China’s $12 Trillion Manufacturing Upgrade

Our China Industrials Analyst Sheng Zhong explains how AI, robotics and a major investment cycle could transform China’s manufacturing base and its role in global supply chains.

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Sheng Zhong: Welcome to Thoughts on the Market. I’m Sheng Zhong, Morgan Stanley’s China Industrials analyst.

Today – how AI and automation are transforming China’s factories, and what that could mean for global manufacturing.

It’s Tuesday, September 29th, at 3 PM in Hong Kong.

For decades, Made in China has been shorthand for scale, speed, and low-cost manufacturing. Now the story is shifting toward 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 Industry 5.0. Industry 4.0 was about connecting machines and digitizing production. Industry 5.0 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 percent of global manufacturing value-added and covers all 666 industrial subcategories defined by the United Nations. There are 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 ninefold 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 Industry 5.0 could generate about $12 trillion USD of incremental industrial investment in China from 2026 through 2035. Around $5.5 trillion USD would go toward factory upgrades, including robotics, smart equipment, and software, while roughly $6 trillion USD would support new industrial capacity.

But that investment cycle is likely to build gradually. We expect industrial capex growth of about 4 to 5 percent annually in 2026 and 2027, before accelerating toward 6 to 7 percent from 2028 as excess capacity is absorbed, technology bottlenecks ease, 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 percent from roughly 5 today. Industry 5.0 could lift China’s potential GDP level by around 3.5 percent, helping cushion some of the drag from an aging population. And China’s share of global manufacturing value-added could increase from about 28 percent to 30 percent.

And those changes would not stop at China’s borders. Final assembly can 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 percent of China-to-U.S. exports can 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 elsewhere. That is the move from Made in China toward Made by China.

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