At a bustling store in south China's metropolis of Shenzhen, a small crowd gathers around what looks, at first glance, like an ordinary display of plush toys, El.kz citesXinhua.
They are soft, round and brightly colored, the sort of companions that have filled children's rooms for decades. But then they begin to murmur in their own uniquely programmed digital dialect.
At the prompt of a young girl, the beige "creature" in her hand, one of the palm-sized AI toys known as "Fuzozo," pauses, its tiny eyes flickering as if in deep thought. "What would you like to talk about?" it asks in Mandarin. The girl smiles and answers. What follows is not a scripted exchange, but an AI-powered conversation.
The toy, now a popular item on Chinese e-commerce platforms, is part of a new breed of smart plush products, the AI-powered companions. Designed with soft textures and cute features, it hides a more complex interior including a voice recognition system, large language models and a feedback loop that allows it to remember, adapt and respond.
For decades, toys have spoken to children, and pressing a button might trigger a song or a phrase. Once unresponsive or mechanically interactive toys, made of plastic, plush or rubber, are being infused with "perception and personality," as advances in artificial intelligence (AI) begin to reshape even one of the most longstanding consumer habits.
From emotional companionship to educational applications, a new generation of intelligent toys is gaining traction both online and offline in China.
In late 2025, China's Ministry of Industry and Information Technology said the country's AI toy market reached about 24.6 billion yuan (about 3.59 billion U.S. dollars) in 2024, projecting the market to grow to around 29 billion yuan in 2025.
"The new 'species' of consumer technology is beginning to reshape how children learn and grow, how families interact, and even how society defines the boundaries between machines and emotional life," said Xue Xiaowei, executive president of the Shenzhen Toys Industry Association.
EVOLUTION
BubblePal, a frosted bubble-shaped device designed to clip onto toys, is drawing a lot of attention. It enables children to start conversations simply by squeezing it.
For its creator, Li Yong, a former developer of smart speakers, the idea grew out of his observations of industry pain points.
"Children ask questions that traditional smart speakers are unable to answer," Li said at his company's headquarters in Shenzhen's Qianhai. Questions such as "Does my mom love me?" or "Why are clouds white?" often require not just rigid data retrieved from the internet, but empathy.
The rise of large language models offered a solution to Li's dilemma. By embedding AI into familiar toys, his team sought to turn them into responsive companions. The system combines general-purpose models with child-focused specialist models, integrating platforms such as DeepSeek and ByteDance's Doubao in China, while remaining compatible with platforms such as ChatGPT overseas.
According to Xue, this marks a fundamental shift. "Traditional toys rely on simple 'press-and-play' interactions, but AI-powered toys integrate speech recognition, computer vision and emotion analysis to enable more complicated interactions, turning them into companions that can educate, comfort and engage," he said.
For many parents, the appeal is straightforward. "I don't always have time to be with my child," one buyer wrote online. "I hope there can be something that listens and responds."
INTEGRATION
If demand helps explain the rise of AI toys, tech supply helps explain their rapid growth. For tech companies, the toy sector represents a uniquely receptive market.
China is one of the world's largest toy manufacturers, yet the industry has long been marked by a clear divide. Domestic brands have long been trapped in price competition, driving sales through high output and thin profit margins, with the high-end segment largely dominated by overseas players that leverage intellectual property and brand strength.
However, a new wave of change is now reshaping this dynamic. Backed by stronger demand and supply, many Chinese firms are turning to AI as a way to move up the value chain. They use technology not only to differentiate products, but also to break out of the long-standing reliance on low-end manufacturing.
"During this era, children are natural digital natives," said Yang Kun, co-founder of Shenzhen-based toy maker Dr. LookAI. "They are inherently comfortable with multimodal, intelligent interaction, making them ideal users for next-generation products."
By late 2025, China had 2,450 registered companies related to smart toys, according to data from business registration platform Qichacha. More than half, 56.65 percent, were concentrated in Guangdong Province, clustered in manufacturing and innovation hubs such as Shenzhen, Shantou and Dongguan.
"From chips to components, everything behind BubblePal is sourced domestically, mostly in Guangdong," Li Yong told Xinhua, noting that the company's headquarters is in Shenzhen's Qianhai, with smart hardware manufactured in factories across Shenzhen and Zhongshan, also in Guangdong, while its co-branded and self-developed plush toys are produced in Dongguan and Huizhou.
Such tightly coordinated supply chains, he said, have helped boost the company's business, with total sales surpassing 300,000 units.
This success has not gone unnoticed. Evolving from a niche craft into a rapidly expanding market, the sector is beginning to draw attention from some of the technology industry's heavyweight firms, including Huawei and JD.com.
That influx is reshaping competition. Yang Kun noted that, compared with traditional toy makers, tech companies hold a decisive edge in turning cutting-edge AI into scalable products.
"Conventional manufacturers excel at IP operations, industrial design and distribution," he said. "But when it comes to translating advanced AI into stable, mass-producible user experiences, the barriers are high. Technology firms, by contrast, can more effectively integrate algorithms, chips and interaction design."