Snake Island Institute

Localization of the production of unmanned systems and electronic warfare (EW) assets is critical to the development of Ukraine’s national defense industry. It reduces dependence on unstable foreign supplies, increases flexibility in adapting technologies to frontline needs, generates economic benefits, and unlocks significant export potential—positioning Ukraine as a reliable producer of strategically important technologies. At the same time, success in manufacturing these systems directly depends on the development of the component market.

Today, this market is highly uneven. Some components are widely used across most systems, while others cover only a small share of demand or are entirely absent. Across all segments, a common trend is evident: component manufacturers have the potential to scale, but do not receive sufficient orders from final system producers, who often prefer imported components. As a result, it is necessary to support the development of domestic component manufacturers by removing regulatory barriers that favor imports and by providing financial support to enable scaling and reduce production costs.

The state has already introduced a number of localization support instruments, but they have clear limitations:

— Financial support: Grant programs such as Brave1 and Made for Victory are effective at the early stages of production. Lending remains extremely limited due to the lack of insurance mechanisms, banks’ unwillingness to assume risk, and the absence of criticality status for component manufacturers required to access state subsidized lending.
— Tax conditions: Diia City and Defence City offer favorable regimes for payroll taxation, working capital, and profit reinvestment. However, tax and customs benefits that favor imported components create an additional burden and increase production costs for domestic manufacturers.
— Criticality status: The absence of state contracts restricts component manufacturers’ access to the status of the critical defense-industrial complex (DIC) enterprise, complicating access to subsidized financing and workforce reservation. Localization incentives in public procurement: Initial steps have been taken in this direction (the Weapons of Victory resolution, draft law No. 13392), but a systematic mechanism is still lacking.

To address these challenges and develop the component market, the following measures are proposed:
— Establish a dedicated grant program for strategically critical components; expand state subsidized lending  by adding risk insurance and extending eligibility to component manufacturers; attract foreign capital.
— Ensure equal conditions for Ukrainian and imported components through amendments to tax and customs legislation.
— Grant criticality status to component manufacturers whose products are actually used by the Armed Forces, even in the absence of state contracts.
— Stimulate localization in public procurement by providing preferences directly to final system manufacturers that use Ukrainian made components.
— Our proposals go beyond identifying priorities. They are complemented by detailed descriptions of implementation mechanisms, assessments of the expected impact on market development and production localization, and analyses of potential obstacles and risks during implementation.