Al Root

Elon Musk has disrupted car manufacturing and rockets. He has shaken up the federal government, as well as the defense industry. Now he is coming for drones.

Investors should pay attention, though the ultimate effect might not be what they expect.

In November, Musk came after jets, tweeting some thoughts about manned fighters." Meanwhile, some idiots are still building manned fighter jets like the F-35," he said after seeing a video of coordinated drones.

Coming into Wednesday trading, shares of Lockheed, the F-35 maker, were down 15% since the tweet, three percentage points worse than the S&P 500.

Late Tuesday, Musk weighed in on drones. "Almost 100% of drones have a supply chain dependency on China," Musk said on Tesla's first-quarter earnings conference call. "The United States should not have such a severe dependency on China for drones and be unable to make them unless China gives us the parts, which is currently the situation."

While that sounds dire, it might not be as bad as feared. "Perhaps he means cheap consumer drones," said AeroDynamic Advisory managing director Richard Aboulafia. "It isn't true for military drones unless you include rare-earth elements."

Tesla didn't respond to a request for clarification about Musk's comments.

Barron's asked several makers of military drones about their exposure to Chinese parts. Not all responded. The most definitive answer came from Kratos Defense & Security.

"Kratos's family of high-performance jet drones, which includes the XQ-58A Valkyrie, 5GAT, BQM-177, BQM-167, MQM-178 Firejet Tactical Firejet, and other systems are made without Chinese parts," said the company in an emailed statement. "Kratos is sanctioned by China, and while our platforms were already free from their materials, they also now 'disallow' Kratos from using them."

Chinese parts aren't supposed to be included in military drones. More than a decade, ago, Honeywell faced a government investigation for having a Chinese magnet in an F-35 part. The Pentagon briefly stopped shipments of F-35s in 2022 after rare-earth materials used in the planes were traced back to China.

Honeywell and Lockheed didn't immediately respond to requests for comment.

Sometimes there is confusion within the industry. Anduril founder Palmer Luckey recently exchanged X posts with Mach Industries founder Ethan Thornton.

Thornton pointed out his company's Viper drone didn't use Chinese components. Luckey had questions about the airframe. Anduril and Mach didn't immediately respond to requests for comment.

Airframes are probably not the main issue. Excluding Chinese magnets and rare-earth materials from products can be challenging. China dominates rare-earth production. Estimates put its share of global refining capacity north of 85%.

Still, there are some non-Chinese options, which the Pentagon intends to grow. It wants to have a " mine-to-magnet" supply chain meeting 100% of national security needs by 2027. It is part of the Defense Department's Defense Industrial Strategy designed to ensure America can manufacture enough of the weapons it needs.

Companies are already reacting to the plan, including Anduril, which has a private market valuation of about $30 billion. One of the company's strategic goal is to build hyperscale, low-cost domestic drone production.

What the industry sometimes call "RadioShack" drones almost certainly have Chinese parts. The most serious ones, most likely, don't.

Musk might not be right, but anything that helps boost production of key military technology isn't a bad thing.

Write to Al Root at allen.root@dowjones.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

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April 23, 2025 15:52 ET (19:52 GMT)

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