Damo: China is moving towards “Industry 5.0” in the next 10 years or ushered in a 12 trillion US dollar physical investment supercycle

The Zhitong Finance App learned that Morgan Stanley recently released a research report saying that China is entering a new stage of industrial development and is moving from its low cost and manufacturing scale advantages in the past to ecosystem and innovative leadership. The bank believes that this will have a profound impact on China's industrial supercycle, manufacturing profit migration, and China's position in the global manufacturing value chain.

According to Damo, China's manufacturing story is often reduced to overcapacity, low prices, pressure on profit margins, and supply chain migration (China+1). The bank believes the more important question is what will happen next?

China is moving from a “world factory” to a “global industrial operating system” — combining scale, automation, AI, supply chain depth, and global deployment capabilities, according to Damo. Following digitalization and connectivity in the Industry 4.0 era, this transformation will enter China's “Industry 5.0” stage.

China's industry has a strong starting point of 5.0. It currently accounts for about 28% of global manufacturing value added, covers all 666 manufacturing subcategories defined by the United Nations, and ranks first among more than half of the world's exports. More than 30,000 smart factories and 100 million connected industrial devices provide physical and data infrastructure for the next phase. The key question is whether China can make its industrial system adaptable, autonomous, and deeply embedded in the global system.

1. Industry 5.0: Built on the three pillars of industrial intelligence, resilience and leadership

China's proven advantage lies in its ability to deploy industries, and Industry 5.0 aims to extend this model further upstream in the industrial chain. In the next phase, Damo believes there will be five key breakthroughs.

In terms of intelligence: 1) AI native adaptive factories; 2) Embodied AI to turn manual labor into capital that can be upgraded through software. In terms of resilience: 3) an autonomous, controllable and continuously evolving industrial technology stack; 4) Exporting industrial ecosystems, not just products. In terms of leadership: 5) Achieving technical leadership in selective fields — the greater opportunity lies in leading the upstream base of many downstream industries at the same time.

2. This is an entity investment supercycle

China's Industry 5.0 will require large-scale restructuring of production systems. Damo estimates that between 2026 and 2035, China's industry will bring in additional industrial capital expenditure of about 12 trillion US dollars, or 80 trillion yuan; the total cumulative industrial capital expenditure during the same period is about 50 trillion US dollars.

Funding will go to the following areas: AI, power, and digital infrastructure; factory automation, robotics, sensors, control systems and software; and strategic production capacity in semiconductors, advanced materials, energy, mobility, and other cutting-edge industries.

Damo estimates that between 2025 and 2027, investment growth will be slow, at 4% to 5% due to ongoing “anti-inflow” actions. Thereafter, the investment growth rate will accelerate to a compound annual growth rate (CAGR) of 6% to 7% between 2028 and 2035.

3. Expected returns will be reflected in increased productivity, profit margins, and global share

Damo believes that by 2035, China's industry 5.0 should be able to bring three major benefits, and it is likely to show a J-curve pattern of evolution. including:

1) Industrial profit margin: As value is transferred to software, equipment, materials, services and platforms, the profit margin will rise from about 5% to 8%.

2) Potential GDP: China's potential GDP level will increase by about 3.5%, and the benefits from productivity will begin to become more obvious in the late 2020s.

3) Manufacturing share: China's share of global manufacturing value added will increase from about 28% to 30%.

4. Multipolar global system: “Made in China” will become “created and manufactured in China”

“China+1” and the return of manufacturing are current trends, but Damo believes that it will be difficult to replicate China's complete upstream industrial ecosystem in the short term. The next phase will increasingly be presented as “Made by China” — that is, China provides components, machinery, production systems, technology and service networks for overseas manufacturing, while embedding standards into the global industrial ecosystem, and the global system will also become more multipolarized.

5. China's industry 5.0 will not develop linearly

China's path to Industry 5.0 is likely to depend on three major factors: stronger policy support for residents' needs, faster breakthroughs in industrial AI, and stable access to overseas markets could all accelerate commercialization, productivity growth, and industrial deployment.

At the same time, the risk is that premature fiscal tightening and supply-centered investment may result in “intelligent overcapacity,” deflation, and lower return on investment. At the same time, technological bottlenecks, restrictions on foreign investment that have lasted too long, and trade frictions may also delay the adoption and overseas expansion of related technologies.

6. Stock Market Impact: Structural Opportunities

Industry 5.0 should create an efficiency and ROE cycle. Damo anticipates that the main beneficiaries will include: 1) industrial intelligence enablers, such as software, automation, control systems, sensors, and robots; 2) autonomous and controllable bottlenecks: wafer factory equipment (WFE), electronic design automation (EDA), computer numerical control (CNC) machine tools, metering equipment, and advanced materials; 3) cutting-edge platforms: humanoid robots, autonomous driving systems, electric vertical take-off and landing vehicles (eVTOL), and aerospace; 4) ecosystem exporters: new energy vehicles—batteries—charging, photovoltaic—energy storage—power grids; 5) Global Leaders: automotive, electronics, semiconductors, and machinery.

Damo added that factors already taken into account by the market include the expansion of the scope of short-term capital expenditure and the subject of localization. Factors not yet taken into account in the market include the long-term potential for China's transformation, ROE recovery due to increased productivity, profit migration to upstream software/equipment, and global TAM (total potential market size) potential.