China is experiencing massive growth in its middle class, with annual disposable income quadrupling between 2000 and 2010. The wage increases that are making the nation less competitive as a source of cheap manufacturing are also creating a multitude of consumers who crave the same material goods that the West has enjoyed for decades: cars, computers, fashion apparel, gourmet foods from around the world. 

But who will supply those products? Chinese companies are in the best position to satisfy the new wave of demand. They already have the manufacturing infrastructure. All they have to do is redirect their factories from turning out western goods for export, to making their own branded products for domestic consumption. (Assuming, of course, that rising Chinese factory wages don't render those local plants uncompetitive. It would be a rich if familiar irony if Chinese manufacturers had to go abroad for cheap labor.)

On paper, there is no more promising market than China's. Even if only a fraction of its 1.35bn people have money to spend on anything other than pure necessities, the country still represents a goldmine for global merchandisers. China has 160 cities with population of more than a million, and 676 million Chinese are classified as non-rural.

But how can American manufacturers compete with the Chinese on their own turf? According to Nicholas Wells, attorney and owner of the Wells IP Law firm, there are plenty of Chinese brands with high name recognition at home. Their apparent head start has to be balanced against the cachet that foreign brands possess, in China as well as the rest of the world. German-made cars dominate the country's automotive market. The Chinese are no different from anyone else in their love of status symbols.

Still, Western manufacturers selling in China would be foolish to think that they're operating in a completely free market. Wells cites the many legal and regulatory barriers that foreign brands face in gaining a foothold there. Even the basics, such as setting up a local subsidiary and asserting the right to trademarks, are fraught with complexity.

Intellectual property protection is an especially thorny area in China. Things might be better than 10 or 20 years ago, but foreign companies still are finding it extremely difficult to shield their IP from spies and copycats. The rule of law is just beginning to take hold.

No matter what promises are made by Chinese entities, enforcement remains a problem, says Wells. "It can be very difficult to even know which patents are being violated," he says. And who's to stop them from drawing on the manufacturing expertise they acquired from making things for others? "They have the right to use those skills in their own businesses."

Bottom line: "Any company entering into those types of [IP] agreements has to know they're entering into a devil's bargain," says Wells. Nevertheless, there are steps that U.S. companies ought to be taking to ensure a modicum of protection for their patents, copyrights and IP. Foreign manufacturers should be careful to register trademarks, both in their native and Chinese languages, for each category of product they wish to sell. At the same time, they should establish relationships with a Chinese law firm, which can provide a basis for future action.

"So many companies that I work with, as they enter the Chinese market, are so cost-conscious that they don't want to invest in strong trademark or patent protection," says Wells. But they'll pay in the end.

China is likely to ramp up enforcement of its IP laws as it seeks to enter foreign markets with its own brands. The U.S. and other western nations could put a damper on imports of Chinese consumer goods if they believe that China isn't respecting their companies' patents and trademarks. Reciprocity is the key to opening markets in both hemispheres.

For now, though, "enforcement mechanisms are still weak," says Wells. U.S. companies with sensitive technology or product designs must guard against the kind of IP "sharing" that has typified the Chinese market for the past 20 years.

Where future product comes from is an open question. There's no reason to assume that Chinese goods intended for domestic consumption will always be made in China. Vietnam and other parts of Southeast Asia are attractive low-cost sources of labor, even if they lack the enormous scale that production in China can achieve. In fact, it's not an impossibility that Chinese and U.S. manufacturers, both aiming to serve the Chinese market, could have plants located site by site in a third country.

Sourcing questions aside, U.S. manufacturers will rarely find themselves able to compete with the Chinese on price alone. But product quality could put them over the top. Research from last year by the Boston Consulting Group found that more than 60 percent of Chinese consumers surveyed were willing to pay more for products labeled "Made in USA" than those labeled "Made in China." And nearly half of Chinese consumers preferred a U.S.-made product to one from China, when price and quality were equivalent.<

Of course, the whole question of product origin will be rendered moot if globalization continues at its current pace. Someday soon, the lines between nations, at least when it comes to identifying the flag of a business or its products, could become hopelessly blurred.

Next: Taking the pulse of U.S. manufacturing.

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Keywords: supply chain, supply chain management, international trade, China economy