China has made robotics a focus of its technology strategy over the past few years, unveiling plans to create supply chains and mass-produce machines.

Chinese President Xi Jinping and China’s top leadership, known as the Central Committee, met in October to release proposals for the 15th Five-Year Plan, a document that lays out some of Beijing’s key areas of focus in the coming years.

The article mentions the term “embodied AI,” which refers to AI-powered hardware such as robots or self-driving cars.

For China, humanoid robots represent an opportunity to solve labor challenges in the world’s second-largest economy and advance Beijing’s pursuit of technological supremacy.

Karel Eloot, a senior partner at McKinsey & Company, told CNBC: “China’s drive to develop humanoid robots is to address population pressures, drive a new round of economic growth and strengthen its role in global competition.”

Analysts say China’s manufacturing prowess and success in producing other products such as electric vehicles could give it an edge in robotics.

“The depth of China’s supply chain means companies can develop and manufacture robots at a significant cost advantage over other regions,” Ethan Qi, associate director at Counterpoint Research, told CNBC.

In fact, UBTech expects production costs to fall by 20% to 30% annually.

At the same time, many local governments in China have developed subsidy programs for companies in the robotics industry.

However, Horváth’s Brauchle said the United States “has advantages in artificial intelligence, autonomy and the development of advanced algorithms.”

U.S. companies are “betting on vertical integration” — meaning owning and controlling more of their supply chains, McKinsey’s Eliot said. This includes components such as actuators that power the robot’s movement, as well as artificial intelligence software integrated into the final product.

“We believe that tighter ownership of the entire system will lead to superior performance, a stronger security case and defensible intellectual property,” said Ellott.

China’s humanoid robot market will initially exceed that of the United States, but it won’t stay that way forever.

“In the longer term, both countries are expected to move towards similarly large markets, with absolute mass market penetration expected after 2040, driven primarily by mass adoption in private households,” Brauchle said.

China’s robotics industry is not without challenges. One bottleneck is its restricted access to certain chips needed for the robot.

“I think there’s a very high reliance on U.S. chips, like Nvidia chips,” Jacqueline Du, head of China industrial technology research at Goldman Sachs, told CNBC’s “The China Connection” last month.

Forrester principal analyst Charlie Dai pointed to a number of other potential obstacles, such as the limitations of artificial intelligence in the unpredictable operating conditions of humanoid robots and regulatory hurdles.

“These challenges combine to slow commercialization over the next two years and require coordinated innovation, safety and policy frameworks,” Dai told CNBC.

There are also technical difficulties in replicating the movement of human limbs such as hands and fingers – an extremely complex task that requires the ability to mimic biological functions. “Most robots have far fewer effective degrees of freedom, severely limiting their range of motion,” McKinsey’s Elliott notes.

Finally, perhaps the biggest challenge is reducing the cost of these complex machines. Today’s advanced humanoid prototypes cost between $150,000 and $500,000 per unit, Eloot said. To “compete with human labor,” the cost per unit needs to drop to $20,000 to $50,000.

Although robotics is a strategic priority for China, that has not stopped regulators from warning that the market may be overheating.

In November, China’s top economic planning agency, the National Development and Reform Commission (NDRC), warned that the market for humanoid robots was at risk of forming a bubble. The National Development and Reform Commission said there are more than 150 humanoid robot companies in China and the number is growing, with many of them launching similar products.

Technologies that Beijing has given strategic importance to, such as electric vehicles, have gone through boom and bust cycles in the past.

“Many believe that humanoid robots will soon surpass human-level versatility, speed and autonomy. Manufacturers reinforce this perception with elaborate demonstration videos and staged trade show performances that demonstrate capabilities that have yet to be replicated in real industrial settings,” says Horváth’s Braukeler.

“The gap between perception and reality increases the risk of investment bubbles.”

“Market corrections may slow innovation and commercialization momentum,” Forrester’s Day added.