In 2025, Ukraine produced weapons worth $9 billion, said former head of the Ministry of Strategic Industry and Trade Herman Smetanin. The imagination immediately paints a picture that the Ukrainian economy earned an "extra" $9 billion instead of giving this money to foreign suppliers.
But the reality is a bit more complicated. Of this $9 billion, a significant portion of the money went abroad to purchase components for weapons production. Ukrainian military equipment remains highly dependent on imported, particularly Chinese, electronics, and certain critical components.
The scale of this is staggering. One of the largest importers of Chinese parts, Ukrainian company TAF Industries, has contracted $1 billion worth of components in China in the last 18 months alone.
This makes you think about the production of components in Ukraine. After all, it is not only about money, but also about independence from political restrictions, the ability to control quality, protection of technologies, acceleration of deliveries, creation of jobs, the key to entering the global market, etc.
The presence of local production of weapons components is an indicator of the maturity of the defense industry and its readiness for external challenges. But is the state ready to give the green light to component manufacturers and stimulate their development?
There are certain problems with this in Ukraine. An interesting fact: foreign component manufacturers have preferential taxation, while Ukrainian ones do not. That is, the state actually encourages buying Chinese electronics instead of Ukrainian ones, and domestic companies to transfer production to neighboring countries.
The state arms order is structured in such a way that the Ministry of Defense cannot take into account the presence of Ukrainian components during procurement and give a manufacturer with high localization an advantage in concluding contracts.
The "short" contracts concluded by the Ministry of Defense make long-term planning impossible, which is extremely necessary for building complex production chains with a high degree of localization.
"Defense" investigated why Ukrainian weapons production still remains immature in terms of components and whether domestic manufacturers will be able to get rid of their dependence on China.
Why are weapons components a strategic issue?
One Chinese factory can simultaneously fulfill orders for Russian and Ukrainian "friends." At the same time, Beijing makes it more difficult for its enterprises to access the Ukrainian market every year. First, the Communist Party imposed restrictions on the export of drones, and then on components for them.
The market has adapted to these restrictions and found ways to continue trading through intermediaries and, perhaps, loopholes in the law. But there is no doubt that this remains possible only because the Chinese authorities want it to.
In the event of an escalation of the conflict or another rapprochement between Beijing and Moscow, Ukraine, together with its partners, may quickly be left without the ability to produce its main weapon, at least in the same large volumes.
Manufacturing our own components is needed not only in case of World War III. Local production allows for better control over the quality and pace of deliveries. Previously, drone manufacturers told Defense that there were frequent cases when low-quality equipment, unsuitable for combat operations, arrived at Ukrainian factories from China. Or it arrived late due to a large logistical burden.
The requirements for combat drones are constantly increasing, and the scope of their use in war is expanding. This creates a need for specialized military components, rather than ordinary civilian ones.
"Civilian cameras are optimized for the cost and convenience of the average user. Combat cameras are optimized for specific combat tasks: low latency, high "survivability", protection from moisture, specific operating modes for different scenarios, integration with other devices."
For example, searching for a target in the sky will be different from searching for a ground target. You need high contrast, a narrow lens angle for long-range detection, and a high number of frames per second, as the target is moving at 300+ km/h," Andriy Tagansky, business director of Odd Systems, explained to Oborontsi.
Such military technologies can already be classified as strategic, so the corresponding R&D centers and production capabilities should ideally be located as close as possible to prevent supply disruptions and technology theft.
The ability to produce at least some of the components is also about economic benefit and the development of engineering. The Ukrainian market for drones and missiles is worth billions of dollars, most of which does not stay within the country, but flees abroad due to the need to buy electronics and explosives there.
According to the founder of Vyriy, Oleksiy Babenko, if in the future all Ukrainian drones are converted to domestic engines, it will help create about 1,000 jobs. And according to Tagansky, the production of cameras for just 100,000 drones per month could create hundreds of jobs.
Component production could become an integral part of future arms exports, which are set to begin soon.
"If we are focused on selling weapons to NATO countries, then the use of Chinese components is a "red flag" for the buyer (Western countries put forward requirements for their manufacturers to minimize dependence on China - ed.). Foreign buyers are interested in Ukrainian cameras or ready-made gimbals, because our companies are ready to provide quality, production volumes and, of course, a competitive price," said Serhiy Goncharov, executive director of the NAUDI association.
And the last one is the possibility of transferring production lines with electronics to civilian tracks after the end of hostilities. Theoretically, this will be easier to do than producing ready-made drones.
"All these productions will be very easy to repurpose for civilian life with all production cycles. For example, if we make a flight controller, we will later be able to make boards for security systems, alarms, washing machines, microwaves, refrigerators, etc. The need for this in the world is huge, and we will be able to compete thanks to cheaper rent, labor, electricity, etc.," said Babenko.
What does Ukraine already produce?
We do not have a developed industrial base to ensure complete localization of weapons production right now. It is unprofitable to produce armor steel in Ukraine, explosives require hundreds of millions of dollars of investment, and complex electronics will inevitably come from Western countries and Taiwan.
"We can't give up on China. For example, very good engines for ground robotic complexes are made in China. They are very cheap and of high quality. We still have to sweat for five years to get to this point."
"Unfortunately, all the people who designed transistors and resistors in Soviet times - many of them are now abroad. We have never manufactured complex multilayer boards, even under license," Igor Fedirko, director of the Ukrainian Defence Manufacturers’ Council, a union of associations, told Defense.
But Ukraine has had some successes. Back in March, one of the largest drone manufacturers, Vyriy, presented its first thousand FPVs made exclusively from Ukrainian components. The company was able to achieve this thanks to its own capabilities and contractors within the country.
The company's founder, Oleksiy Babenko, noted that the Ukrainian components themselves are made from imported chips and more primitive components. However, up to half of the funds will remain in Ukraine thanks to assembly, some localized parts, and the company's profit.
To date, Vyriy has produced about 10,000 FPV drones made entirely from Ukrainian components. Their price is almost the same as drones made from Chinese components.
10 thousand is a drop in the ocean, compared to the 4.5 million units that the Ministry of Defense plans to put on the front in 2025. At the same time, according to Oleksiy Babenko, the company's basic drone models, which are mass-produced, already have 70-80% of domestic components. To switch to the production of purely Ukrainian FPV, only Ukrainian cameras and motors are missing - they are produced, but so far in insufficient quantities. But perhaps this "bottleneck" will disappear over time.
"Defense" visited the production of the Motor-G company , which manufactures electric motors for drones of various types. The enterprise was founded in 2023, and now reaches a volume of one hundred thousand motors per month.
The plant has two main production lines. The first one assembles stators, and the second one assembles rotors. At the third level, both main components of the electric motor are sent to the final assembly line, where they are assembled into a single motor.
The company orders housing parts and raw materials from five Ukrainian and several foreign suppliers. Together with contractors, this production provides several hundred jobs.
In parallel with the gradual increase in its own production capabilities, "Motor-G" helps partners expand the production of body parts, which requires CNC machining, nickel plating of parts, and application of special chemical coatings.
As the director of the enterprise, Oleksiy Hrebin, said, the plans are to produce several hundred thousand electric motors per month by the end of the year.
The company claims that the majority of components in their motors are domestic. However, there is no production of three elements in Ukraine: magnets, small high-speed bearings, and silicone wires.
Local companies are also developing drone battery production. Pawell Power has developed its own battery models for various types of UAVs and is now able to produce up to 10,000 units per month. The company produces batteries ranging from small FPVs to large bomber drones.
The battery manufactured in Ukraine consists of a housing made of plastic and covered with a protective film. The housing is also reinforced with metal angles for structural integrity. Two wire connectors are led out of the battery, which are connected to power and balance the battery. Handles are also attached to the housing for carrying it and attaching it to the drone.
The main problem with localizing drone battery production lies in the power source itself inside the housing. The company purchases them from China, where there is sufficient raw materials, processing capacity, and favorable environmental legislation.
The 1ms company produces devices for initiating the detonation of various types of drones. Located in one of the central regions of Ukraine, the company can currently produce about 10 thousand of such devices per month. They consist of an initiation board, a sealed housing, detonation sensors, wires, and a terminal block.
Wires and terminal blocks are imported from China. The blast sensors and hermetic housing are assembled in Ukraine. At the same time, the most expensive component of the device, namely the initiation board, is manufactured in Poland.
Ukraine also has at least two companies that specialize in manufacturing cameras for military drones – Oko Camera and Odd Systems. Together, they supply dozens of Ukrainian drone manufacturers.
In the state cluster Brave1, it was said that today about 200 companies specialize exclusively in the production of components. Weapon manufacturers themselves are also engaged in this, supplying parts to the entire market.
What hinders Ukrainian component production?
It cannot be said that the state is not making attempts to stimulate the production of components. The Ministry of Defense has a project called "Components Library", which is actually a state catalog of verified manufacturers.
There is also a program "Made for Victory", under which you can receive a grant of up to 8 million hryvnias for the development of component production. However, no one has reported on its results yet. The Brave1 cluster also provides grants to component manufacturers, helps them integrate into the market, and is currently preparing a large-scale program to support such enterprises.
But the main deterrent factor lies not so much in the lack of investment from the state, but in fundamental systemic shortcomings.
The biggest problem is the unequal conditions with the Chinese. The fact is that when the "boom" of drone production occurred in 2023, deputies introduced preferential conditions for the purchase of imported components, eliminating the obligation to pay 20% value-added tax and import duty for them.
The decision was correct and timely, because at that time absolutely all Ukrainian drones consisted of Chinese or European electronics, and it was necessary to make them as cheap as possible.
Two years have passed, the drone market has finally taken shape, and Ukrainian factories for the production of components have begun to appear: cameras, frames, engines, boards, etc. But no one has introduced any benefits for domestic components. It turns out that our manufacturers pay VAT according to general rules, while Chinese ones do not.
Accordingly, Chinese components are not only highly competitive in themselves, but also have a price advantage of 20%. As a result, it is much more profitable for a drone manufacturer to buy Chinese electronics. And Ukrainian component manufacturers are encouraged to transfer investments to neighboring countries, and from there import products without VAT.
The discussion about unequal conditions for Ukrainian and foreign component manufacturers has been going on for over a year. There are two ways to solve the problem. The first is to introduce benefits for domestic manufacturers, the second is to return VAT for Chinese components, equalizing the rules.
Interviewed by "Defense" interlocutors among officials and manufacturers note that it is dangerous to go for Ukrainian by introducing benefits, because it may create a risk that civilian electronics not related to the war will be recorded as "drone components". And if we go for the VAT refund on imported ones, it will increase the cost of drones with Chinese components, which are still the vast majority on the Ukrainian market.
The problem of increasing prices for drones made from Chinese components in the event of a tax refund is debatable, because this "price increase" will return to the state budget in the form of taxes, which will still go to the purchase of weapons. In other words, if VAT on imported components is refunded, the state will simply transfer money from one pocket to another.
According to Fedirko, opposition to the initiative to create equal conditions comes not only from the state, but also from some representatives of the defense industry. During the existence of preferential conditions, the import of Chinese components has become a big business . This business plays a significant role in Ukraine's defense capability, and its beneficiaries do not want to change the rules of the game.
"At the last working meeting with the authorities on components, there was a real deadlock. We have the most meetings now on this topic. The market is divided 50-50, and we need to look for a balanced solution. Perhaps, in the end, customs duties and VAT will be returned for some components, and preferential conditions will be left for others, because Ukraine is not yet able to master their production in the required quantities," Fedirko noted.
So far, there have been no concrete steps taken by the government and people's deputies to correct the situation. According to Oboronka, relevant discussions on this problem are currently underway in the Ministry of Defense.
But VAT is only part of the problem. The Ukrainian state, in principle, does not have a policy on purchasing weapons with a high degree of localization. The domestic procurement system is not able to give priority to a Ukrainian manufacturer over a foreign one, if it is about the same product.
The problem is that the key criterion when choosing a supplier remains price. At the same time, the origin of the manufacturing company, the reliability of supply chains, or the presence of domestic components do not play a role during procurement. "Defense" wrote in the summer that because of this, in particular, a Ukrainian manufacturer of 155 mm shells was left without a contract.
The Head of the Defense Procurement Agency (DPA), Arsen Zhumadilov, notes that something has changed since then, and starting from the next contracting cycle, the factor of local production will be taken into account by the state customer.
"We have already developed a methodology and procedure for its application so that we give priority to domestic manufacturers. In October, we will receive a list and volumes of products that need to be supplied next year. And for the first time, we plan to apply localization requirements to them.
The first step is to distinguish whether it is a local manufacturer or an import. If the manufacturer is Ukrainian, then it will have priority when contracting. This is called a qualification criterion. And already in the basket there will be competition with Ukrainian manufacturers. At the same time, clear rules will be prescribed for diversifying supplies so as not to give all orders to one manufacturer.
The second step is that we will be able to distinguish among the already presented Ukrainian products how deep the localization of production is. But we will not implement this system immediately, since it requires a high-quality methodology and a control system so that manufacturers do not manipulate it.
"We will work on the second step starting next year. It is important to do all this gradually so as not to "break" the contracting and not leave the army without weapons," Arsen Zhumadilov told Defense.
In other words, first the rules will be applied to give priority to the Ukrainian manufacturer. And later the rules will be written to make it possible to give priority to the "most Ukrainian" among them.
The key problem here will be to determine what exactly we consider a Ukrainian component. Because in theory, it can be both a full-fledged domestic product with high added value and a Chinese camera with a Made in Ukraine sticker.
Avoiding manipulation by manufacturers, who may mask the origin of a component behind a bunch of contractors, will be an even bigger challenge. "I believe that it is possible to reliably determine the origin of components, there are tools for this. But this will result in a heavy burden on regulatory authorities," Fedirko said.
Another factor inhibiting component production, which Serhiy Goncharov points out, is short contracts. The problem is that building complex production chains with in-house production, rather than purchasing components, requires predictability for years to come.
But in Ukraine, arms supply agreements are usually concluded "by the end of the year." That is, a defense company has no guarantees that its products will be purchased next year. And if they are, it cannot be sure about the volumes.
This applies not only to drones, but also, for example, explosives for ammunition. The Ukrainian system of ordering weapons makes investing in the production of components risky and encourages manufacturers to look for "quick" solutions, such as buying ready-made components abroad.
"Defense" mentioned this problem in a separate article. The Ministry of Defense verbally declares the possibility of concluding three-year contracts, but in fact these contracts are one-year with the possibility (!) of extension. That is, the state customer is legally obliged to finance "three-year" agreements for only one year. Everything else is "if there is money."
Zhumadilov assures that the problem with three-year contracts will be fixed. "At the beginning of 2025, three-year contracts really lacked legal guarantees for their financing. We worked this out with the Ministry of Defense and the General Staff so that appropriate guarantees for manufacturers would appear. And in January of next year, financing three-year agreements will be an obligation, not a right, of the Defense Procurement Agency," he noted.
Ukraine needs its own production of weapons components now more than ever in every sense: politically, economically, and militarily. But this industry will never appear on its own. Lack of money for development is only part of the problem, because manufacturers still need favorable and predictable market conditions.
"Currently, there is no business logic in producing components in Ukraine. Manufacturers do it only because they themselves decided to do so. Due to unequal conditions, it is much cheaper to launch the same thing in China or Poland," Babenko concluded.