AI + Hardware in China: Observations and Reflections

The conventional wisdom suggests a clear divide: the US excels at software, while China dominates hardware. This narrative is reflected in investment patterns, with Silicon Valley prioritizing AI models, while Chinese hubs like Beijing and Shenzhen focus on robotics and manufacturing.

As traditional labour-cost advantages diminish and globalization slows, the relative value of various economic factors is being reshaped. Is this notion of “software-heavy US, hardware-heavy China” truly accurate? From an investment perspective, what advantages make China a compelling choice for Long China strategies? In an AI-driven era, how will manufacturing, globalization, and hardware intersect to create new paths for development?

We delve into this dynamic, analyzing China’s hardware evolution and its implications for the AI-driven future.

1. China's Consumer Electronics: The Eras of Transformation

China’s consumer electronics sector has undergone significant evolution over the past few decades, shaping the global landscape. Driven by manufacturing, the sector’s rapid rise mirrors similar industrial revolutions in other nations, such as the UK's 18th-century transformation and Japan's post-WWII resurgence. The key to China’s success has been its systematic policy support, infrastructure development, and focus on industrial capacity.

From the 1990s to present, China's electronics industry has evolved through three distinct phases, each building on the last.

Era1(1995–2010): Manufacturing Hub

China emerged as the global leader in consumer electronics manufacturing during this period, overtaking Japan. The country’s labor cost advantages, combined with globalization trends, enabled its rise as the world's dominant electronics manufacturer. During this time, the U.S. ceded leadership in consumer electronics to Japan. However, as Japan’s market share grew, China quickly adopted a competitive approach, leveraging its own labor force and manufacturing infrastructure to scale production.

Foxconn , BOE Technology Group Co., Ltd., and Amperex Technology Limited ATL were key players in this era. Foxconn, for example, revolutionized contract manufacturing, growing its revenues by 20 times over 24 years. Similarly, BOE’s state-backed investments in LCD technology enabled it to establish a dominant position in the sector. ATL's focus on lithium batteries also contributed to China’s dominance, particularly as the industry expanded into energy storage and electric vehicles.

Below are more insights from notable industry players:

• Foxconn (Hon Hai Precision Industry):

In terms of contract manufacturing, a representative company in this field is Hon Hai (Foxconn).  The company pioneered a complete set of EMS (Electronic Manufacturing Services) processes, including SMT (Surface Mount Technology) placement, PCB (Printed Circuit Board) fabrication, PCBA (Printed Circuit Board Assembly), DIP (Dual Inline Package) assembly, and SMT factories. While Foxconn was not the first foreign contract manufacturing company to enter the Chinese market, it has undoubtedly had the most profound impact on the mainland EMS industry. Between 2000 and 2024, Foxconn achieved a 20-fold increase in revenue and indirectly facilitated the transformation and upgrading of domestic contract manufacturing models, such as those of BYD.

• BOE Technology Group:

In 1992, the company underwent a shareholding reform, and by 2001, it was listed on the A-share market. In 2008, the provincial government of Hefei allocated one-third of its annual fiscal revenue to support BOE Technology, which at the time was operating at a loss of over RMB1 billion. This investment was used to build the country’s first sixth-generation LCD production line, marking a significant leap forward in the upstream segment of the industry chain. This progress was driven by both market-driven demand and the long-term commitment of state-backed capital.

• ATL (Amperex Technology Limited):

An early pioneer in lithium battery production, later transitioning into energy storage and electric vehicle batteries.  The firm established a domestic industrial chain in a field that had long been dominated by Japanese companies.

Initially, consumer lithium batteries were primarily supplied to PC and mobile phone manufacturers. As the industry evolved, two significant trends emerged:

1. Miniaturization:

The demand for small lithium batteries from a diversified range of consumer electronic products began to exceed the combined demand from PCs and mobile phones.

2. Scaling Up:

The demand for power batteries and energy storage batteries, driven by their larger capacities, far surpassed that of traditional consumer lithium batteries. These trends marked the beginning of a second wave of industrial structural transformation.

During this phase, the establishment of large-scale EMS (Electronic Manufacturing Services) infrastructure and widespread adoption in China were largely complete. This development not only engaged a significant labor force in contract manufacturing for consumer electronics but also nurtured a generation of technically proficient engineers and entrepreneurial leaders with deep technological insights

Era 2(2011–2019): Product Complexity & Branding

As China’s manufacturing base matured, the industry began shifting from Electronic Manufacturing Services (EMS) to Original Design Manufacturing (ODM), and eventually to branded products. Companies like Xiaomi Technology and BYD exemplified this transition, creating their own brands while still leveraging China’s manufacturing efficiencies. BYD’s focus on vertical integration and investment in lithium iron phosphate batteries set the foundation for its leadership in the New Energy Vehicle (NEV) market. Xiaomi, meanwhile, combined hardware efficiency with branding success, expanding its product portfolio and global reach, particularly in the smartphone and smart home sectors.

During this period, Chinese firms began to demonstrate the ability to develop branded products that could compete globally, shifting from purely manufacturing to innovation-driven enterprises.

Below are more insights from notable industry players:

BYD: Mastering Vertical Integration in NEVs

BYD leveraged the early success of its F3 model to focus its efforts on the burgeoning new energy vehicle market. Despite facing a sales plateau starting in 2010, the company used this period of stagnation to build a solid industrial foundation, particularly in lithium iron phosphate batteries. BYD went on to construct the world’s largest lithium iron phosphate battery production base.

Throughout this period, BYD’s profits from car sales were almost entirely reinvested into research and development (R&D). At one point, BYD reported a net profit of just 200 million RMB against an R&D expenditure of 8 billion RMB, highlighting the substantial resources dedicated to advancing supply chain capabilities. This approach exemplifies the enormous efforts Chinese companies have invested in developing advanced industrial supply chains.

With the explosive growth of the NEV supply chain, BYD capitalized on its strong foundation in lithium batteries and consumer electronics to build a comprehensive electric vehicle supply chain. By focusing on vertical integration and in-depth R&D, BYD emerged as a leader in NEV production, setting an example for other Chinese enterprises.

Xiaomi: Combining Efficiency, Innovation, and Branding

Xiaomi is a quintessential example of China’s electronic information industry, combining manufacturing efficiency with product diversity and establishing strong global brand influence. Between 2010 and 2015, Xiaomi began with its MIUI operating system, attracting a loyal user base. In 2011, it launched its first smartphone, which gained rapid market recognition for its exceptional value-for-money proposition.

From 2017 onward, Xiaomi expanded its product line, introducing the now-iconic Mi Home ecosystem, which spans wearable devices and smart home products. By 2018, Xiaomi went public in Hong Kong. Recognizing the explosive growth in China’s NEV supply chain, Xiaomi decided to enter the electric vehicle market. Founder Lei Jun famously referred to NEVs as “a big smartphone with four wheels,” a remark initially dismissed by sceptics but later validated as Xiaomi successfully differentiated its offerings from traditional auto giants by focusing on optimizing the user experience.

Xiaomi’s journey reflects the remarkable diversity and richness of China’s electronic information manufacturing sector. The company has shown an ability to integrate different product types under a unified brand identity and culture while maintaining rapid iteration cycles. Xiaomi also stands out for its global reach: approximately 43% of its revenue is derived from international markets, with more than 50% of its non-automotive consumer electronics revenue coming from overseas. Despite challenges such as regulatory hurdles in India, MIUI’s user base, with over 80% located outside China, underscores Xiaomi’s success as a global brand.

This period saw the rise of IoT, renewable energy, and industrial automation. Chinese companies transitioned from EMS to ODM and eventually to branded products, signalling the maturation of their global competitiveness.

Era 3 (2019 – present): New Productivity & High-Tech Chains

The current era has seen the development of cutting-edge technologies such as autonomous driving, robotics, and energy storage at scale. Previously high-cost technologies are now accessible for mass production, making China’s high-tech sector increasingly competitive. The rapid growth of the robotic vacuum cleaner market, fueled by advancements in LiDAR technology, illustrates this shift. Once a niche market, robotic vacuums are now mainstream, with Chinese companies such as Roborock playing a leading role.

Other innovations, like autonomous navigation and humanoid robots, are extending into new domains, including home service robots and medical devices. These advancements are increasingly accessible to consumers, driven by reduced costs and improved production capabilities.

Case Study: Robotic Vacuum Cleaners

The domestic market for robotic vacuum cleaners exploded in 2019, with total sales rebounding to 6 million units and revenue reaching RMB9.41 billion. This growth was fuelled by consumer upgrades and the “stay-at-home economy” triggered by the pandemic, which drove demand for cleaning appliances. Additionally, the declining cost of LiDAR technology made robotic vacuums more affordable, breaking the price barrier set by premium foreign brands like iRobot and allowing more consumers to adopt these products.

The development of robotic vacuum cleaners can be divided into several phases:

• 1996–2002: iRobot resolved the basic functionality of robotic vacuum cleaners.
• 2003–2015: Overseas brands explored intelligent solutions, such as VSLAM (Visual Simultaneous Localization and Mapping) and LSD (Laser Scanning and Detection) navigation.
• 2016: The launch of the domestically produced LSD-powered Mi Home robotic vacuum by Roborock marked the realization of basic intelligence.
• 2019–Present:

With the widespread adoption of docking stations, significant improvements in autonomy have been achieved, including self-emptying and self-cleaning capabilities. These advancements have elevated robotic vacuum cleaners beyond niche products, breaking through market ceilings.

Expansion into New Domains

The same capabilities — autonomous navigation, object recognition, and docking station-based charging—are now visibly extending into other areas, such as garden maintenance and home service robots. Examples include pool-cleaning robots, lawn-mowing robots, and robots designed for companionship or tasks like home cleaning. Similarly, the rapid development of humanoid robots has spurred advancements in their key components, such as joint motors, dexterous robotic hands, and electronic skins. Improvements and cost reductions in these upstream products are beginning to spill over into other consumer electronics sectors, including wearable exoskeletons, rehabilitation robots, prosthetics, and electric wheelchairs. This has created opportunities for new companies to emerge and make these next-generation technologies accessible to consumers.

Talent Migration

Another notable trend is the migration of talent from academia, where researchers focus on high-tech fields, into various industries. General robotics, which requires a high degree of integration between hardware and software, demands a combination of these skill sets. The spillover of such talent into other sectors has created a “catalyst effect,” forcing traditional players to innovate and adapt.

Key Insights from Three Eras of Development

As we reach the end of 2024, it is evident that China’s consumer electronics industry has built enduring strengths, with three key advantages:

• Comprehensive Supply Chains

China’s full industrial ecosystem, covering every part of the supply chain, from raw materials to finished products, is unparalleled globally. This structural advantage allows China to maintain its competitive edge, which other regions, such as North America and Southeast Asia, cannot replicate.

• The Engineer Dividend

Over the past 20 years, China has cultivated a highly skilled workforce. The country now trains millions of engineers annually, enabling rapid technological implementation and a high rate of innovation. Thirty years ago, China’s advantage lay in inexpensive labor, which supported labor-intensive industries. Today, the focus is on the “engineer dividend,” driving technology-intensive sectors that rely on R&D. Between 2000 and 2020, China trained over 60 million engineers, and by 2023, the number of engineers reached 20.59 million — nearly equivalent to the population of Australia. These highly skilled workers operate with efficiency far exceeding their global counterparts, enabling technologies to be implemented in China at several times the speed seen elsewhere.

• Global Product Capability

Chinese companies have developed significant product capabilities, continuously iterating on designs to create products that meet global standards. This product innovation, combined with the country’s supply chain efficiency and engineering talent, positions China to remain a dominant force in consumer electronics.

The U.S. Lead in AI Innovation and the Short-Chain Advantage

At present, the United States holds a decisive lead in AI innovation, while China faces notable challenges in bridging the gap, particularly in algorithm and architecture development. Chinese companies specializing in large-scale AI models require significant funding and long-term investments to catch up with their American counterparts.

Key Differentiators in AI Innovation

• Model Capability

The United States consistently demonstrates an edge in model performance. For instance, following the release of Sora, Google quickly launched its Veo 2 model, which outperformed in various metrics. Such advancements are significantly enhancing AGI (Artificial General Intelligence) capabilities in areas like video processing. This superiority is underpinned by the U.S.’s unparalleled computational power, a critical advantage for training and deploying advanced AI models.

• Architectural Innovation and Foundational Logic

The United States excels in architectural breakthroughs that expand the application range of AI models. For example, OpenAI’s O3 model employs reinforcement learning to enhance the inference capabilities of LLMs (Large Language Models), broadening their applicability across industries. Additionally, structural advantages, such as dominance in the semiconductor sector, further cement the U.S.’s leadership. High-performance chips and processors, vital for AI, remain a significant bottleneck for global competitors, including China.

Historical Context: The United States’ Second Wave of Innovation

The United States’ resurgence in the information age marks a second wave of technological leadership, driven largely by its “short-chain innovation” model. This concept—often overlooked during the initial stages of technological revolutions—has gained visibility in the AI era, where its fruits are now evident. The U.S.’s excellence in software, algorithm talent, and a supportive innovation environment forms the backbone of this framework.

Understanding Short-Chain vs. Long-Chain Innovation

Short-Chain Innovation

Short-chain innovation refers to the streamlined process of transforming technical breakthroughs into commercial products, bypassing extensive intermediate steps. This approach involves moving swiftly from R&D to prototypes, leveraging network media for dissemination, and tapping into mature enterprise software ecosystems to monetize innovations efficiently. A small team of developers and researchers can achieve significant outcomes in a short timeframe.

Key characteristics include:

• High Efficiency: Direct transition from code to product demos and market launch.

• Minimal Intermediaries: Fewer steps between R&D and end-user adoption.

• Lower Costs: Rapid, cost-effective scalability enabled by digital infrastructure.

Long-Chain Innovation

In contrast, long-chain innovation involves complex, iterative processes to develop physical products. This approach requires coordination across multiple layers of the supply chain, including product managers, R&D teams, and dozens of component suppliers, manufacturers, and design service providers, culminating in the final product reaching the consumer.

Key characteristics include:

• Comprehensive Coordination: Integration of diverse supply chain components.
• Physical Infrastructure: Reliance on manufacturing and logistics ecosystems.
• Extended Timelines: Longer lead times for product development and market deployment.

The U.S. Short-Chain Advantage

1. Science-Driven Innovation

The U.S. supply chain places a strong emphasis on scientific research (Science), with engineering capabilities (Engineering) catching up. Silicon Valley’s tech giants, such as Google and Meta, invest heavily in R&D, drawing talent from the world’s leading universities. PhD students often transition directly from academia to corporate labs like Google Labs, where they contribute to cutting-edge industrial research. These companies’ ability to transform accumulated technological insights into commercial products exemplifies the efficiency of short-chain innovation.

2. Rapid AI Evolution

The development of AI illustrates this paradigm shift. Technologies like GPT-3 to GPT-4 appear to evolve over a few months, but these advancements are built on years of foundational research and iterative improvement. In the U.S., where globalization has concentrated R&D and design activities, progress occurs in leaps rather than incremental steps. This requires sustained investment, a tolerance for experimentation, and the freedom for R&D teams to innovate without constraints.

3. Apple’s Chip Development: A Benchmark for Short-Chain Success

Apple’s journey in chip design is a prime example of short-chain innovation. After a decade of R&D, Apple parted ways with Intel to develop proprietary SoC (System-on-Chip) architectures, elevating its hardware ecosystem. This breakthrough enabled seamless cross-platform integration across devices such as iPhones, iPads, and Macs, reinforcing Apple’s ecosystem dominance and showcasing the transformative potential of short-chain innovation.

The Broader Implications of the Short-Chain Innovation

1. Scalability and Efficiency

Short-chain innovation enables the U.S. to dominate in fields where speed and flexibility are paramount, such as software development, platform-based services, and AI model deployment. The ability to commercialize breakthroughs quickly gives American companies a significant competitive edge in global markets.

2. Talent Utilization

The U.S. innovation ecosystem is fueled by its concentration of world-class talent. Universities and corporate labs work in tandem to produce a steady pipeline of researchers and innovators who drive technological advancements.

3. Ecosystem Synergies

The United States benefits from a mature digital infrastructure, including advanced cloud platforms, enterprise software ecosystems, and global distribution networks. These elements amplify the impact of innovations developed within the short-chain framework.

China’s Long-chain Advantage

While the U.S. thrives in short-chain innovation, China’s strength lies in its long-chain capabilities, particularly in physical product development and supply chain integration. This model enables China to dominate industries that require large-scale manufacturing, intricate supply chain coordination, and long-term industrial planning.

China’s long-chain advantage complements the U.S.’s short-chain innovation, suggesting potential opportunities for collaboration in global markets. For instance, combining American software expertise with China’s manufacturing prowess could accelerate the development of AI-integrated hardware solutions.

In the early stages of AI development — such as the release of Large Language Models (LLMs) — short-chain innovation has proven effective, as these technologies predominantly exist in digital domains. However, as AI evolves to interact with the physical world and achieve multi-scenario deployment, the need for hardware-software integration becomes critical. This is where China’s long-chain advantage, with its robust engineering and manufacturing capabilities, becomes indispensable.

Below is a  graph from a report by ARK Investment on the transformative potential of AI, smart devices, general-purpose robotics, and digital currencies between 2020 and 2030. These innovations are expected to surpass the economic impact of the internal combustion engine and the personal computer, underscoring the magnitude of the current technological shift.

Summarizing China’s Industrial Chain Advantages and the Differing Development Paradigms of China and the US

1. Tools:

A decade ago, tool-based products dominated the market. At this stage, product intelligence was primarily limited to the early IoT era, offering basic functionality such as remotely turning on a home air conditioner.

2. Copilots:

Over the past five years, products with autonomous and intelligent features have emerged in specific scenarios, though they still require user inputs, such as setting schedules or routes. These “Copilot” products significantly reduce the user’s operational time and offer partial autonomy.

3. Agents:

In the next three to five years, we are likely to witness the rise of “Agent” products that will autonomously learn and execute tasks while interacting with users through natural language commands. These products will eliminate learning curves and usage barriers, making human-machine interaction seamless and intuitive.

Case Study: Outdoor Power Equipment (OPE) in Garden Maintenance

North America and Europe have long dominated the global Outdoor Power Equipment (OPE) market, accounting for over 80% of the total market share. According to Frost & Sullivan, from 2016 to 2025, North America’s market share is expected to remain stable at around 55%, primarily driven by the US and Canada. Meanwhile, Europe’s share, concentrated in countries with high green coverage like the UK, France, and Italy, will hold steady at 30%.

The traditional players in garden maintenance (OPE) have focused on tool-based products. These products, typically powered by fuel engines, have significant user entry barriers and are primarily designed for tasks like mowing, leaf blowing, and snow removal. The top five global garden machinery suppliers—John Deere, Toro, Husqvarna Group, MTD, and STIHL—together command approximately 52.6% of the market.

However, with the maturation of China’s lithium battery industry, Chinese brands such as TTI, Chervon, Greenworks, Daye, Sumec, and Positec—many of which began as ODM/OEM manufacturers—have advanced into the top tier of the OPE electrification landscape, differentiating themselves from traditional fuel-based competitors.

From Tools to Copilots

Mowing and pool cleaning are two of the largest maintenance scenarios in the garden industry, both of which are currently transitioning from tool-based products to Copilot solutions. Companies like Sobot, Ecovacs, and Segway, originating from industries such as exoskeletons, robotic vacuum cleaners, and electric mobility, are leveraging their expertise in robotics to penetrate high-end households in North America and Europe.

Key features of this generation of Copilot products include:

• Autonomy: Partial automation for tasks such as navigation and operation.
• Scenario Recognition and Navigation: Users can set the pool cleaning robot’s schedule and select surface or underwater cleaning via an app. While the robot can autonomously complete most tasks, users still assist with monitoring, charging, and replenishing supplies.

The Future: Intelligent Agent Products

Future garden maintenance products will integrate advanced capabilities powered by large language models. Users will be able to issue natural language commands, such as:

“Summer is here. I want the lawn maintained at 4 cm, but leave a bit longer in the backyard for football. Around the driveway, please ensure you don’t damage my flowers.”

These robots will convert such commands into abstract instructions, decompose them into executable tasks, and autonomously complete the work. They will also manage the full operational cycle, including docking, recharging, and self-cleaning, without human intervention. Over time, these robots will evolve into versatile solutions capable of mowing, snow clearing, and de-icing.

Extended Applications: AI-Driven Innovations

Other promising scenarios include outdoor sports equipment, such as ball-launching machines. These products have evolved from simple motor-driven devices to intelligent solutions incorporating multi-sensor technologies for shot placement and feedback. The next step will be AI-powered coach agents, which will:

• Enhance Human-Machine Interaction: Tailor training based on the user’s style, technique, and skill level.
• Achieve Precision: Integrate multi-sensor fusion and optimize terminal computing power to ensure accurate shot placement at an affordable cost.

Imagine commanding a ball launcher with simple instructions like:

“Today, I want to practice baseline techniques and returns, and finish with 20 minutes of match play.”

This eliminates the need for app-based setup and complex parameter adjustments, offering an effortless and immersive experience.

Conclusion: The Rise of Intelligent Systems

China’s “hardware-first” approach, combined with its emerging strengths in AI, positions it as a leader in the next wave of global technological evolution. By leveraging its supply chains, talent pool, and cost-efficient innovation, China is shaping the future of intelligent systems, with far-reaching implications for industries, economies, and societies worldwide.  China’s ability to integrate AI and hardware ensures it remains at the forefront of the evolution towards intelligent agent products, creating transformative solutions across industries.

In the coming years, the interplay between the US and China — characterized by both competition and potential collaboration — will define the global technological landscape. Understanding these paradigms will be crucial for stakeholders navigating this transformative era.