China's 2Q26 automation market growth accelerates, with OEM recovery and rising localization as the key themes
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China's 2Q26 automation market growth accelerates, with OEM recovery and rising localization as the key themes
Morgan Stanley believes China's automation upcycle has been confirmed, with the industry expected to grow approximately 5% year over year in 2026. AI-related demand, broader capital expenditure, energy security, replacement demand, and the export competitiveness of equipment makers are the core drivers.
- In 2Q26, low-voltage AC drives, servo systems, small PLCs, medium- and large-sized PLCs, and industrial robots grew 7%, 25%, 15%, 14%, and 17% year over year, respectively, with most categories continuing to accelerate from 1Q26.
- MIR raised its 2026 overall automation market sales growth forecast from 2% to 5% year over year and increased its forecasts for core FA products including servo systems, PLCs, and industrial robots.
- The recovery broadened downstream, with batteries, electronics, semiconductors, robotics, logistics, machine tools, and textiles performing well, while demand from chemicals, metallurgy, and elevators remained weak.
- Domestic brands continued to gain share. In 2Q26, their shares of low-voltage AC drives, servo systems, small PLCs, medium- and large-sized PLCs, and industrial robots reached 42%, 59%, 39%, 17%, and 61%, respectively.
- The report prefers Hongfa Technology Co Ltd (600885.SS) and Shanghai BOCHU Electronic Technology (688188.SS), citing order momentum, opportunities from 800V architectures, and attractive valuation for the former, and manufacturing capital expenditure recovery, laser penetration, and new product expansion for the latter.
Report interpretation
Overview
This report focuses on China's 2Q26 automation market. The core view is that OEM market growth accelerated significantly, while the project market remained relatively subdued. Driven by AI and physical AI applications, resilient downstream demand, energy security, replacement demand, and improving export competitiveness among equipment companies, Morgan Stanley believes the automation capital expenditure upcycle has been reconfirmed.
Core views
The report believes China's automation market entered a moderate upcycle in 2026, with MIR raising its full-year automation market growth forecast to 5% year over year. By product, growth accelerated for core FA products such as servo systems, PLCs, and industrial robots. By downstream sector, growth improved in batteries, electronics, semiconductors, and robotics, while logistics, machine tools, and textiles maintained solid momentum. Meanwhile, domestic brands continued to gain share across several key categories, with the localization rate of industrial robots exceeding 60%.
Analysis framework
The report combines top-down industry-cycle tracking with bottom-up mapping of products, downstream sectors, and companies. It first examines industrial enterprise profits, machine-tool orders, and MIR's automation market forecasts, then breaks down the OEM and project markets, key FA products, downstream industries, and domestic-brand shares, before mapping these findings to Chinese industrial companies under coverage, including Hongfa and Bochu.
Methodology notes
Use industrial profits, machine-tool orders, OEM demand, and project-market demand to assess the automation industry cycle.
The report cites the gradual recovery in industrial enterprise profits, continued improvement in Japanese machine-tool orders for China, and the acceleration of the automation OEM market in 2Q26 as evidence of an upcycle in automation capital expenditure in 2026.
Break down demand by low-voltage AC drives, servo systems, small PLCs, medium- and large-sized PLCs, and industrial robots.
The broad-based year-over-year acceleration of core FA products in 2Q26 indicates that the demand improvement was not driven by a single product.
Use forward price-to-earnings multiples to estimate target prices.
Hongfa is valued at 25x 2027E P/E, while Bochu is valued at 30x 2027E P/E, reflecting their market positions, growth expectations, and historical valuation ranges.
Asset mapping & comparison
Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).
- Hongfa Technology Co Ltd (600885.SS)One of the Chinese industrial automation-related companies preferred by the report.
- Strengths
- Strong order momentum, with opportunities in AIDC, ESS, new electrical products, and 800V architectures; well-diversified global operations and downstream exposure.
- Weaknesses
- Margins may be affected by price competition and rising raw-material costs; weakness in real estate could weigh on appliance consumption.
- Comparison
- Valuation uses 25x 2027E P/E, broadly in line with the historical average plus one standard deviation.
- Risks
- AIDC, ESS, and new electrical product growth falls short of expectations; adoption of 800V products is slower than expected; global electric vehicle demand declines.
- Shanghai BOCHU Electronic Technology (688188.SS)One of the Chinese industrial automation and laser equipment chain companies preferred by the report.
- Strengths
- A leading position in laser-cutting motion control systems, benefiting from the recovery in manufacturing capital expenditure, structural laser penetration, new products, and expansion into end markets.
- Weaknesses
- The report expects revenue growth may slow in 2026-2027, resulting in a target valuation below its five-year historical FY2 P/E average.
- Comparison
- The target multiple is 30x 2027E P/E, broadly in line with Inovance but below Bochu's own five-year historical average of 36x FY2 P/E.
- Risks
- Narrowing demand for low- and medium-power equipment; margin pressure from intensifying competition in the low- and medium-power market; unfavorable product mix.
- China Industrial Automation IndustryThe core macro and industry research subject of the report.
- Strengths
- Accelerating OEM market, rising domestic-brand share, and growth contributions from AI, robotics, electronics, semiconductors, batteries, and logistics.
- Weaknesses
- The project market remains weak, while demand from chemicals, metallurgy, and elevators is subdued.
- Comparison
- The automation market declined 1% year over year in 2025, while MIR expects it to improve to 5% year-over-year growth in 2026.
- Risks
- Capital expenditure recovery falls short of expectations; intensifying price competition; renewed weakness in end demand.
Key data
- 2Q26 Low-Voltage AC Drive Sales Growth+7% year over year1Q26 was +4% year over year.
- 2Q26 Servo Sales Growth+25% year over year1Q26 was +17% year over year; MIR raised its 2026 servo growth forecast from +17% to +21% year over year.
- 2Q26 Small PLC Sales Growth+15% year over year1Q26 was +14% year over year.
- 2Q26 Medium- and Large-Sized PLC Sales Growth+14% year over year1Q26 was +11% year over year.
- 2Q26 Industrial Robot Sales Growth+17% year over year1Q26 was +14% year over year; collaborative robots grew 45% year over year in 2Q26.
- MIR 2026 Automation Market Forecast+5% year over yearThe previous forecast was +2% year over year; this implies overall market growth of approximately +5% year over year in 2H26.
- 2Q26 Domestic Brand ShareLow-voltage AC drives 42%, servo systems 59%, small PLCs 39%, medium- and large-sized PLCs 17%, industrial robots 61%These increased by 1, 4, 4, 1, and 5 percentage points year over year, respectively.
- Estun Industrial Robot Share9.9%It was the largest industrial robot manufacturer in 2Q26 based on China shipment volume.
- Hongfa Target Price and Current PriceTarget price Rmb43; current price Rmb33.28Current price as of 2026-07-28; rating is Overweight.
- Bochu Target Price and Current PriceTarget price Rmb122; current price Rmb99.03Current price as of 2026-07-28; rating is Overweight.
Impact & implications
For investors, the report's main implication is that China's industrial automation demand is shifting from isolated recovery to broader capital expenditure improvement. Domestic leaders may benefit simultaneously from recovering demand and share gains. Rather than simply betting on the project market, the report emphasizes structural opportunities in the OEM chain, AI-related equipment, robotics, electronics, semiconductors, batteries, laser processing, and electrical products.
Risks
- A persistently weak project market could cause the recovery in overall automation demand to fall short of expectations.
- Intensifying price competition and rising raw-material costs could compress corporate margins.
- A decline in global electric vehicle demand could weigh on related automation, electrical, and relay demand.
- A sharp downturn in the real estate market could weaken appliance consumption and affect related supply chains.
- Bochu faces risks from narrowing demand for low- and medium-power equipment, intensifying competition, and an unfavorable product mix.
- If emerging demand from AI, physical AI, robotics, PCB equipment, liquid cooling, and electronics develops more slowly than expected, the industry upcycle could weaken.
What to watch
- Whether MIR continues to raise its 2026 automation market and core FA product forecasts.
- Whether the overall automation market can achieve approximately 5% year-over-year growth in 2H26.
- Whether acceleration in the OEM market can extend to the project market.
- Whether domestic brands continue to gain share in servo systems, PLCs, low-voltage AC drives, and industrial robots.
- Order momentum in downstream sectors including batteries, electronics, semiconductors, robotics, logistics, machine tools, and textiles.
- Progress of Hongfa's orders for AIDC, ESS, new electrical products, and 800V architectures.
- Changes in Bochu's share in high-power MCS, welding MCS, new products, and end-market expansion.