Karate Kid 3 has it's issues, everyone would agree. Even the most ardent Karate Kid'er will admit Karate Kid 3 was not up to par with part 1 or even part 2. (However thanks to an edited version I have made I was able to salvage KK 3 and turn it into a decent movie. More info on that to come.)
But it looks to me the 3rd installment would have gone even further off the deep end had the above scence not been cut. It appears to be a machine of some sort inteded to teach Daniel how to block punches.
There was a mention of this in the director's commentary of Karate Kid 1. I think it best it never came to fruition in 1,2 or 3.
