China's total GDP (nominal value) in the first quarter of 2025 is expected to be between 32 and 33 trillion yuan. Affected by the base effect, policy stimulus and the external environment, the actual growth rate was 4.8%, slightly lower than the annual target. The impact of the economic situation in the first quarter on manufacturing and industrial automation will be directly transmitted to the core upstream industry of encoders/sensors. As a key component of the "perception layer" of industrial automation, its demand changes, technological iterations and competitive landscape are all deeply bound to macroeconomics, industrial policies and technological trends.

I. Demand Side: The upgrade of industrial automation drives the increase in the production volume of core components

Under the rigid demand of the incremental market, especially for intelligent manufacturing equipment, the demand for encoders: high-precision servo systems
(robots, CNC machine tools) and new energy equipment (photovoltaic silicon wafer cutting,
wind power pitch adjustment) has grown, driving up the penetration rate of absolute encoders and incremental encoders (anti-interference).
Sensors: The demand for real-time data collection in smart factories has been upgraded, and the demand for MEMS sensors (vibration, temperature),
industrial vision sensors (AI quality inspection), and force-sensing sensors (collaborative robots) has exploded.

Meanwhile, the alternative opportunities in the existing market and the transformation of traditional production lines continue to exist.
Low-end photoelectric encoders (incremental type) are gradually being replaced by high-reliability products,
and the digital transformation of old equipment has given rise to the demand for bus-type encoders (such as EtherCAT).
The traditional switch quantity sensors have been upgraded to IO-Link intelligent sensors to meet the requirements of remote configuration of parameters in flexible production lines.

Ii. Technology Side: A key window for domestic substitution and high-end breakthroughs

High-end breakthrough in the encoder industry: Foreign brands (such as Heidenhain and Tamagawa) monopolize the market for optical encoders with more than 23 bits.
Domestic enterprises need to break through in grating etching and anti-fouling technologies.
Magnetic encoders replace optical encoders in cost-sensitive fields (logistics AGV), but the problem of hysteresis effect remains to be solved.
Battery-free multi-turn encoders have become the focus of technological competition.
With the increase in the domestic production rate of the sensor industry: pressure/flow/displacement sensors have been initially replaced,
but high-linearity Hall sensors (for automotive EPS) still rely on stmicroelectronics.

Iii. Policy Side: Supply chain security and standardization drive industry restructuring

With the successive introduction of specialized support policies for industrial automation in our country,
such as the Ministry of Industry and Information Technology's "Industrial Foundation Reconstruction Project" providing subsidies for the
precision bearings of encoders and the wafer fabrication of sensors,
it will be conducive to reducing the R&D risks of domestic enterprises.
Meanwhile, if the industrial sensor communication protocols led by China (such as the "Intelligent Sensor Industry Standard") are implemented in 2025,
it will also weaken the protocol barriers of European and American manufacturers.

Iv. Competitive Landscape: Industrial Chain Synergy and Ecological Competition

The concentration of the top players in the domestic encoder industry is an inevitable trend.
Encoder enterprises that are deeply bound with servo motor manufacturers (Inovance, Yakebest, Estun) will receive stable orders.
The cross-industry competition brought about by consumer electronics giants (such as Huawei) entering the industrial
field through magnetic coding technology will also challenge the traditional pattern.

With the arrival of the convergence trend of sensors and edge computing, 
it will drive sensors to upgrade from "single perception" to "perception + diagnosis".
In addition, European and American manufacturers maintain their premium prices through the bundled model of "sensors + industrial software",
while domestic enterprises need to break through the shortcoming of algorithms.

V. Risks and Challenges

Low-end encoders are at risk of price wars, as the threshold for low-end encoders (such as incremental ones)
is not high and the situation of overcapacity may drag down the profits of enterprises.
At the level of technological iteration, if quantum encoders and optical fiber sensors achieve breakthroughs in the next two years, the existing technological routes may face disruption.
From the perspective of supply chain resilience,
if encoder chips are affected by geopolitics, it may lead to extended delivery times.

To sum up, high-end encoders/sensors benefit from favorable factors such as new energy,
semiconductor equipment,  and the upgrading of advanced manufacturing equipment, and there is a large space for domestic substitution. However, 
for mid-to-low-end sensors, as customers are more sensitive to prices, the reshuffling will accelerate,  and the industry concentration will steadily increase.