China has faced significant challenges in mastering the production of high-end machine tools, a critical technology in manufacturing, despite its progress in areas like artificial intelligence, solar power, and semiconductors. According to the Financial Times, high-precision machine tools, which are essential for creating everything from jet engine parts to circuit boards, continue to be largely supplied by Japanese, European, and U.S. companies, even as Beijing strives for self-reliance in strategic technologies.
Xiao Feng, an industrials analyst at CLSA, referred to machine tools as “probably the last quandary for China’s manufacturing sector,” while Mingda Qiu from Eurasia Group described them as “indispensable” for the supply chain. These tools, particularly those involving computer numerical control (CNC) systems, are crucial for producing high-quality, intricate components. However, this part of the industry has long been dominated by Germany’s Siemens and Japan’s Fanuc, making it difficult for China to break into the high-end market.
Despite pledging in 2015 to reduce foreign reliance on machine tool technology by 2025, China’s progress has been slow, largely due to the competitive advantage held by incumbent players and shifting government priorities. According to analysts, Beijing’s focus has recently shifted from machine tools to robots, with some experts suggesting that the machine tools industry wasn’t profitable enough to warrant continued heavy government support.
A powerful network effect further complicates the situation. Siemens and Fanuc hold a near duopoly in the market, which makes it difficult for new entrants to gain traction. As one anonymous employee of a Chinese machine tool manufacturer pointed out, the dominance of these two companies is akin to trying to sell a computer with a homemade operating system, adding that they “still have better brand positioning” in China’s domestic market.
Given the high price tags of machine tools, manufacturers are hesitant to switch to unknown or unproven brands, as even minor issues with these machines can cause significant production disruptions. Renaud Anjoran, CEO of Sofeast, which helps foreign companies set up supply chains in Asia, emphasized the importance of reliability in this market, pointing out the challenges of replacing machines quickly if they break down.
China’s efforts to develop a competitive domestic CNC machine tool industry were first initiated in 2007 as part of the government’s 11th five-year economic plan. However, after an initial boom of CNC manufacturers, the sector faced intense competition and many companies shut down. Additionally, local government support has waned due to fiscal pressures, partly arising from the ongoing property sector crisis. As a result, some of China’s oldest manufacturers, like Dalian Machine Tool and Shenyang Machine Tool, have gone bankrupt in recent years, only to be later acquired by the state-owned conglomerate Genertec.
Despite these setbacks, foreign companies continue to dominate the market, with data showing that Fanuc, Mitsubishi, and Siemens collectively control around 70% of China’s machine tool sector. Chinese companies have focused on dominating the lower end of the market, where they can compete by slashing prices. However, this price war has led to a sharp decline in profits and a shift away from the necessary long-term investments in research and development, which are crucial for advancing in the high-end machine tools sector.
The result has been a substantial drop in revenue for the machine tool industry. The China Machine Tool and Tool Builders’ Association recently reported a 5.2% decline in revenues to 1 trillion yuan ($138 billion) in 2024, while profits plummeted 76.6% to 26.5 billion yuan. This report attributes the sharp decline in profits to intensified competition and shrinking margins, making it harder for domestic companies to invest in high-end innovation.
Although China has managed to dominate the mid- and low-end segments, the country still struggles to break into the high-end CNC machine tools market. Analysts believe that while China may not yet be competitive at the high end, it is slowly making progress. Robert Voyle, CEO of the Aviation Services Research Centre at Hong Kong Polytechnic University, remains optimistic, stating that “China is definitely getting there,” but added that the country is not quite there yet.
Despite the struggles in the machine tool sector, China’s government will likely continue to prioritize its efforts in advanced technologies for chip manufacturing and space exploration, areas where it sees more immediate returns. As Qiu from Eurasia Group noted, “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.”
