Insight April 13, 2010, 10:30AM EST

Three Growth Megatrends in China

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A further megatrend unfolding in China is the upgrading of quality and capabilities in Chinese factories. Many factory owners are looking at how to move away from simply being outsourcing manufacturers and toward building their own brands, just as Taiwanese computer vendors such as Acer (2353:TT) and Asustek (2357:TT) have done.

As cheap labor becomes increasingly scarce and as fear of a Chinese yuan appreciation rises, Chinese factories are retooling to become more automated. Companies see that owning their own brands gives them better margins than mere manufacturing does. It also lets them sell to the fast-growing domestic market.

Chinese partners now look to compete

A consumer backlash in the U.S. and Europe (as well as in China itself) against poorly made Chinese products has also driven factories to improve oversight and quality control. Advances have been made to such an extent that even German companies renowned for demanding perfectionism are starting to relocate production of higher-end products to China, which partly explains why China last year replaced Germany as the world's biggest exporter.

The key takeaway: If low-cost labor is a priority, companies need to look to other labor pools such as those in Vietnam and Bangladesh to manufacture low-end products. They also need to realize that old manufacturing partners in China might quickly start competing directly with them on brand image, not just price.

Companies must adjust their vision, if they haven't already, to accommodate the fact that China is now more important as a market than as a cheap export source. High-quality production is now possible there. Those who realize this soonest will be able to seize the advantage over slower movers. China has changed in five years—and it will change a lot more in the next five years.

Shaun Rein is the founder and managing director of the China Market Research Group, a strategic market intelligence firm. He writes for Bloomberg BusinessWeek on strategy and marketing in China. Follow him on Twitter at @shaunrein.