AI hardware upgrades are set to stimulate equipment investment opportunities amid rapid AI development. The enhancement of liquid cooling solutions is expected to marginally boost the growth rate of the machine tool industry. From a supply and demand perspective, domestic machine tool companies are likely to capture more market share, presenting investment opportunities. The main points are as follows:
AI hardware upgrades are driving demand for machine tools, with China's machine tool sector expected to increase its market share. The progression of AI computing power towards higher power levels creates expansion opportunities for AI manufacturing, particularly through the increased necessity and upgrading of liquid cooling systems, which in turn raises demand for precision machining with machine tools. The development of AI manufacturing is anticipated to bring upgrade and import substitution opportunities for China's machine tool industry.
Upgrades in liquid cooling solutions are generating demand for precision machining, leading to a marginal increase in machine tool growth rates. Common components in AI server cooling include heat sinks, cold plates, manifolds, pumps, cold heads, and large water distributors. As the power per AI server rack continues to rise, the urgency for liquid cooling solutions increases, driving upgrades in related components. For instance, UQD, a key connector in the coolant circuit, has seen its mainstream specification upgrade to the large-diameter UQD08, made from stainless steel or corrosion-resistant alloys with high hardness and low surface roughness, resulting in higher precision machining requirements. The upgrade of liquid cooling solutions is creating new demand, which is expected to marginally boost machine tool growth rates. According to the Japan Machine Tool Builders' Association, Japan's machine tool industry orders in March 2026 increased by 28% year-on-year, with March order value hitting a record high. Overseas orders surged by 40%, driven by demand across sectors including automotive and artificial intelligence. AI manufacturing is projected to continue providing marginal growth for the machine tool sector.
With the machine tool market growth rate accelerating, Chinese machine tool enterprises are poised to increase their market share. The rise in AI manufacturing demand contributes to market expansion. Considering medium technical requirements and tight capacity among overseas manufacturers, domestic brands are expected to gain share. From a technical demand perspective, the barriers for liquid cooling components are lower than those in aerospace and military applications, but requirements for production efficiency, cost, and stability are high, areas where domestic machine tools hold relative advantages. From a supply perspective, domestic machine tools offer faster delivery and cost-effectiveness, while overseas machine tool supply is relatively inflexible. Therefore, domestic machine tools are likely to achieve further import substitution. According to the China Machine Tool & Tool Builders' Association, China imported $5.39 billion worth of metalworking machine tools in 2025. Domestic machine tool companies are expected to continue import substitution, increase market share, and present investment opportunities.
Risks include macroeconomic fluctuations leading to lower-than-expected investment, weaker-than-anticipated AI demand, slower-than-expected development of liquid cooling systems, and rising raw material prices impacting corporate profits.