Is China Still the Growth Engine of Global Manufacturing?

(upbeat music) - Industry Talks by ARC Advisory Group. - Welcome everybody to ARC Industry Talks, the monthly podcast where we discuss the latest industry trends. I'm here with my colleague Florian Guzna, my name is David Humphrey. Today's Monday, we're back in our very comfortable studio here. Did you manage to have fine time to do the ARC wire analysis? - Yes, and we did that again, back to spreadsheets, and it wasn't that much industry. We went on, we had the consumer electronics shows and Las Vegas, but we weren't really traveling, so we went back to spreadsheets. - All right, let's talk about it a few, but give me a quick overview of what the topics were. - As you know, Siemens was at the consumer electronics show, so we wrote about that, and many people were interested in these writings. One of the top click links we had in our news that we're around the Orlando Forum that is taking place in February. We had an article from Rita, our office lead in China about China and green energy with the focus on hydrogen, and we had always, like, scaring an interesting topic at the same time, AI and cybersecurity in articles from Shantai Poisonetti. - So David, you are the main lead analyst for Siemens at ARC. Can you please talk about Siemens and the consumer electronics show? What happened? Why are they even there? The C55 is some years ago. - Okay, you still know that one. All right. - Yeah, I have one. - Yeah, the consumer electronics show is for things like RoboVacumes and other consumer devices. It's not really where you expect to find Siemens, and yet Siemens, not only exhibited there this year, but they had a keynote speaking slot with the president, Roland Bush, CEO of Siemens speaking. He did the same last year, and the reason he was even in Las Vegas is because he's talking up the partnership that Siemens started four years ago with NVIDIA, and NVIDIA, you know, as just an incredibly valuable influential company in graphic chips, and now moving into AI. And Siemens is taking the initiative by finding the right company to partner with, number one company, to develop the future of AI. And four years ago, we were there. They talked about the industrial made-of-ers developing it, whatever it is, it sounds kind of far-fetched. But at the time, at least this year, they talked about, they talked about developing the industrial AI operating system. Now, to me, they didn't go into a lot of details. This would be what lies underneath, what every device runs on. And to achieve this, Siemens agrees to contribute, its industrial AI expertise of which it has gathered a lot in recent years, and NVIDIA is going to produce, is going to share its AI infrastructure, simulation technologies, and accelerated computing platforms. Now, just to give you an idea, you know, digital twins, we have them today. We're using them. They're great for simulation. For simulating how a product is designed. And then when you have the design finished, how you actually go out and build it. And today, you can go out and simulate, a handful, a few dozen different scenarios in order to find out the best one for your product versus design and the most optimal way to manufacture that product. In the future, you can use complex industrial foundation models that will help you factor 1,000 or 1,000 or 100,000 to test and simulate not dozens, but maybe a few 100,000 different scenarios of how best to build your product or to design your product. And then I'm just picking the right one afterwards as a user or what's in for the user. That design, the very sophisticated networking that goes into this, though they'll tell you the distance equals 0, even though it's 8. So to answer your question, it's a private crowd cloud that's on-premise, technically, virtually on-premise. But it's an exclusive cloud, which is why it's private. There's no other people taking part using its resources as well. It's purely dedicated. It's one really thick, fiber optic cable that Audi actually had the workers go out and dig up the trench to lay along the Bundestrasse going out to the data center. All right, let's move on. The ARC industry forum that takes place in Orlando's coming up, I think, in February, how is registration looking? Good. I mean, we see that many people click on the registration, so we see it ramping up. And they can't believe it's actually the 30th forum. Wow. And on the other day, I got a notification on LinkedIn saying, Andy Chetta is now employed at ARC for 40 years now. I did road and-- Our president in our founder. I did road and he said, Andy, is it ARC's 40th anniversary? And yes, in January this year, we had our 40th company University. And you had your 25th anniversary. I did my 25th anniversary last year. So this year, we are-- the title is how AI is driving the future of industrial operations and supply chain. Very interesting topic. So sessions look great. We have very great presentations. We have Magnus Newton, head of animations from AstraZeneca, Ashine Parik from PepsiCo. I hope I'm not pronounciate his name too bad. Greg Davidson from Rolls-Royce, ChatRite, CIO from Boston Dynamics, Michael Farrell. We also know director of business transformation from West Pharmaceutical Services. He was at our forum in stitches last year. So we have quite a diverse group of key notes there. Looks very, very good. Of course, like the oil and gas companies are also there like every year. On the sponsor side, we have global gold sponsor Siemens. We have our global sponsor Smarr. Also, 14-and-a-texagon inductive automations, LTTSO, PC Schneider, Electric, and CDATA are all gold sponsors. We have numerous others. So I mentioned all these names just to show it's a very mixed back. It's not just the forum about the US automation companies and the oil and gas industry. It's the complete industry. Companies from Brazil, from Germany, from all over the world, also participating actively. So I'm really looking forward to that. It's going to be very, very good and look forward to the presentations as such. And also, David, to the networking event, to meeting people. It's always a very open atmosphere. We do exit interviews and ask people, what do they really like about the forum? And the feedback has been consistent over years. The people say, the presentations? Yeah, they were great. I mean, great stuff. But the real value for me, as an attendee, was the networking. The people that I met there had a chance to chat with and who I didn't expect to meet. And the resulting conversations and actions that I'm going to take. I mean, I've been there in the last few years. It's always the same. The sessions are packed. So people also really like the presentation. But the networking is a key value. And it's a key business value to be there. And I think our forum is unique in the case that there is not much left in US in terms of industry events. That's true. We had company events. Everybody has a company event, but nobody has a true executive level industry event. And it's not neutral if it's one company. Yeah. Yeah, it's a very unique event. And I'm really looking forward to be there. Great. Let's talk about hydrogen and China. And it seems like a contradiction. I want to think of China, think of coal. What's happening there? A few years ago. So when I was first, my first trip to China was 2010-ish. And I had, I think, five to 10 minute walk in Beijing. And afterwards, your mouth was really crispy. Last year, one and a half years ago, I was in Shanghai. I did 10K run along the river. And how was your mouth? Draw. Perfect. No, it really has changed a lot. And according to the data from the national energy administration by the end of October, last year, the installed capacity of renewable energy across the country has reached 2.2 billion kilowatts, being almost 60% of the installed capacity. Wind, solar, everything. And we saw that, like the example that I mentioned, right? Something else happened to the city of Lins in Austria. They-- for the Austria, they were polluting the city. And they had to clean it to get workers there and be an attractive employee and an attractive city. So this is, of course, one motivation for China to go green, to go net zero, basically. But it had also great strategic and geopolitical reasons. So China does not have any more much oil. They need their rely on imports. And they want to be self-sufficient and independent. And renewables are an option, right? So they also have a lot of e-cards. We talked about that before as well. But also, power is becoming a comparative advantage for nations when it comes to AI, because we have that huge need for power for the AI mega-giga monster factories. The interesting thing with hydrogen is that in the mix of renewable energies, photovoltaic, thermal solar, wind, biomass, whatever, it has some unique, really unique characteristics. And the one thing is you can store it in one way or the other. So you can generate power with wind. And then you store the hydrogen or you store it in-- you can store it. You can ship it, and this is something that really helps stabilizing the grid. And just one other way, instead of just using lithium battery storage and like-- it also is something that helps the decommunization of high energy intensive industries. Steel, chemical, cement. And there are processes in there that use methane. And others as feedstock or just for heating, for burning, you can burn hydrogen. And that really helps achieving the near-zero life cycle carbon emissions in these industries. And you cannot do that with other energy sources, or just by substituting primary energy carriers with secondary energy carrier power. The third benefit of hydrogen is that it functions as a connection between electricity, heat, and fuel, not only in industry, but also in a greater society. So you can inject hydrogen in the gas pipelines. And it really helps making the whole society greener. It's really strategic value. Why is it that you're always the person covering China from the European team? It just happened that I'm traveling there since almost 15 years now. And I've worked very closely with the Chinese team since 15 years now. So going back and forth, visiting multiple cities always very close to our Shanghai office. So it's not just me alone covering it. It's our team in China as well. And presumably I will be invaging this March again. And also I have discussions with Chinese OEMs. I'm just involved in China discussions since 15 years. So the last item on our list is Shantal's article about NIST AI and Cybersecurity. What is it about? This is a report on what's happening in the US through a government agency called NIST, which I think stands for the National Institute of Standards and Technology. And what they are doing is they're getting behind manufacturing in the US. They're expanding their efforts to ensure American leadership in artificial intelligence, whether they actually ensure American leadership and the Chinese aren't faster, even the Europeans that remains to be seen. But concrete is what they've established to centers to advance the delivery of AI-based technology solutions to accelerate and improve the position. There's something going on in other parts of the world to here in the European Union. There's a similar strategy that it's basically operates through a more decentralized network of centers rather than at a single agency run institute. The framework is primarily driven by this center called the European Cybersecurity Competition Center. It's based in Bucharest. And it serves as a central hub for consolidating cyber security research and funding to give you an idea that's centered recently, year marked 350 million euros for AI-powered threat detection and initiatives promoting cyber solidarity to enhance the protection of criminal entities. And I'll add just one final interpretation to that. We would think of AI as being a tool to go out and ferret out cyber threats. But on the other side, AI is being used as a tool to write code for viruses. That's what we're up against. AI is actually automatically generating the threats. It's not just finding the threats on the good guys side. The bad guys side are using as a tool against industry. And that's what it's all about. All right, Florian, thanks for your time today. In one month, we're going to record our next podcast. And we're going to talk about the topics and events in the happenings at the Orlando Forum, which takes place coming up in about two weeks. So-- Second week of February. Yeah. To our audience, thanks for tuning in today. I'm going to ask Florian to put on a pot of coffee, because we're about to go into our deep dive on China. So please stay tuned. This is David. And I'm back with Florian to enjoy a round of coffee and to talk about what's happening in China. And Florian, we need to talk about China. I'm doing some research in a certain area right now on the Chinese market. And I have the impression that the certainties that we once understood as the God-given truth no longer apply, what's happening in China? A lot of the so-- yeah, the truth. That the certainties that we once had, which made our analyst life quite easy, they are gone. So anything you mean specifically-- I mean, China is-- OK, China used to be a huge growth market. We relied on China. It members for its reliable growth of every year, 9% in industrial markets. We were much higher than that. And I'm not sure of anything anymore in China because of the economic and political situations. I mean, it's a multi-dimensional problem. So we do need to talk probably top down. macroeconomic level first, then industry. And then we can finally go down to automation all the way down to up sensors and stuff. All right, let's start with the macroeconomic trends. Well, how are things looking there? You want the brief summary? Give me the main points, and we'll talk about them individually. OK, so the brief summary would be, huh? It's not looking as easy and good as it has been in the past from the really macroeconomic framework. One of the very basics of macroeconomic growth is population growth. Everyone knows one tried to pull this a long time. So they have a demographic challenge, like we in Germany or large parts of Western Europe. They actually want to turn back the clock. Well, the Chinese don't like more than one children. Now it gets very expensive in the city. So that means from the population side, you will not experience more growth. If you think of that big country trying to like the coastal area, it's the most developed, the richest part of the country. And they have the consumer markets are saturated. So you don't need a third, a fourth, a fifth BYD, or NEO, or what we're going to build the cars. The consumers have basically everything. So for a long time, the growth from the consumer side came from the sort of moving the wealth westwards towards inland China. Also there, we are slowly starting to deteriorate it. So this is the consumer side. Another side is, of course, the political environment, the geopolitical environment. And it started well before Trump. So already before we had trade wars to be honest, they were more cold trade wars than hot trade wars. But they had the geopolitical block building. So China is, of course, less, does less rely on imports to satisfy certain consumer demands, but they do rely on exports. On the import side, they do rely on certain key technologies. My prime example is always ASML. It's a Dutch machine builder, who builds machine to build semi-collectors. Without ASML, there is no chip. There is no AI, there are no computers. So this is one of the jewels we have in Europe. They rely on that as well, of course, on some of the commodities. So if you look at this complete framework, like export-driven growth being the workbench of the world, consumer demands, and it really seems that the traditional Chinese growth model is coming to an end or at least gets less dynamic. All right, let's move from macroeconomics to industries. As an example, I attended the automobile show in Munich. And I would say two thirds of the exhibitors were Chinese. All these electric vehicles, all of them better than Tesla, all of them challenging the European market. And I thought, this is a fantastic market. But then I looked into it and I was going on in China. And I found out that the market is anything but rosy. There's too many suppliers. There's the market is saturated. There's overcapacity, resulting in price drops and discounts of up to over 30%. What examples do you have of industries in China? Well, from the macroeconomics to industries, that seems to be actually also a common threat among these industries. So most prominence is probably the cement industries and the steel industry where I think we're cemented around 50% of global capacity of cement production is in China, but not 50% of the demand. So they have all capacities in these markets. Another funny example, I think, is tomato paste. So what they do is they produce a tomato paste and they ship it to Italy. It gets canned. So you have the Italian flag on it and you buy it then on the supermarkets. Certainly it's Italian. Yeah, suddenly it's Italian. No one knows that it. That's a gross quantity that they have for many many years. It is really cat-x-focused. So the local authorities really push that and lead to new investment instead of basically maintaining the idea best what we are doing in Europe at least. So it leads to all the capacity, then flood the market, flood the market with cheaper products or cheaper products than prices drop globally, which is good for us because the tomato paste gets cheaper or the steel and cement. So some extent it's not all negative for us here in the West Europe. But once they are in the market, they also can create dependencies. And now with a political situation, it is of course more challenging to rely on other regions, on other countries and people try to get the supply chains more resilient. But I don't want to sound too negative here. So I'm not pointing in China. I'm saying you're just copycat. There is innovation there. So like with electric vehicles. Yeah, for example. So eCars are a good example where for, especially for battery production, because battery is the central element, they own the supply chain. So they own the know-how of building the battery, and then also making the machines that build the battery. So that's a very good vertical integration. There is one thing we still have to mention about the development and where we are right now. Overall, the productivity is lower than in Europe or in North and America. And productivity is output per hour in pieces. It's not profitable with the how much one year. So it doesn't matter. But still, when you look at these numbers, it's important to see that they manufacture different goods. So a lot of the toys and the like are manufactured there. Why specialty machinery's high end goods are still manufactured in North and America and Europe. So it's different that there are, it's true that there are different goods manufactured. On the other hand, there is that they call it the smile curve. I think it was Stanley. It means that the profitability is the highest at the beginning and at the end. At the beginning is where you have the product design and at the end is where you have the retail basically. So there you have the largest margin. And for manufacturing, you have the lowest. And that's what they are. They are the work pinch of the world. I want to add one thing, and this is something, it's mindset. The good old German engineering, the desire to build the better mouth trap also is this linked to loyalty to the company and to really strive to get better all the time. I'm not saying that's not existing in China, but there are many cases where, especially on the mass production area, that the people have problems keeping the workforce. So you have Chinese New Year, everyone gets home. And then suddenly the company misses 10, 20, maybe 30% of the workforce. They just don't come back. They stay in their village. So it's different in China. It's not all worse. It's just different than. Florian, what about Chinese automation players? I think in recent years, there's a copycat business. There are a lot of locally produced copies, black market products, gray market products. But now, in my research for the PLC study, I see these champions starting to emerge with their own innovation, their own product lines, I think of Inovance, I think of Xinjiang. You've been to China, and have actually visited these suppliers. What have you seen? Yeah, I wasn't them in 2024. For example, it was interesting to see what happened in the 12th or so years since my first visit, because the first visit I went to a train show. You saw I/O modules, and they had a slogan, "compatible with," and then enter a global brand Siemens Mitsubishi, China, electric, rock ball, whoever, compatible with 30% cheaper. That was the business model. And these are, I would say, basically gone. The companies you have left now are in their own way innovative. That exclamation mark necessarily means that the hardware alone is innovative. It can also be the business model. It can be the way something is done and how they treat it. So it's a lot of things, but you have these innovative companies here. Next to the PLC area, it's certainly also a subcon and allows this from the DCS world. And one of the first markets they really had local champions were actually process instrumentation, so valve manufacturing, which is close to basically being a foundry. So the electronic complexity is lower for a valve than it is for a DCS. So with all that background, I came to a visited subcon and I was super impressed by their animation. And always keep in mind that I visited them. I think the company was 10, 11 years old by that time. It goes super fast. They have an MES system, which is app-based. So something we write about is being leading edge. They do that. They do virtual control, virtualization of control. And one of our four homes in Singapore, they get a presentation of about AI and work considered one of the four runs here. And also for subcon, they are very good with their business model. That means they have the service centers. They also actually have a web store where you can buy everything. You can buy a thriller. We are subcon, they're good like Alibaba/Amazon from the industry then. And they also do a lot of custom engineering on site. Site notes same like other players. So and that is expected in China. So they come, they solve the problem, and they just throw a lot of manpower at it. But they're good at that. And they, there's really a squeeze out right now. So coming back to their original question about the markets. But our market, there is a very tough squeeze out right now. Of Western suppliers, non-Chinese suppliers. No, okay, so I think of the market shares of the suppliers. We know dominating the market for years. What's happening to them? In DCS is already basic subcon and policies are leading the Chinese DCS market. Shown in our studies, they are leading the market. And it starts in other areas as well. So we looked at that very problem. So in the difference, how far at once are Western suppliers? And honestly, the Chinese vendors, they can do 80% of the tasks or more. So wherever you can, you can actually replace it with the Chinese vendors who are significantly cheap. I'm not allowed to say any specific numbers. We actually researched those numbers. But then you actually have to look again on where are the machines used. If they are in the export market, it's very likely that the machines still have Siemens, Siemens, Rockwell, Mitsubishi, Schneider, Amy, Mihoever in there. So the big brands, because they are having global presence. So you get spare parts on the like. The local market is for local Chinese end users. It's really Chinese, increasingly Chinese, especially critical infrastructure. All right. Florian, thanks for your insight into the Chinese market. You've visited the country several times, and you have your own unique perspective. And I appreciate that. Yeah, that's our deep dive into the Chinese market that is not the same market that we used to know, the market of high growth of copycat products. China is becoming its own market with its own suppliers. And it's not as dynamic as it used to be. Florian, thanks for sharing a cup of joe with me. Thank you. Hello, this is the ARC Advice Recruitment. We cannot take your call as we are recording a podcast. Please leave a message. Hello, this is Ritalil from ARC China. Today I'll share some insights about China's humanoid robot market. Right now, humanoid robots are a total standard in the global capital market. And the Chinese market is booming as well. Marketing has the call-girls engine for the whole track. In 2025, two Chinese suppliers reported their annual shipment of pure humanoid robots over 5,000 units. Now it's worth noting that the market is still in its early days, not at a large scale adoption yet. But although sole shipment numbers in 2025 mean, the industry has officially moved from tag testing to the earliest commercial stage. This boom didn't come out of nowhere. It's driven by three key factors coming together. Firstly, we will hit a tech turning point, both the brain and body, or robots, have made breakthroughs at the same time. Sexual embodied intelligence powered by generated AI. Robots can now understand the commons on their own and adapt to new environments. The time to train robots on new movements could be cut down from days to just hours. Secondly, on the hardware side, key parts like high-talk motors and harmonica reducers have matured, and their coasts have declined to a new level, where commercial use makes sense. Certainly, China has a huge advantage in its full industrial supply chain. Some upstream reverse magnates and reducers to middle-stream robot body manufacturing. So looking at how humanoid robots were shipped and used in China in 2025, they are no longer just for cultural shows or tech demos. They are also being tested in industrial, energy, and civilian scenarios. For example, they are doing inspections and operations in power grids and energy storage stations. And some of them are even helping with refueling different types of vehicles at gas stations. So we are confident that this market has my self-growth potential ahead, with tons of room to expand applications. But to see explosive growth and widespread adoption, there are still three key challenges to get passed. Firstly, tech isn't mature enough yet. Most products are still just for demos. They struggle to adapt to complex real-world situations. Secondly, the commercial pause isn't clear. High-manufacturing coasts collage with limited application value, so we haven't found a course in Europe that can drive large-scale profits yet. Certainly, issues like high cost for key components, like unified technology standards, and the incomplete safety command systems help make the market take a weight-and-seek approach. So generally, overall, moving from the current early stage, where robots have weak intelligence, short battery life, and high cost, to the future of the wants of form, or embody the intelligence plus general AI, it will take more than a decade to upgrade core technologies, like drones, batteries, and AI algorithms. But with breakthroughs in embodied intelligence and upgrades to key components, human-knowledge robots will enter a positive-industrial cycle. Like technology upgrades will drive down coasts, which expands where they are used, builds up more data, and in turns, builds up further technology progress. OK, so all about this hour sharing today, thanks for listening, bye.