Yes, the OWI Robot arm is just a toy and doesn't have nearly enough accuracy, repeatability, sensor feedback, etc. to be able to do any sort of "real" assembly task. I'm sure you are aware of industrial arm like Kuka, ABB, etc. However, these arms are not suited to fine assembly either. A new class of robot arm is becoming more popular, one that is "human safe" and designed for assembly tasks with some human involvement. These are things like Universal Robotics, Rethink Robotics Sawyer, and ABB YuMi.
Also, even with "perfect AI control", a robotic arm needs a certain about of good sensor feedback to do anything useful. One example of this is demonstrated in an old experiment where a woman's hand was completely numbed and she was asked to light a match. It took about 45 seconds of fumbling with the match before she was successful. With an un-numbed hand she can light the match in just a few seconds on the first try. The point being that even with arguably the most powerful computer on the planet (the human brain), without good tactile sensing we are unable to do fine manipulation. (I was unable to locate the video of said experiment, but it is also mentioned in this article.)