Physical AI and reshoring: robots, drones and eVTOLs

The Pentagon’s autonomy budget request has grown from about $250 million to $55 billion, with $14 billion allocated for unmanned systems. The request covers funding for autonomous ground and aerial platforms and includes partnerships with commercial technology firms.

Zeno Mercer, head of robotics and AI research at VettaFi, told investors the budget increase is tied to government contracts with commercial technology companies that can provide steady revenue for makers of automated platforms and components.

Defense and aviation companies have signed deals to develop systems that serve both military and commercial customers. Joby Aviation plans commercial eVTOL service in the U.S. by 2028 and is working with L3Harris to pursue military eVTOL markets.

On the manufacturing side, U.S. Purchasing Managers’ Index data has begun to climb after a period of stagnation. Core suppliers of industrial robot arms and components have reported higher sales as some production returns onshore and factories adopt smaller, more automated production lines. Manufacturers report more staff are assigned to maintain, repair and supervise automated systems rather than perform the most precise assembly tasks.

Japanese industrial robotics firms have reported strong results. Fanuc has reached multi-year highs and has announced collaboration with Nvidia on physical AI applications. Mitsubishi Electric is developing advanced drones and ground robots with partners, and Yaskawa has projected operating profit growth that analysts expect to be substantial this year.

Chinese companies in the automation and EV sectors are pursuing new product lines while facing pressure in their core auto markets. XPeng has expanded into humanoid robots, in-house chips, robo-taxis and a flying‑car unit. The company’s robotics unit is targeting production of about 1,000 humanoid units by year‑end and is developing a proprietary Turing chip intended for automotive customers.

Investment products offer different exposures to these trends. Index funds focused on robotics hardware and logistics seek to capture gains from industrial and defense deployments, while funds targeting software and AI infrastructure focus on the computing technologies that enable autonomy. VettaFi provides the indexes used by two ETFs in these areas and receives licensing fees for those indexes; the ETFs themselves are separate products.

Large defense budget proposals, industry partnerships and rising manufacturing activity coincide with increased investment in hardware, software and supply chains for autonomous systems in the United States, Europe and Japan.