China's Next Industrial Era

China is entering a new phase of its decades-long industrial evolution — one that could reshape manufacturing and productivity worldwide.

“China is moving from being the world’s factory toward becoming the world’s industrial operating system – combining scale, automation, AI, supply-chain depth and global deployment,” says Sheng Zhong, Morgan Stanley’s Head of China Industrials Research. 

Morgan Stanley Research believes this shift from “made in China” to “made by China” could help China capture more value in higher-margin areas such as software, advanced equipment and industrial technology, supporting an increase in profit margins from approximately 5% to 8% and increasing China’s share of global manufacturing value-added from 28% to 30% by 2035.

“Unlike previous industrial revolutions centered primarily on technological progress, China's Industry 5.0 is simultaneously a productivity revolution, a geopolitical response, a manufacturing reorganization and a strategic capital Supercycle,” says Zhong.

For investors, the opportunity extends far beyond China itself. As artificial intelligence moves from isolated applications to system-level deployment across factories, China may spend up to $12 trillion through 2035 on infrastructure, factory upgrades and new industrial capacity.

That spending may create opportunities for companies involved in automation, robotics, semiconductors, industrial software, power systems and next-generation manufacturing technologies.

China’s Competitive Strength

While much of the global conversation around AI has focused on chatbots and software applications, China's focus is increasingly on industrial applications. The goal is to embed AI into factories, supply chains, energy systems and manufacturing processes at scale, creating a new era of industrial productivity. 

China enters this phase from a position of strength. The country already combines manufacturing scale, integrated supply chains, engineering talent, capital and infrastructure at a level few other nations can match.

“We believe China's Industry 5.0 approach will be unique, leveraging its strong industrial base, empowered through industrial intelligence, industrial resilience and, as time progresses, increasing industrial leadership,” says Robin Xing, Morgan Stanley's Chief China Economist.  

Critical Pillars of China’s Industry 5.0

China’s competitive advantage has long been driven by property investment, labor-intensive manufacturing and low-cost production. Industry 5.0 aims to evolve that growth model by bringing together manufacturing scale, engineering talent, AI deployment, supply chains and capital investment into a more intelligent and integrated industrial ecosystem.  

Morgan Stanley Research expects Industry 5.0 to rest on three pillars.

The first is industrial intelligence: using AI, robotics, industrial software and autonomous systems to make factories and production networks smarter, more efficient and more adaptive.

The second is industrial resilience, or greater control over critical technologies and supply chains, from semiconductors and energy systems to aerospace, advanced materials and manufacturing equipment.

The third is industrial leadership: building global ecosystems through scale, standards setting, industrial platforms and next-generation manufacturing capabilities, while leading technology innovation in selected industries.

“These three pillars reinforce one another,” says Xing. “Intelligence boosts productivity and generates data; resilience strengthens critical technologies and supply chains; and leadership expands China's global industrial footprint, creating new sources of growth, innovation and competitive advantage.”

5 Key Breakthroughs For China 

As China builds on the three pillars of Industry 5.0, five breakthroughs could support its shift from scale and cost toward ecosystem and industrial innovation leadership.

By 2035, Morgan Stanley believes Industry 5.0 could boost productivity, profitability and China's position in global manufacturing. 

“The opportunity is not just to produce more, but to capture more value,” Zhong says. “As China's industrial ecosystem moves further into software, equipment, advanced materials, services and platforms, we expect profit margins to increase from 5% to 8%.” 

Potential Roadblocks

Morgan Stanley Research estimates that AI and industrial investments could boost China's potential GDP by approximately 3.5%, while the country’s share of global manufacturing value-added could increase from 28% to 30%. 

The biggest risk is creating too much advanced manufacturing capacity without enough demand, putting pressure on prices and profitability.  

China also faces several near-term challenges, including weak pricing power, excess capacity in some industries, property-related headwinds and persistent deflationary pressures. An aging population and rising local government debt have added to those pressures. 

However, China's financing system is uniquely suited to a long-term industrial transformation. Bank lending, government support and capital markets provide funding across different stages of development, allowing companies to invest in factories, infrastructure and emerging technologies even when commercial returns may take years to materialize.  

“The path forward is unlikely to be linear,” says Chetan Ahya, Morgan Stanley's Chief Asia Economist. “But this funding structure could help sustain the investments needed to advance Industry 5.0 and support China's long-term industrial ambitions.”

A Multipolar Industrial system

China's new phase of industrial growth is contributing to a more multipolar global industrial landscape. The U.S. continues to lead in frontier technology, capital and demand, making it well positioned to benefit from AI infrastructure, reshoring and electrification. 

Europe takes charge in selected software, automation and complex equipment; Japan in precision and production efficiency. China's advantage lies in scaled deployment, integrated supply chains and industrial ecosystems.  

“Rather than signaling a retreat from global trade, these shifts suggest China's role is evolving,” says Ahya. “As supply chains become more geographically dispersed, China is increasingly positioning itself as a provider of the technologies, equipment and industrial capabilities that enable manufacturing growth around the world. In that sense, the model is evolving from simply 'made in China' to 'made by China.’”