Is the US Focused on the Wrong Part of the AI Competition with China?

Among the many facets of China-U.S. competition in the realm of artificial intelligence (AI), the field of embodied AI holds particularly high potential for China to gain a competitive edge – and Beijing knows it.

Embodied AI refers to AI systems integrated into a physical form, such as the robotic dog produced by Boston Dynamics and humanoid robots like Tesla’s Optimus. Unlike many Silicon Valley startups that still concentrate on language models or agent-based systems, a significant portion of Chinese AI startups nowadays focus on embodied AI, ranging from robotic hands to companion robots of various forms. Startups aside, China has proven to be successful in fostering revenue-generating mature companies in this space, as demonstrated by world-leading commercial drone company, DJI.

China’s advantage lies in its rapid deployment of robotic innovations, combined with its domestically developed manufacturing capabilities. This enables mass production of robots at a rapid pace, both for consumer use and for enhancing industrial efficiency. No other country can match China’s combination of companies innovating in the field of embodied AI and companies able to manufacture these robots.

As a case in point, while Tesla holds patents, its robots are manufactured in China. Without the economy-of-scale enabled by the mature manufacturing system currently located in China, Optimus loses its price advantages. Its ambition of massive production is now being put on hold amid the ongoing China-U.S. tariff war, which threatens the stability of Tesla’s supply chains.

In recent years, China’s robotics market has maintained high-speed growth. From 2017 to 2021, sales of industrial robots increased from $4.6 billion to $7.5 billion, with an average annual growth rate of 13.0 percent. Sales of service robots rose from $1.2 billion to $4.9 billion, with an average annual growth rate of 42.2 percent. China's share of global sales for industrial and service robots grew from 28.2 percent and 18.2 percent in 2017 to 42.9 percent and 28.5 percent in 2021, respectively.

According to information revealed at a recent convention on embodied AI jointly organized by the district government in Beijing and a leading robotic consultancy firm, China aims to occupy 44.6 percent of global sales, a market share that would equate to around $14.2 billion.

Professionals working in the field recognize that the United States will likely continue to have an edge on the most cutting-edge technologies, but they see China as competitively positioned to become one of the largest producers, if not the biggest innovator, of advanced robotics. This is not dissimilar to the trends in electric vehicle (EV) production: Although Tesla was the flagship of EVs globally, Chinese EVs – both big and small brands – have come to dominate actual sales, especially for markets outside of the United States.

Most Chinese AI firms operate under the norm that private funding will take the lead on initial investment, followed by the state, which focuses on pouring resources into promising projects. This model enables targeted financial support for emerging technologies in China, such as quantum computing. However, many current robotics firms are benefitting more from state policies than companies like the famed DeepSeek. There are numerous funding schemes and technology parks available in China at various levels to help support firms in the embodied AI sector.

The increased state funding is partially due to robotics companies needing more resources to take off. But also, like the EV sector, China’s leaders – in central and local governments alike – see robots as a complex enough ecosystem to be worth the investment, with the clear objective of bolstering related upstream and downstream sectors and thus contributing to job creation. For embodied AI, the related sectors include algorithms, semiconductors, radars, synthetic skin materials, cloud computing, CPUs, controllers, batteries, and more. 

China’s AI development also benefits from a second-mover advantage and China’s ability to capitalize on rapid adaptation. The recent breakthrough of DeepSeek, for example, benefited from its cost-innovation synergies. The reason DeepSeek sent shockwaves among U.S. investors was not only due to the product quality, but also because it demonstrated that a cutting-edge LLM could be trained at a low cost. 

It is likely that China will continue to enjoy the numerous benefits of playing catch up, while making innovations beyond imitation. The Chinese investment market remains closely tied to trends in the United States, attendees at the AI convention noted. The U.S. currently sets the direction of the global AI market, with early investments prioritizing diversity and innovation. Chinese investors tend to follow these trends, using U.S. benchmarks as reference points. Consequently, when U.S. firms produce unicorns, the valuations of corresponding Chinese companies also rise, often triggering waves of industrial consolidation.

Lastly, China boasts a vast market for robotics. Applications span from industrial use to home appliances and personal robotics, reinforcing China’s momentum in innovations and facilitating economies of scale. Robotics is expected to play a key role across multiple sectors, including smart cities, healthcare and elderly care, the service industry, education and entertainment, and consumer-facing applications.

Despite the rosy picture, China’s robotics sector still faces technological bottlenecks, particularly in high-end components and software development. The country remains heavily dependent on imports for critical hardware such as high-performance chips, precision sensors, servo motors, and advanced motion control systems. At the same time, in terms of domestic innovation in robotics-specific operating systems and AI algorithms – especially those required for real-time perception, decision-making, and autonomous operation – China still lags behind global leaders.

The scene, however, is changing fast, arguably on a timescale of months, not years. The human dexterous hand features 25 degrees of joint freedom and 21 degrees of actuation freedom. In mid-2024, Optimus’ hand boasted 22 degrees of freedom; just a few months later, China produced a hand of 20 degrees of freedom, with more breakthroughs being announced in the following months.

All hype aside, embodied AI is here to stay, and China is ready to capitalize on the emerging sector.