Besides playing a part in helping to solve China's environmental troubles, manufacturing faces a range of new challenges: rising wages and other factor costs, growing consumer sophistication, more complex value chains, and heightened volatility. Many of the barriers to operational improvement are organizational, not technical: too many managers still lack the experience to identify root causes of inefficiency. Chinese companies have to get beyond the “faster, cheaper” fixation that's characterized their approach to R&D in recent decades, adapt supply chains to a new consumer reality, and build logistics hubs closer to the opportunity-laden cities of China's interior.

Competing through collaboration
An automotive joint venture recently began working with 60 of its suppliers to address 30 pressing quality problems. It fixed them in only six months and put in place a new performance-management system ensuring that both the automaker and its suppliers would keep up their ends of the bargain. Collaboration was also important when a multinational lighting manufacturer was pushing its Chinese and global R&D units to join forces. For ten weeks, a mixed R&D team worked with representatives from the marketing, procurement, supply-chain, and quality groups. This approach helped spark improvement in unusual areas, including product packaging.