China’s state playbook fuels humanoid robot boom, resolves Evergrande crisis

“With things like this in China, there’s always an element of surprise to some extent simply because the system is so opaque that nobody knows what’s going on.” – on the sudden legal actions in the Evergrande case

Key Takeaways:

• Chinese state subsidies driving the humanoid robot sector are likely to prompt protectionist steps in the West
• The coordinated liquidation of Evergrande and sentencing of its founder reflect Beijing’s priority of maintaining social stability

By Rene Vanguestaine and Doug Young

We’re currently witnessing two very different, yet equally telling, chapters of China’s state-managed economy playing out simultaneously. On one hand, Beijing is heavily subsidizing a futuristic humanoid robot industry, utilizing a familiar playbook that has previously upended global markets. On the other, the government is finally closing the book on fallen real estate titan Evergrande (3333.HK), liquidating it after years of careful, behind-the-scenes management. These two developments perfectly illustrate how the Chinese government pulls the levers of its economy to manufacture technological dominance while engineering social stability.

A recent eye-opening report from the Financial Times revealed exactly who is buying up many of the dancing and leaping humanoid robots suddenly coming out of China. Unsurprisingly, it turns out the answer is the government. A sizable portion of these companies’ revenues comes from government-owned training centers. These centers buy the robots, generate vast amounts of operational data using them, and send that data back to the manufacturers to rapidly improve their performance. In one case, a company called Leju received 45% of the revenue for its flagship humanoid model last year directly from these government centers.

In China’s humanoid robot industry, this kind of comprehensive state support undeniably works. Chinese companies receive substantial subsidies at the central, provincial, and local government levels. Throwing such substantial amounts of money directly and indirectly at these efforts helps to build a highly efficient supply chain and ecosystem. Inevitably, some companies thrive in this environment and decide to conquer the world, armed with highly competitive prices.

But this common refrain isn’t going to make robot makers outside of China very happy. We’ve seen this exact Chinese playbook unfold in the solar and EV industries. Western governments repeatedly complain about unfair state support, even if it isn’t always the most efficient use of capital. In response to this new wave of robots, we expect to see inevitable pushback. Governments in the U.S., Europe, and Japan will likely take belated measures to protect their domestic manufacturers, such as Tesla (TSLA.US) with its Optimus humanoid, from total obliteration.

Despite the glitzy videos of kung fu robots and machines breaking human running records, the reality is less glamorous. Away from the hype, these robots may still be very prone to making mistakes. There’s not a whole lot of use for a kung fu robot in daily life. We believe the industry will split into two paths: industrial and personal use. On the industrial side, there are plenty of applications that can tolerate occasional, or even multiple, failures because the risk of harming humans is incredibly low.

However, on the personal usage front, we’re far from mass adoption. All it will take is one spectacular incident — we wouldn’t call it an accident, but an incident — where a robot beats up an elderly person in a hospital bed, for the industry to face massive trouble. We shouldn’t forget how the Segway at the turn of the century was supposed to revolutionize the world. Similarly, the low-altitude economy of flying machines lost its momentum the moment a small plane crashed into a building in Beijing. Visionaries will always promise that technology will make life entirely peachy, but the safeguards simply aren’t there yet for mass adoption.

A carefully orchestrated end for a real estate giant

Moving from the industries of tomorrow to the problems of yesterday, we’re also watching the final act of a long-running saga in China’s suffering property sector. In late August, Chinese courts suddenly found Hui Ka Yan, the founder of Evergrande, guilty of massive fraud and financial mismanagement, sentencing him to life in prison. Almost immediately after, a Chinese court accepted a bankruptcy petition to liquidate Evergrande — a move the company’s creditors have been requesting forever.

Many are speculating that the close timing of these two events isn’t a coincidence. With things like this in China, there’s always an element of surprise because the system is so opaque that nobody truly knows what’s going on behind the scenes. But in reality, everyone should have expected Hui to end up in serious trouble eventually.

Evergrande defaulted back in 2021 after years of growing skepticism in Western financial markets regarding the health of its finances. The real estate sector’s troubles actually began before Covid, when the central government tightened borrowing rules to rein in companies that were building endlessly with cheap money in a market where everyone believed prices would always rise. When order comes to a bubble, it typically crashes.

Over the last five years, the government has slowly worked to stabilize the sector. Because the overriding concern in China is always potential social impact, Beijing never moves aggressively. Instead, the government took its time progressively transferring domestic assets to domestic creditors, local governments, and unfinished housing projects. Now, it appears the government feels the fallout has been contained enough to let the system work. This means forcing shareholders, certain creditors, and banks to absorb the remaining losses. Government-owned banks at various levels, of course, have less visible back-door channels to absorb these hits.

From a political and public relations standpoint, orchestrating the liquidation alongside Hui’s sentencing makes perfect sense. It ensures that any remaining victims, such as those still waiting for their apartments, see that this isn’t the government’s fault. They can pin it all on the “bad guy.” As detailed in previous reports on Evergrande’s liquidation, this marks the first time Chinese courts have accepted a liquidation petition for such a major company. Will this trigger a wave of liquidations for other big companies like Country Garden (2007.HK) or Vanke (2202.HK; 000002.SZ)? We think there will have to be some more, but it’s going to be a very slow process. The government’s primary concerns remain employment and local tax revenues. Some companies will be cleaned up if the social impact is deemed nil, but others, we’re afraid, will be kept on life support to maintain stability.

About China Inc

China Inc by Bamboo Works discusses the latest developments on Chinese companies listed in Hong Kong and the United States to drive informed decision-making for investors and others interested in this dynamic group of companies.

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