Executive Summary
Taiwan’s drone supply chain is expanding rapidly. Drone exports in 2025 were nearly 35 times higher than in 2024, and exports in the first quarter of 2026 have already exceeded the full-year total for 2025. However, the batteries that power these drone systems remain one of the challenges for Taiwan’s defense industry in its attempt to achieve a non-red supply chain.
Drawing on in-depth interviews with battery manufacturers and electrode material suppliers in Taiwan, Japan, and the United States, alongside industrial data analysis, this report compares policy approaches across countries to advance recommendations for how Taiwan can reduce its exposure to China in the production of lithium batteries for drones. The research indicates that although the share of Taiwan-made drones using Chinese cells has fallen from 70 percent to 50 percent and Taiwan now possesses internationally competitive downstream packing capacity, the upstream supply risk persists. Sectors such as cathode active materials (CAM), CAM precursors (pCAM), anode active materials (AAM), and battery-grade refined minerals remain heavily dominated by China. Furthermore, China has shown a tendency to strategically control the export of high-energy-density lithium battery-related materials and technologies over the past three years.
To avoid the risks posed by China in the battery supply chain, a sufficiently large and high-specification market demand for non-China-made batteries is needed to incentivize electrode material manufacturers to invest in producing key raw materials that cost 40-50 percent more than those manufactured in China. However, due to the highly fragmented demand for drone batteries and the market size being far smaller than that of electric vehicles or large-scale energy storage systems, market mechanisms alone are insufficient to drive Taiwanese manufacturers to invest in production lines, nor are they enough to attract material suppliers from outside China to set up factories in Taiwan.
To solve this problem, it is not enough to simply rely on existing regulations, such as excluding non-China-made batteries from public sector drone procurement. Taiwan must adopt an integrated industrial strategy, connecting defense and public sector drone batteries with the broader demand for high-end batteries, and playing the role of a “procurement partner” within that alliance framework, actively participating in the standards setting agenda. By aggregating demand and guiding non-China-made battery-grade material suppliers to invest in long-term production, Taiwan and its strategic partners can jointly reduce their dependence on China in the drone battery supply chain.
- The Structural Risk of the Battery Supply Chain Lies in the Reliance on Chinese-made Cathode and Anode Active Materials
The high energy density and fast discharge speed of the NMC chemistry makes it a primary choice for drone applications. However, China controls roughly 65 percent of global NMC CAM production, 95 percent of pCAM, 97 percent of AAM output, and 95 percent of battery-grade graphite processing. In 2025, Beijing imposed export restrictions on cathode technologies, placed battery cells and precursors on the Dual-Use Export Control List, and sanctioned eight Taiwanese defense-linked enterprises. These actions clearly demonstrate how China has leveraged its upstream monopoly to pursue its geopolitical interests.
- Taiwan’s drone battery industry possesses both international technological achievements and structural exposure
Taiwan has considerable downstream technological capabilities. According to this report, Taiwan’s annual battery cell production capacity is approximately 9.41 GWh, and it holds a dominant position in battery pack packaging.
Interview data shows that at least one Taiwanese manufacturer maintains monthly shipments of 5 to 7 million cells to Ukraine. According to Ukrainian customs data (HS 8507 electric storage batteries), Taiwan’s battery exports to Ukraine in the first quarter of 2026 amounted to approximately US$ 11.85 million. Looking at historical figures, Taiwan has risen from 24th place among Ukrainian suppliers in 2019 to third place in 2025, second only to China and Vietnam.
However, this report points out that Taiwan’s battery industry is still constrained by three structural conditions:
- Inconsistent battery chemistry with military-grade requirements: Approximately half of Taiwan’s domestic battery cells are lithium iron phosphate (LFP), whose characteristics do not meet military-grade requirements, and less than half of the battery modules used in drones are non-red batteries.
- High exposure to upstream supply chains: Currently, Taiwan has no domestic manufacturers of high-nickel cathode active material or cathode precursors.
- Insufficient market scale benefits: Taiwan’s drone battery cell market is too small and fragmented to attract upstream material investors.
Policy Recommendations
- Sharpen non-red battery supply-chain governance in line with international traceability timelines
In January 2026, the Public Construction Commission under the Executive Yuan issued a drone procurement guideline encouraging agencies at all levels to incorporate non-red sourcing requirements into their tender documents. Under the guideline, the procurement of drone battery modules and other passive components must be sourced from non-Chinese suppliers from 2027 onward.
Drawing on industry interviews and a review of the EU Battery Regulation, the EU Critical Raw Materials Act (CRMA), and the procurement restrictions on Foreign Entities of Concern (FEOC) scheduled under the 2026 U.S. National Defense Authorization Act (NDAA), this report recommends that the government set a clear timeline for removing Chinese inputs at the cell and material level. By 2028, publicly procured drones should use Taiwan-made battery cells and non-Chinese material suppliers.
Phasing in this adjustment would strengthen firms’ incentive to diversify their upstream sources and build a workable basis for origin tracing. It would also position Taiwanese manufacturers to qualify for the U.S. Department of War procurement list and prepare them in advance for the EU battery-market requirements now coming into force.
- Build scale through standardization and high-spec aligned export markets
Taiwan should address the challenges of highly atomized demand and insufficient market scale in its drone battery sector by driving specification standardization and expanding exports. Specifically, Taiwan should target Eastern Europe and the Ukrainian market, leveraging battlefield deployments to establish technical credibility, accumulate operational data, and aggregate order volumes necessary to surpass the minimum order quantity (MOQ) thresholds enforced by upstream material suppliers.
In addition to customized designs, Taiwan should strategically plan the mass production of standardized cells built on common military specifications. Concurrently, the government should provide targeted subsidies for verification and testing costs, thereby assisting small and medium-sized manufacturers in acquiring the credentials required to enter high-value allied defense markets and adjacent emerging sectors such as eVTOL aircraft and robotics, effectively expanding the scale of market demand.
- Secure non-Chinese cathode and precursor supply
Taiwan should address the structural gap in upstream cathode and anode materials by combining short-term stockpiling – viable for roughly six months – with longer term strategies to build non-Chinese material flow, since domestic CAM and pCAM production from scratch is economically unrealistic given thin midstream margins. We recommend pursue three complementary paths: attract non-Chinese CAM and pCAM manufacturers to build facilities in Taiwan through direct government incentives, engage actively as an advisor in the Partnership for Indo-Pacific Industrial Resilience (PIPIR) dialogue and propose the aggregation of demand across allied partners; and develop a recycled-feedstock pathway by coordinating domestic recyclers and cell manufacturers to secure offtake agreements with midstream partners.
Scope of Report
Chapter one situates Taiwan’s drone procurement expansion against its persistent reliance on Chinese-made batteries, a supply chain Beijing has already shown inclination to weaponize through export controls and targeted sanctions on defense-linked firms.
Chapter two maps the global lithium-ion battery supply chain from raw mineral extraction through midstream processing of cathode and anode active materials to cell manufacturing, identifying NMC cells and its upstream as the strategic chokepoint.
Chapter three assesses Taiwan’s battery industrial position, the three structural constraints on drone-battery security (chemistry mismatch, upstream dependence, insufficient scale), and elucidating that current policy push does not address supply chain disruption risk while market pull remains inadequate.
Chapter Four sets out concrete policy recommendations organized around three mutually reinforcing strategic actions: extending procurement rules to electrode materials, building economies of scale by driving specification standardization and integrating international market demand, and seeking strategic cooperation with non-Chinese upstream material suppliers.
