China has struggled to develop the most advanced machine tools essential to manufacturing, despite its huge strides in artificial intelligence, renewable energy, semiconductors and electric vehicles.
High-end machine tools, used to make everything from jet engine parts to tiny circuit board components, continue to be built and supplied to China by Japanese, European and US companies.
“Machine tools are probably the last quandary for China’s manufacturing sector,” said Xiao Feng, an industrials analyst at CLSA.
“It’s the base of everything,” said Mingda Qiu, senior China analyst at Eurasia Group. “It’s an indispensable part of the supply chain.”
China’s particular challenge has been building the hardware and software that operate high-precision computer numerical control (CNC) machine tools, a corner of the industry long dominated by Germany’s Siemens and Japan’s Fanuc.
Beijing in 2015 had pledged to “significantly decrease” foreign dependence on the technology by 2025, but the incumbents’ competitive advantage and the Chinese government’s shifting priorities have slowed progress, according to analysts.
“It looks like the government has started to look away from machine tools and focus on robots,” said Morten Paulsen, head of Japan research at CLSA. “Left on its own, the industry just wasn’t profitable enough.”
Powerful network effects add to the challenge. The duopoly held by Siemens and Fanuc means for other entrants, “it’s like trying to sell a PC with a home-made operating system”, said Paulsen. The varied applications of machine tools also require a deep understanding of industries ranging from medical devices and electronic components to aviation.
Siemens and Fanuc “still have better brand positioning”, said an employee, who asked not to be named, at a Chinese machine tool manufacturer that prefers using them over domestic CNC controllers.
Given machine tools’ high price tags, manufacturers are cautious about unknown brands, said Renaud Anjoran, chief executive of Sofeast, which helps foreign companies set up supply chains in Asia.
“We’re not talking about buying something we can easily replace if it stops working,” said Anjoran, noting the significant disruption to production from faulty machines.
Beijing laid out efforts to support the CNC machine tool industry as early as 2007, when the sector was part of the government’s 11th five-year economic plan.
“The 11th five-year plan led to a boom of CNC manufacturers,” said Robert Tam, a senior project fellow at the Hong Kong Polytechnic University Industrial Centre.
But after an initial surge in companies in the sector, many closed down amid intense domestic competition. In more recent years, local government support has also dried up due to revenue shortfalls from the country’s property collapse.
In 2017, Dalian Machine Tool, one of China’s oldest machine tool manufacturers, dating back to the People’s Republic’s founding, went bankrupt. Then in 2019, Shenyang Machine Tool, another well-established company, also folded after a debt-fuelled expansion.
Both companies have since been bought by the state-owned conglomerate Genertec, which has overseen a reorganisation that analysts say has been challenging.
Slowing industrial demand and declining local government subsidies have led to further consolidation, with foreign groups growing their share of China’s market, according to Ming Lee, head of greater China industrials at Bank of America.
Data from the bank shows foreign machine tool companies command roughly two-thirds of China’s market, with Fanuc, Mitsubishi and Siemens comprising 33 per cent, 20 per cent and 16 per cent, respectively.
Chinese companies have rushed to dominate the market’s lower end, where they can compete on cost. “The way they tried to gain market share was through price cuts,” said Lee.
That has led to industry profits dropping sharply. A recent report from the China Machine Tool and Tool Builders’ Association highlighted a 5.2 per cent decline in the sector’s revenues to Rmb1tn ($138bn) in 2024, while profits plunged 76.6 per cent to Rmb26.5bn. It attributed this to “the intensification of . . . vicious competition” further eroding profit margins.
Brutal price competition has also meant a shift away from the long-term research and development China needs to compete at the industry’s top end, even as it has become competitive at making the hardware of machine tools.
“If everyone blindly pursues scale, it becomes challenging to maintain long-term investment,” said Liu Junqi, a machine tool analyst at brokerage Northeast Securities.
Chinese companies now dominate the industry’s middle and low end, according to analysts. The country went from being a net importer of machine tools to a net exporter in 2021, although many of the tools made in China and sold internationally are manufactured by foreign companies operating in the country, said Paulsen.
Some industrial experts are convinced China will eventually succeed at creating high-end CNC machine tools.
“China is definitely getting there,” said Robert Voyle, chief executive of the Aviation Services Research Centre at Hong Kong Polytechnic University. “They’re not quite on the high-end CNC yet, but they will be.”
However, Beijing will probably remain more focused on advanced technologies for chip manufacturing and space exploration, even if cutting-edge CNC machine tools are applicable to those areas.
“When you have to balance different priorities with only limited resources, that’s where you’re going to have to make some kind of compromise,” said Eurasia Group’s Qiu.
