1 The industrial machinery sector—a trillion-yuan growth track—holds the potential to give rise to core assets.

Machine tools are the cornerstone of manufacturing, and the domestic market size could exceed 250 billion yuan.

Machine tools are an indispensable part of manufacturing. Machine tools are machines used to manufacture other machines; they are also referred to as “industrial mother machines.” Any component requiring high machining accuracy and fine surface roughness must be processed using machine tools. Therefore, machine tools play a pivotal role in downstream manufacturing industries and the development of the national economy.

China’s machine tool market, with a scale of hundreds of billions of yuan, has been in a downward adjustment period in recent years. China’s machine tool market is primarily divided into two major segments: metal cutting machine tools and metal forming machine tools. Affected by fluctuations in downstream manufacturing conditions and the replacement and upgrade cycle, China’s machine tool industry is currently in a downward adjustment phase. The market size has declined from approximately 250 billion yuan in 2015 to about 170 billion yuan in 2020; however, the overall market size remains quite substantial.

The machine tool market boasts a trillion-dollar scale, and manufacturing powerhouses such as Germany, Japan, and the United States have all nurtured companies with revenues exceeding ten billion dollars.

Given that the machine tool industry virtually covers all sectors of manufacturing, each sub-sector is poised to nurture sizable industry leaders. Looking at the world’s top ten machine tool manufacturers in 2019, each of them had revenues exceeding 10 billion RMB, and there was little overlap between their product lines and downstream application areas. This suggests that the machine tool industry has the potential to give rise to multiple industry leaders with outstanding competitiveness and substantial scale. By contrast, although China’s machine tool market boasts a massive size of nearly 200 billion RMB, the revenue of most domestic machine tool companies has yet to surpass 5 billion RMB, leaving ample room for growth. As CNC technology, intelligent manufacturing, and domestic production continue to advance in the machine tool sector, China’s machine tool industry is expected to follow a similar development path as overseas markets and produce several core enterprises.

China is the world’s largest consumer of machine tools, and there is an urgent need for leading domestic enterprises to emerge.

China boasts the world’s largest machine tool market, providing fertile ground for nurturing global industry leaders. According to Gardner data, in 2019, China's machine tool industry reached a consumption volume of 22.3 billion U.S. dollars, equivalent to nearly 160 billion yuan, accounting for 27% of global machine tool consumption. Such a massive market is the prerequisite for nurturing industry leaders; China’s trillion-dollar market provides fertile ground for the emergence of leading machine tool enterprises.

Domestic machine tools are large in scale but lack strength; there is an urgent need for leading, high-quality enterprises to emerge. From the production side, in 2019, China’s machine tool output value was only 19.4 billion yuan, and a large number of machine tools—especially high-end models—relied heavily on imports. The main reason is that China’s machine tool industry is big but not strong, lacking a robust presence of high-end products in critical areas such as CNC systems, high-end cutting tools, and spindles. Meanwhile, state-owned machine tool manufacturers, due to institutional constraints, have made relatively slow progress and were largely phased out during the industry’s downturn from 2011 to 2019. China’s machine tool industry urgently needs a group of high-quality private leading enterprises to once again take up the banner of domestic substitution.

China’s machine tool industry is large but not strong, and a key reason for this is the lack of in-house capabilities to produce core components.

China's machine tool industry chain as a whole is lagging behind, and it lacks the capability to independently produce core components. Although China’s machine tool industry boasts a scale of hundreds of billions of yuan, its overall competitiveness remains insufficient, resulting in a situation characterized by large size but weak strength. One major reason for this is the lack of in-house capabilities to produce core components. Take Guosheng Zhike, a leading domestic private machine tool manufacturer, as an example: whether it’s transmission systems, CNC systems, or various functional components, the proportion of core components sourced from external suppliers generally exceeds 80%. Achieving domestic substitution for these core components is a critical bottleneck that urgently needs to be addressed in the future development of China’s machine tool industry.

2 Grasp the long-term logic of the industry and patiently wait for the leading players to emerge during short-term cycles.

The prosperity of China's machine tool industry has been steadily recovering since the second half of 2020.

Driven by the economic recovery and sustained demand from downstream manufacturing industries, China’s machine tool industry is experiencing a robust recovery. Since the second half of 2020, the industry’s main business revenue has been steadily rebounding, and its scale has now returned to pre-pandemic levels. Moreover, sales of key product categories such as cutting machines and forming machines have all resumed positive growth. Meanwhile, CNC systems for machine tools—being leading indicators that typically anticipate machine tool sales by 3 to 4 months—have maintained rapid growth since mid-2020, signaling that machine tool sales will likely continue their upward trend in the first half of 2021.

21 The first half of the year may represent a short-term peak in the cyclical upswing.

2021 In June, China’s manufacturing PMI came in at 50.9%, down slightly by 0.1 percentage point from the previous month. Since March 2020, the index has remained above the boom-bust threshold for fifteen consecutive months, indicating that China’s manufacturing sector continues to be on a steady recovery path. Since the second half of 2020, markets closely linked to manufacturing capital expenditure—such as machine tools, industrial robots, and forklifts—have remained robust. According to the latest data, in May 2021, sales of metal-cutting machine tools rose by 46.34% year-on-year, and industrial robot production increased by 67.15% year-on-year; however, the growth rates have begun to slow down. Given that the growth rate of the manufacturing PMI has already moderated somewhat, coupled with traditional off-season patterns and weather factors, it is expected that sales growth rates for machine tools, industrial robots, and forklifts will gradually decline in the second half of the year. The first half of 2021 may represent the short-term peak of this cyclical upswing.

Product Upgrade: The trend toward greater precision is accelerating equipment iteration, driving growth in demand for four-axis and five-axis machine tools.

The trend toward product refinement will drive machine tools toward higher precision and intelligent development. As China’s manufacturing sector shifts from low-end to high-end, downstream industries such as automotive, aerospace, and 3C electronics are increasingly demanding higher precision in machining. Take the automotive industry as an example: With the rapid pace of model updates and ever-rising consumer expectations, there is a corresponding surge in demand for finely crafted parts and highly efficient supply chains, thereby placing even greater demands on the machining efficiency and precision of machine tools.

Driven by the increasing sophistication of processing demands, the renewal and upgrading of machine tools are expected to accelerate. According to our research, most domestic manufacturing enterprises currently still rely primarily on 2- to 3-axis machine tools, and the rate of CNC adoption remains relatively low. As a result, these enterprises often find it difficult to meet the growing demand for increasingly precise machining. The mismatch between the processing capabilities of existing equipment and the downstream processing requirements will accelerate the pace of machine tool upgrades and replacements.

Domestic Substitution: Although the high-end domestic market is still dominated by foreign companies, Chinese enterprises are gradually narrowing the gap.

Foreign companies dominate the domestic high-end market and possess comprehensive competitive advantages. Currently, the high-end machine tool market in China—particularly in sectors such as automotive and aerospace—remains dominated by companies from countries like Germany and Japan. Overseas machine tool manufacturers offer a broader product portfolio and have been developing their technologies for longer periods, accumulating extensive expertise. As a result, they enjoy clear advantages over domestic manufacturers in terms of machining performance, machining accuracy, and the completeness of their industrial chains.

Domestic enterprises are stepping up their efforts to catch up, and the gap with foreign counterparts is steadily narrowing. In recent years, domestic enterprises—represented by private machine tool companies—have made certain progress in the mid- and low-end segments. Some outstanding private enterprises have already entered the second tier of the industry and are steadily narrowing the gaps with foreign manufacturers. However, in the short term, they still cannot shake the leading position held by foreign manufacturers.

Shift in the Landscape: Private enterprises have taken the lead in China’s domestic machine tool industry and are poised to carry forward the banner of domestic substitution.

Privately-owned machine tool enterprises have risen rapidly and have now taken the lead in China's domestic machine tool industry. As mentioned earlier, since 2000, as China’s machine tool industry entered a period of rapid growth, private machine tool enterprises in China have emerged rapidly. In 2000, private machine tool enterprises accounted for approximately 20% of the total number of enterprises and slightly over 10% of the industry’s total output value. By 2005, both the number of private enterprises and their share of the industry’s output value had doubled. Starting in 2012, China’s machine tool industry entered a downturn; yet during this period, private machine tool enterprises continued to maintain a steady and progressive momentum. By 2015, the number of private enterprises and their share of the industry’s output value had each exceeded 70%, completely dominating the domestic machine tool industry. In the future process of replacing imported machine tools with domestically produced ones, private machine tool enterprises are poised to play a leading role.

CNC Transformation: CNC machine tools will continue to replace conventional machine tools.

Whether in the field of metal cutting or metal forming, CNC machine tools offer significant advantages over conventional machine tools in terms of machining accuracy, processing efficiency, machining capabilities, and maintenance. Driven by the continually increasing demand for higher precision in downstream manufacturing, the penetration rate of CNC machine tools is expected to rise further.