China’s $12 Trillion Manufacturing Upgrade

Sheng Zhong (0:00)

Welcome to Thoughts on the Market. I'm Sheng Zhong, Morgan Stanley's China Industrial Analyst. Today, how AI and automation are transforming China's factory and what that could mean for global manufacturing. It's Tuesday, September 29th, at 3 p.m. in Hong Kong.

For decades, Made in China has been shorthanded for scale, speed and low-cost manufacturing. Now, the story is shifting towards something more ambitious. Using technology, productivity and industrial know-how to shape not just what gets made, but how it gets made. We call this transition Industrial 5.0. Industrial 4 was about connecting machines and digitalizing production. Industrial 5 goes a step further using AI to improve how factories schedule production, manage quality and maintain equipment.

China is starting from a position of enormous scale. It represents roughly 28% of global manufacturing value added and covers all 666 industrial subcategories defined by the United Nations. There were already more than 30,000 basic level smart factories and more than 100 million connected industrial devices. That industrial base also gives China a strong platform for robotics. Traditional industrial robots generally perform fixed tasks. Embodied AI could make machines more flexible, allowing them to gain new capabilities through software and updated models. That could effectively turn some physical labor into software upgradable capital. And the numbers give you a sense of how quickly this could scale. China could go from selling about 8 million robots a year in 2025, to 29 million in 2030, and 76 million by 2035 That's roughly a nine-fold increase in annual sales in just a decade.

Scaling robotics and AI across such a large manufacturing base will require a lot of capital. We estimate Industrial 5 could generate about $12 trillion of incremental industrial investment in China from 2026 through 2035

Around $5.5 trillion would go toward factory upgrades, including robotics, smart equipment and software, while roughly $6 trillion would support new industrial capacity. But that investment cycle is likely to build gradually. We expect industrial capex growth of about 4-5% annually in 2026 and 27, before accelerating towards 6-7% from 2028, as access capacity is absorbed, technology bottlenecks is, and AI adoption broadens across factories. If that investment translates into higher productivity, the economic impact could be meaningful. By 2035, China's industrial profit margin could rise to 8% from roughly 5% today. Industrial 5 could lift China's potential GDP level by around 3.5%, helping cushion some of the drag from an Asian population. And China's share of global manufacturing value added could increase from about 28% to 30%.

And those changes would not stop at China's borders. Final assembly could shift to new locations, but the supplier networks, machinery, and production know-how behind it are much harder to replicate. We estimate only around 40% of China-to-U.S. exports could be readily substituted. That means China's role may increasingly extend beyond exporting finished goods to supplying the equipment, components, and industrial systems used to make them as well. That is the move from Made in China toward Made by China.

Thanks for listening. If you enjoyed the show, please leave us a review wherever you listen and share Thoughts on the Market with a friend or colleague today.

SPEAKER_2 (4:41)

The preceding content is informational only and based on information available when created. It is not an offer or solicitation, nor is it tax or legal advice. It does not consider your financial circumstances and objectives and may not be suitable for you.