The upward cycle in automation has been confirmed, with AI and humanoid robots emerging as new focal points.

Overview

This research report, based on the Bernstein team’s field visits to 14 automation companies in China and Japan, confirms that the global factory automation (FA) sector has entered a broad-based upcycle. The report notes that, despite macroeconomic volatility, micro-level order data point to robust demand, primarily driven by investments in semiconductors and AI-related technologies. In addition, it provides an in-depth analysis of the varying degrees of adoption of “physical AI” technologies, the commercialization trajectory of humanoid robots, and the divergence in pricing power among Chinese and Japanese firms within the competitive landscape, thereby updating earnings forecasts and target prices for several key companies.

Core views

The global automation upcycle has been firmly established, with demand both genuine and sustained. Research indicates that Inovance Technology in China reported a 40% year-on-year increase in April orders, while Japanese FA companies have also confirmed the persistence of demand, despite weak fixed‑asset investment data during the same period. Beyond semiconductors and AI—accounting for 5–25% of automation demand—other verticals such as automotive are likewise recovering. Crucially, FA firms have not observed any unusual “front‑loading” of orders, suggesting that current demand is driven by underlying end‑user needs rather than inventory buildup. Institutions project that China’s growth peak will occur in the first half of 2026, with the global peak in the first quarter of 2027, and that the upcycle will persist for more than a year beyond the peak. Physical AI marks a technological watershed, with FANUC clearly leading the pack. Among the many companies touting AI, FANUC stands out for its execution. Its entire robot lineup is compatible with Nvidia and Google’s physical AI platforms, having already secured thousands of orders since their launch last December. By contrast, Yaskawa announced support for these platforms only in a specific series—Motoman Next—two and a half years ago, with cumulative orders totaling roughly 200 units. FANUC views physical AI not as a short‑term disruptive growth driver, but as a complementary technology to broaden robotic application scenarios and lower the barrier to entry, a pragmatic positioning that has earned market recognition. Humanoid robots are poised for their first commercial deployments, positioned as “complementers.” Humanoid robots are transitioning from entertainment and research toward practical applications, with warehouse and factory material handling emerging as their initial killer use cases. Chinese manufacturers report year‑on‑year sales growth exceeding 200%. Field surveys confirm that humanoid robots are designed to tackle tasks currently difficult for conventional FA equipment to automate—such as packaging, loading/unloading, and wire harness assembly—acting as complements to industrial robots rather than replacements. To safeguard margins and accelerate development, component suppliers—including Harmonic Drive and Inovance—are shifting from single‑part offerings toward actuator modules and even full‑machine integration. Competition in China is intensifying, leading to pronounced divergence in pricing power and profit margins. Japanese FA companies broadly acknowledge the technological advances made in China, yet adopt differing strategies. Keyence and FANUC maintain stable market shares through continuous innovation; Yaskawa opts to sacrifice share in favor of protecting profitability; Omron has introduced low‑end SKUs tailored specifically for the Chinese market in an effort to regain ground, though institutions remain skeptical about their effectiveness. Against a backdrop of rising costs—driven by inflation and tariffs—pricing power hinges less on market concentration and more on innovative capability: Keyence and FANUC can fully pass on cost increases, whereas SMC and Harmonic Drive manage only partial cost pass‑through. In terms of profitability, Keyence and AirTAC demonstrate strong performance, while SMC lacks a clear plan to improve margins, resulting in margin erosion.

Analysis framework

This report employs a “bottom-up” approach, combining on-the-ground field research with updates to financial models. First, by visiting 14 representative companies in China and Japan—both listed and privately held—we gather first-hand data on order intake, technology adoption, and competitive dynamics, thereby validating the underlying macroeconomic cycle. Second, by comparing how various firms deploy new technologies—such as physical AI and humanoid robots—and analyzing market feedback, we assess their long-term competitiveness and the strength of their technological moats. Finally, drawing on the latest financial statements and insights from our fieldwork, we update key financial assumptions—including revenue growth rates, profit margins, and valuation multiples—to derive a rationale for adjusting target prices. For instance, we raised Han’s Laser’s target price based on stronger-than-expected demand for PCB equipment in AI‑driven data centers and improved operational efficiency; conversely, we lowered SMC’s target price due to concerns that its sales‑force expansion will drive up costs and put pressure on profitability.

Methodology notes

• Cyclical and Business Cycle FrameworkAnalysis of the Economic Turning Point

  By examining the divergence between micro-level order data—such as Inovance Technology’s April orders, up 40%—and macro-level indicators like fixed-asset investment (FAI), we can identify turning points in industry sentiment.

  The research report notes that while macro-level fixed-asset investment data remain weak, micro-level corporate order books are robust, with no evidence of abnormal early ordering. This confirms that the current upturn in the industry has genuinely begun, rather than being a spurious boom driven by inventory restocking.

• Competitive and Strategic FrameworkMoat / competitive advantage

  Pricing power, as a key metric for assessing a company’s competitive advantage, becomes particularly crucial during periods of rising costs.

  The research report emphasizes that, whether the market is fragmented or concentrated, only companies with robust innovation capabilities—such as Keyence and FANUC—can fully pass on cost increases while sustaining high profit margins. This ability to maintain profitability through innovation is a more reliable indicator of managerial excellence and competitive moats than market share alone.

• Industry/Industrial Analysis FrameworkTransmission across the upstream, midstream, and downstream segments of the industrial chain

  The trend is shifting from upstream core components (reducers, motors) to midstream modules and downstream complete-machine integration.

  Faced with new opportunities such as humanoid robotics, component suppliers are no longer content with supplying individual parts; instead, they are expanding into actuator modules and even complete systems to capture greater value and accelerate the commercial deployment of these technologies—this is a quintessential manifestation of the industrial chain’s value reconfiguration.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• FANUC (6954.JP)

  Benefits: Leading in the practical application of physical AI technologies, with its entire product lineup compatible with mainstream AI platforms, driving a surge in orders.

  Strengths

  Strong ecosystem compatibility, a pragmatic technological positioning, and a stable market share.

  Comparison

  Compared with Yaskawa, which supports AI only for select product lines, FANUC’s strategy of enabling AI across its entire product range is more competitive.

• Keyence (6861.JP)

  Benefits: Strong pricing power, enabling full cost pass-through and industry-leading profit margins.

  Strengths

  Strong innovation capabilities, an efficient direct-sales model, and robust cyclical resilience.

  Comparison

  In a fragmented market, the company maintains high gross margins through innovation, outperforming peers such as SMC that rely on economies of scale.

• Inovance (300124.CH)

  Benefits: A leading beneficiary of China’s automation recovery and a key supplier of core components for humanoid robots.

  Strengths

  In April, orders surged by 40%, reflecting a strategic shift from components to module and complete‑machine integration.

  Weaknesses

  Facing intense domestic competition.

  Comparison

  Compared with pure component manufacturers, an integrated strategy helps safeguard profit margins.

• Han’s Laser (002008.CH)

  Benefits: Demand for AI data-center PCB equipment has exceeded expectations, while lithium-ion battery and consumer electronics equipment are experiencing a recovery.

  Strengths

  Operating efficiency has improved, and the product mix has been optimized, leading to a substantial upward revision of the target price.

• SMC (6273.JP)

  Downgraded/Neutral: Despite being in an uptrend cycle, profit margins remain under pressure, prompting a reduction in the target price.

  Strengths

  A leading manufacturer of pneumatic components with a high market share.

  Weaknesses

  The expansion of the sales force has driven up costs, while the absence of a clear plan to improve profit margins and limited pricing power further weigh on performance.

  Comparison

  Profit margins underperformed those of Keyence and AirTAC.

  Risks

  Investors lack confidence in its balanced growth and profitability.

• Leader Drive (688017.CH)

  Downgrade: Facing intense competition in the Chinese humanoid robot reducer market; rating set to Underperform.

  Weaknesses

  Intensified competition has led to downward revisions in medium- and long-term revenue forecasts.

  Risks

  Market competition has exceeded expectations.

Key data

• In April, Huichuan Technology’s order growth rate+40% YoYConfirming robust demand in the Chinese market
• Growth rate of humanoid robot sales>200% YoYBased on feedback from Chinese players, it is in the early stages of rapid growth.
• FANUC Physical AI OrdersThousands of unitsAchieved within months of release, significantly outpacing Yaskawa’s performance over the same period.
• SMC’s New Target Price78,000 Japanese yenDowngraded from JPY 84,000, reflecting margin concerns.
• Han’s Laser New Target PriceRMB 130.0A substantial increase from RMB 42, driven by strong demand for AI-related PCB equipment.

Impact & implications

The research report argues that the recovery in the automation sector is both broad-based and sustainable, and investors should focus on leading companies that possess genuine technological innovation capabilities and pricing power. For FANUC and Keyence, their industry-leading positions in physical AI and high-precision sensing enable them to withstand cost pressures and capitalize on sector-wide tailwinds, making them core holdings. Among Chinese players, Inovance Technology stands to benefit from localization advantages and rapid responsiveness as humanoid robotics and general‑purpose automation rebound; meanwhile, Han’s Laser and Hikvision are seeing valuation re-rating driven by AI‑related data‑center equipment and overseas expansion/digitalization initiatives, respectively. By contrast, SMC faces valuation headwinds due to management’s uncertainty in balancing growth with profitability; IPG Photonics is grappling with tariffs and intensifying competition, resulting in a slower-than-expected margin recovery; and although Green Harmonic occupies a hot growth segment, it contends with fierce competition and has been assigned an “underperform” rating.

Risks

• Geopolitical uncertainty could lead to delays or cancellations of capital expenditure projects.
• Rising raw material costs and U.S. tariff policies could further compress corporate profit margins.
• The commercialization of humanoid robots and AI-related applications has lagged behind expectations.
• Intensified competition in China’s domestic market could trigger price wars, eroding the industry’s overall profitability.

What to watch

• Will the growth rate of global FA orders peak as scheduled in the second half of 2026 to 2027?
• Real-world deployment cases and customer feedback on FANUC’s and other vendors’ physical AI platforms.
• Mass production and delivery data for humanoid robots in warehouse logistics applications.
• Cost control measures and marginal improvement signs among companies with under pressure on profit margins, such as SMC.