By Xin-Yao Ng, co-manager of Aberdeen Asia Focus
Chinese humanoid robots keep hitting the headlines. Among other feats, they can now run faster than Usain Bolt, master the intricacies of Suzhou embroidery and even stroll straight off a production line and make a cup of coffee.
Sadly, I didn’t witness any of this when I recently spent several weeks in China. No robot suddenly sprinted past me at gold-medal-winning pace. No robot rattled off an exquisitely stitched robe for me to take home. I couldn’t even find a robot to rustle up a quick latte.
Not least for investors, the explanation for this lack of spectacle is both disappointingly straightforward and deeply significant: all these headline-grabbing acts are really just gimmicks. They might make jaws drop, but they won’t necessarily make stock markets rise.
As critics have pointed out for some time, the fundamental issue is that this isn’t the sort of real-world application that heralds genuine transformation. It instead merely hints at what might be possible somewhere down the line.
See also: Artemis’s Pugh: AI risk looks tilted to the downside – where is the reverse true?
For example, a robot that can run fast needs to do more than top the podium at the Robot Olympics. A robot that’s a wizard with a needle and thread needs to expand its repertoire to encompass more productive and disruptive tasks. A robot barista needs to be able to function amid the relentless hustle and bustle of a café in downtown Huangpu.
None of this to suggest, though, that there’s no investment case for Chinese robotics – quite the opposite. What we have here is very likely a matter of “when” rather than “whether”. This is a global race that’s already well under way, and there are many reasons to suppose China will win it.
From ‘circular financing’ to demand fulfilment
We first need to move beyond the headlines and consider where things currently stand. One important point that’s routinely overlooked is that most of the humanoid robots made in China aren’t yet sold commercially.
They instead end up at government-backed “robot schools”, more than a hundred of which have already been built or are under construction. The principal purpose of these facilities is to gather data and then sell it back to the manufacturers to help them improve their technology.
A similar type of “circular financing” has played a major role in the rise of AI data centres. It has also fuelled enormous enthusiasm for robotics start-ups, which continue to proliferate across China – sometimes with jarringly inflated valuations.
This system had created a tricky landscape for investors. As is often the way with radical innovation, the fundamental challenge is to separate hype from reality.
See also: Allspring: An investor’s guide to the AI infrastructure stack
On the one hand, it’s tempting to be seduced by an ever-expanding assortment of market participants and the regular parading of ostensibly game-changing breakthroughs – the sprinting, the embroidering, the coffee-making and so on. On the other hand, it’s useful to pause, take a breath and pose a pressing question: where’s the demand?
The short answer is that the demand doesn’t yet exist – but it very likely will one day. Ultimately, if you believe the future lies in AI – and, despite sporadic wobbles, the overwhelming consensus is still that it does – then you have to believe the future also lies in robotics.
Picking the likely winners
This was one of the reasons for my aforementioned trip. With the longer-term outlook very much in mind, I visited a number of Chinese companies associated with the robotics race.
It’s safe to say they were uniformly bullish. They see the global fight for superiority in this arena unfolding in much the same way that the competition for supremacy in the sphere of electric vehicles has panned out – that is, with China emerging triumphant.
The pattern is well established. China has sheer numbers in its favour, as well as proven strength in industrialisation and commoditisation. Many businesses will undoubtedly fall by the wayside, but those that don’t are likely to be battle-hardened, cost-efficient, equipped for continued growth and capable of delivering products and services equal to or better than those of their rivals elsewhere in the world.
Among these survivors, our preference would be for “picks-and-shovels”-type businesses – the makers of gears, hydraulic motors, sensors and other essential components. Whatever the sector, it’s companies like these that quietly enable transformation – as opposed to merely shouting about it from the rooftops.
Most are brand-agnostic, which means there are no constraints on which businesses they can supply. They’re also relatively small, which means many investors have never heard of them – unless, that is, they’ve travelled to China to research and directly engage with them.
I didn’t see the android equivalent of Usain Bolt. I wasn’t presented with the finest in robot-made clothes, cushions or curtains. I didn’t even get to sample an automaton’s take on an Americano. But I did come away with some intriguing investment prospects and a much clearer idea of where this potentially era-defining story might lead.
