When a License Denial Means Bankruptcy

August 2018 - TradeSecure

The Case of CybAero

Can a denial of an export license make or break your business?

For Sweden’s largest military drone company CybAero AB and its line of dual-use helicopter drones, a license denial meant bankruptcy.

In its short history, CybAero had developed valuable collaborations with organizations such as Saab and the US Navy’s Naval Research Laboratory, and garnered widespread interest from China, Norway, Pakistan, Spain, and the United Arab Emirates. Yet the company ultimately declared bankruptcy in June 2018 after a multi-year battle to secure export licenses for an eight-figure deal.

CybAero had signed a joint venture deal with Chinese state-owned Aviation Industry Corporation of China (AVIC) group in July 2014 to supply 70 drones (worth 78-89 million USD) over 8 years. When the deal was announced, CEO Mikael Hult stated the company’s goal was to control 30% of the global drone market. That dream ended only 4 years later.

A drone manufactured by Austrian drone company Schiebel, who was the target of an Austrian parliamentary inquiry for export violations to China in 2013.

The entire AVIC deal rested on the presumption that CybAero would be granted an export license by the Inspectorate of Strategic Products (ISP) — the Swedish export control agency. The company was confident the license would be granted, and CybAero had precedence on their side. Just a few months prior their deal with Chinese Customs for the sale of three advanced drones via an intermediary had been approved.

The first trouble for the CybAero deal came when ISP denied the license for the 70 drone AVIC deal in October 2014. CybAero explained the denial as the result of applying for all 70 drones in one license, notwithstanding the fact that ISP only grants licenses for two-year periods when the AVIC deal was over eight years.

On reapplication CybAero received a positive advanced notice in November 2014 for delivery of the first 10 systems. Advanced notices are not final and require final approval once delivery is to be made. This is key, as the reason for the previous rejection was lack of clarity on the drones’ end-users.

In March 2015, CybAero received the first order from AVIC: five APID ONE Ranger drones designed for commercial purposes such as infrastructure monitoring and environmental mapping. Though CybAero lacked a license at the time, the company stated they were in constant communication with ISP and expected delivery in late 2015. In April, ISP gave CybAero a license for temporary export for demonstration purposes, and the demonstrations were conducted in multiple locations in China in August 2015.

In the less than two years between August 2015 and February 2017, CybAero had two temporary export licenses denied, and one revoked after being granted. CybAero was never able to export even the first five drones to AVIC and began suffering financial problems after years of continued losses.

In early 2018 the newspaper Svenska Dagbladet ran two articles claiming that CybAero had knowingly exported military technology to China in their Chinese Customs deal, despite the EU arms embargo on the country. This drew a response from ISP, which stated that drones can be military or dual-use technology, and that the licenses issued to CybAero were for dual-use technology.

CybAero was in financial trouble, despite multiple new investors, and their listing on the First North exchange was removed.

Following the inability to resume trading, CybAero opted to declare bankruptcy in June 2018, ending the dream of controlling 30% of the global drone market they declared just four years before. Had they fulfilled the AVIC contract, CybAero may have survived. In the end, consecutive years of losses proved too much to overcome.

This case demonstrates the importance of assembling an experienced and well-supported export compliance team that possesses a complete understanding of regulatory requirements in operational markets. It also shows the detrimental effects a license denial can have on smaller companies.

CybAero’s 2014 application for an export license for all 70 drones over 8 years shows they may have misjudged Swedish and EU regulations. It is critical to understand the differences in applying for a license for a one-time export, compared to a multi-year project. Additionally, not knowing end-user information when applying for a license would be a critical flaw in any application. Despite CybAero intentionally avoiding the risks of US components in their products, it was ultimately Swedish controls that sunk their largest deal and ultimately their company.

Countries around the world are placing increasing importance on export controls and protecting technology. Global compliance requirements should not be an afterthought.