[Reuters Breakingviews] China has shaky upper hand in battle of the robots

HONG KONG, March 26 (Reuters Breakingviews) - In January, Chinese President Xi Jinping gathered the country's most powerful corporate chieftains including Huawei founder Ren Zhengfei and Alibaba's 9988.HK Jack Ma in a highly publicised meeting. Among them was Wang Xingxing, the 35-year-old CEO of little-known robotics startup Unitree Robotics. His ascendancy to the country's top industrial ranks underscores the sector's rising importance in the $19 trillion economy.

One of the major drivers behind countries looking to robots is shifting demographics. In China, a rapidly ageing population combined with young people increasingly spurning factory jobs have resulted in a labour crunch: in 2021 officials forecasted a shortage of nearly 30 million manufacturing workers by 2025. It’s likely to get worse. China’s workforce is set to shrink to roughly 645 million by 2045. That compares with a 2013 peak of 794 million, per estimates from the Economist Intelligence Unit, and would represent less than half the total population. For the export-dependent economy, these trends risk derailing President Xi Jinping's goal of doubling per capita GDP by 2035 from 2020 levels.

Little wonder homegrown champions from BYD 002594.SZ, 1211.HK to Xiaomi 1810.HK are racing to automate their production lines. Yet while the People's Republic boasts the world's largest share of industrial robot installations, most of these machines are relatively low-tech: fixed arms typically used in welding, painting, assembly and other repetitive tasks. It's a market dominated by a handful of manufacturers in Japan, Germany and Switzerland.

That is set to change as these machines get more sophisticated. Thanks to advances in AI, chips and hardware, the United States and China are now racing to develop humanoid robots that can be deployed in factories, restaurants, hospitals and even households. Nvidia NVDA.O CEO Jensen Huang recently declared that in less than five years, humanoid robots will be widely used in manufacturing; Tesla TSLA.O boss Elon Musk once called them the "biggest product ever" and has predicted they will soon outnumber all humans, though the billionaire has a poor track record divining mass adoption of tech trends, from fully self-driving Teslas to chips that connect brains to computers.

Analysts at Bank of America forecast annual global shipments will hit 1 million units by 2030, mostly driven by industrial demand and early applications in education and services. Ming Lee, Head of Greater China automotive and industrial research at BofA Global Research, foresees the average selling price to be around $20,000 per unit at that time, implying a market size of $20 billion. Fast forward another 30 years and the bank reckons the humanoid robot population will top a whopping 3 billion, replacing half of the workforce in the services sector.

That's a blue-sky scenario which mimics a similar historical trajectory of smartphones and electric vehicles, where sales in China grew at an annual rate of 90% in the decade to 2023. Falling component costs and generous government support helped EVs in China, where the government is championing a huge push to upgrade its manufacturing sector. But significant technological advancements will be required for so-called general-purpose robots, which can adapt to various environments to perform most tasks humans can and have real-time interaction with people. Current machine learning and generative artificial intelligence models are still a long way from that. Text-based large language models, for instance, will not be able to train machines that need to process visual data too.

Nevertheless, in the United States, Tesla debuted its second-generation Optimus prototype in 2023 and is now targeting mass production this year. The $3 trillion Nvidia also has several projects underway. But lesser known Chinese firms, including the Alibaba-backed Unitree Robotics and UBTech Robotics 9880.HK, already have commercially available products. Last year, the former launched a low-cost humanoid model priced at less than $20,000; earlier this year, it wowed the country with an army of dancing bots live-streamed on television. UBTech's Walker bots are already deployed in Zeekr ZK.N and BYD car factories, working alongside humans on more advanced tasks.

The early success is largely thanks to sophisticated and established supply chains. China is a global leader in electric vehicles, where there is much overlap in areas such as vision systems, sensors and batteries. EV brands that are among the first adopters of humanoids are now building them too: Xpeng 9868.HK is targeting next year to start mass production.

The country, however, is still dependent on foreign firms for many components, notably so-called reducers that are vital to decreasing the speed of a motor while increasing its torque. But local suppliers led by Leader Harmonious Drive Systems 688017.SS, or Leaderdrive, are steadily catching up thanks to scale, competitive prices and an improving track record. The government has also thrown its weight into the ring to support the sector with generous subsidies.

Even so, China robotics may soon hit a wall. The United States remains the global leader in software, AI and chips - all essential to training humanoids. Unitree, for instance, relies on Nvidia's semiconductors. Given the military applications of robot dogs, that puts the country's rising stars and supply chains at risk of Washington's sanctions and tech restrictions. U.S. lawmakers have already warned that Chinese robots are the "next threat". China's early lead in the robot race looks tenuous at best.

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Graphic 1: China's working-age population has peaked

Graphic 2: Expectations for Tesla's robotic sales are high

Graphic 3: Leaderdrive is becoming China's top harmonic-reducer maker