Schulman onboard in 2015 to lead the company's policy and legal work. In 2018, it hired David Hansell from Facebook to be its public policy manager, but he has since moved on to a similar role at Alphabet's Loon. DJI has lobbied for similar advances to the work that Groves will do, having argued in the past for the necessity of drones being able to fly over people, at night or beyond line of sight.

"DJI welcomes competition and an open marketplace where consumers can fairly evaluate our products on affordability, performance, safety and security," Adam Lisberg, DJI's corporate communication director in North America, told Protocol. "Competition makes every competitor work harder and better, and consumers benefit the most."

Meanwhile Barry Alexander, CEO of Aquiline Drones, a Connecticut-based company, said he thinks that for certain use cases, beyond line of sight flight could be on the horizon. "I think there is enough justification for these approvals and rapid adoption of the concept," he said, adding that his company is working with the FAA to figure out a regulatory structure to courier transplant organs using autonomous drones beyond the line of sight of a pilot. "The technology is in place; what the FAA used to struggle with was the regulatory framework that would allow for that."

Can the government be the U.S. drone industry's savior?

Through various bans and restrictions on foreign-made drones, the U.S. government has handed Skydio, like a few other small U.S. drone operators, a gigantic opportunity to expand.

Unsurprisingly, Groves thinks this is a good thing.

"Skydio strongly supports efforts that aim to revive the U.S. drone industry and restore our economic competitiveness, and also any additional choice to the marketplace, which I think is equally important and which often gets lost in the conversation," he said.

President Trump issued a memo last year stating that "unmanned aerial systems is essential to the national defense," and in December, the Defense Department's head of acquisitions, Ellen Lord, said the department is looking to help spur on domestic development of drones. "DJI flooded the market with low-cost quadcopters particularly, which eroded our industrial base and really altered the landscape for the U.S. government and for the small drone industry," Lord said at the time. "What we want to do is reinvigorate that."

Groves told Protocol that it is one of the participants in the Army's "Short Range Reconnaissance drone" project to develop small drones that can help a soldier better understand their surroundings. Beyond Skydio, the $11 million award was split between Parrot, Altavian, Teal Drones, Vantage Robotics, and Lumenier. (Other than Parrot, all these companies are based in the U.S.)

Groves is of the mindset that it's possible to build drones at scale in the U.S., although that doesn't mean all the parts will necessarily come from the U.S. For example, Skydio uses graphics chips from Nvidia, which primarily manufactures in Asia. "I think it's perfectly fine to draw on a global supply chain as long as you have high levels of supply chain security," Groves said. "We need to be making drones in the U.S., with U.S. companies."

But even with large government contracts favoring U.S. manufacturers over others, Skydio would have to severely scale up production to serve the government — assuming it continues to win contracts and ease regulations. One estimate pegs DJI's share of the consumer drone market at 76% and doesn't even have Skydio as one of the 10 largest players. According to the report, there are fewer Skydio drones in the U.S. than there are drones from 3DRobotics, a U.S. company that stopped making its own drones after being priced out of the market by DJI.

Skydio declined to say how many drones it's shipped to date, but describes itself as "the largest U.S. drone manufacturer." Given how hands-on the process of building Skydio's drones is today — they're all assembled in Redwood City — it seems unclear how prepared the company would be for a deluge of new orders from the government or thousands of law enforcement agencies.

"We'll cross that bridge when we get to it," Groves said, "but right now we're focused on building great stuff here in the U.S."

Are U.S. companies safer?

Beyond economic development, one of the reasons some sections of the U.S. government are so interested in producing drones in America is that they see them as potential security threats. "It took about five years for people to realize that drones are nothing more than IoT devices that fly," Groves said. "So we should probably protect them to the same level of cybersecurity rigor we protect any other IoT device."

Various parts of the federal government have grounded their fleets of hundreds of drones from DJI and other Chinese providers, over concerns about national security. Although there haven't been any proven links between DJI and the Chinese government — something the company has vigorously refuted at every time of asking — fears still linger with lawmakers who sought to ban the federal government from buying off-the-shelf drones last year.

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There have been cases brought against Chinese tech companies like Huawei for stealing U.S. trade secrets, but with Chinese drones, the case of Chinese government intervention is less clear. Groves said he doesn't expect to spend much time lobbying from a cybersecurity safety perspective. "Security is not at the core actually of our efforts in D.C.," Groves said, but added he sees how being a U.S. company won't exactly be a hindrance. "There are natural advantages from a security perspective to working with a company based in the U.S. with founders who met at M.I.T. and have deep ties to the technology space."

"We focus quite a bit on ensuring the security of our personal services," Groves said. "But our primary objective in D.C. is to push the regulatory envelope and work with the government to enable the future of autonomous flight."

Image: Yuanxin

Yuanxin Technology doesn't hide its ambition. In the first line of its prospectus, the company says its mission is to be the "first choice for patients' healthcare and medication needs in China." But the road to winning the crowded China health tech race is a long one for this Tencent- and Sequoia-backed startup, even with a recent valuation of $4 billion, according to Chinese publication Lieyunwang. Here's everything you need to know about Yuanxin Technology's forthcoming IPO on the Hong Kong Stock Exchange.

What does Yuanxin do?

There are many ways startups can crack open the health care market in China, and Yuanxin has focused on one: prescription drugs. According to its prospectus, sales of prescription drugs outside hospitals account for only 23% of the total healthcare market in China, whereas that number is 70.2% in the United States.

Yuanxin started with physical stores. Since 2015, it has opened 217 pharmacies immediately outside Chinese hospitals. "A pharmacy has to be on the main road where a patient exits the hospital. It needs to be highly accessible," Yuanxin founder He Tao told Chinese media in August. Then, patients are encouraged to refill their prescriptions on Yuanxin's online platforms and to follow up with telehealth services instead of returning to a hospital.

From there, Yuanxin has built a large product portfolio that offers online doctor visits, pharmacies and private insurance plans. It also works with enterprise clients, designing office automation and prescription management systems for hospitals and selling digital ads for big pharma.

Yuanxin's Financials

Yuanxin's annual revenues have been steadily growing from $127 million in 2018 to $365 million in 2019 and $561 million in 2020. In each of those three years, over 97% of revenue came from "out-of-hospital comprehensive patient services," which include the company's physical pharmacies and telehealth services. More specifically, approximately 83% of its retail sales derived from prescription drugs.

But the company hasn't made a profit. Yuanxin's annual losses grew from $17 million in 2018 to $26 million in 2019 and $48 million in 2020. The losses are moderate considering the ever-growing revenues, but cast doubt on whether the company can become profitable any time soon. Apart from the cost of drug supplies, the biggest spend is marketing and sales.

What's next for Yuanxin

There are still abundant opportunities in the prescription drug market. In 2020, China's National Medical Products Administration started to explore lifting the ban on selling prescription drugs online. Although it's unclear when the change will take place, it looks like more purely-online platforms will be able to write prescriptions in the future. With its established market presence, Yuanxin is likely one of the players that can benefit greatly from such a policy change.

The enterprise and health insurance businesses of Yuanxin are still fairly small (accounting for less than 3% of annual revenue), but this is where the company sees an opportunity for future growth. Yuanxin is particularly hoping to power its growth with data and artificial intelligence. It boasts a database of 14 million prescriptions accumulated over years, and the company says the data can be used in many ways: designing private insurance plans, training doctors and offering chronic disease management services. The company says it currently employs 509 people on its R&D team, including 437 software engineers and 22 data engineers and scientists.

What Could Go Wrong?

The COVID-19 pandemic has helped sell the story of digital health care, but Yuanxin isn't the only company benefiting from this opportunity. 2020 has seen a slew of Chinese health tech companies rise. They either completed their IPO process before Yuanxin (like JD, Alibaba and Ping An's healthcare subsidiaries) or are close to it (WeDoctor and DXY). In this crowded sector, Yuanxin faces competition from both companies with Big Tech parent companies behind them and startups that have their own specialized advantages.

Like each of its competitors, Yuanxin needs to be careful with how it processes patient data — some of the most sensitive personal data online. Recent Chinese legislation around personal data has made it clear that it will be increasingly difficult to monetize user data. In the prospectus, Yuanxin elaborately explained how it anonymizes data and prevents data from being leaked or hacked, but it also admitted that it cannot foresee what future policies will be introduced.

Who Gets Rich

  • Yuanxin's founder and CEO He Tao and SVP He Weizhuang own 29.82% of the company's shares through a jointly controlled company. (It's unclear whether He Tao and He Weizhuang are related.)
  • Tencent owns 19.55% of the shares.
  • Sequoia owns 16.21% of the shares.
  • Other major investors include Qiming, Starquest Capital and Kunling, which respectively own 7.12%, 6.51% and 5.32% of the shares.

What People Are Saying

  • "The demands of patients, hospitals, insurance companies, pharmacies and pharmaceutical companies are all different. How to meet each individual demand and find a core profit model is the key to Yuanxin Technology's future growth." — Xu Yuchen, insurance industry analyst and member of China Association of Actuaries, in Chinese publication Lanjinger.
  • "The window of opportunity caused by the pandemic, as well as the high valuations of those companies that have gone public, brings hope to other medical services companies…[But] the window of opportunity is closing and the potential of Internet healthcare is yet to be explored with new ideas. Therefore, traditional, asset-heavy healthcare companies need to take this opportunity and go public as soon as possible." —Wang Hang, founder and CEO of online healthcare platform Haodf, in state media China.com.

Zeyi Yang
Zeyi Yang is a reporter with Protocol | China. Previously, he worked as a reporting fellow for the digital magazine Rest of World, covering the intersection of technology and culture in China and neighboring countries. He has also contributed to the South China Morning Post, Nikkei Asia, Columbia Journalism Review, among other publications. In his spare time, Zeyi co-founded a Mandarin podcast that tells LGBTQ stories in China. He has been playing Pokemon for 14 years and has a weird favorite pick.

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