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“We’ve all become so dependent on Chinese manufacturing that we’ve lost the ability to threaten lawsuits for loss of business when they get around to going into business against us,” Haysun Hahn, a consultant at trend-spotting firm Futuremode, recently told a conference of U.S. outdoor-apparel companies. “Right now, they’re making minor changes in the ideas they’re ripping off from you. In three years, those changes won’t be so minor.They want to innovate. They may not be ready to launch their own global brands, but some of the manufacturers I’ve met are ready to redefine yours.”

More than any other country in the world, China is about the diffusion of improvements in production processes rather than improvements in end-user technology. Chinese industrialists-and postindustrialists-are on a long march to turn low-cost manufacturing capacity into faster-growth innovation capability. This doesn’t mean cutting-edge Chinese companies will mimic Western industrial history and adopt billion-dollar R&D budgets; after all, neither does Dell. Breakthrough inventions may require expensive research, but innovations that make products cheaper and easier to sell anywhere in the world do not. By tapping into the educated but underemployed work force in China’s countryside, for example, leading domestic cell-phone manufacturer Ningbo Bird builds nearly as many handsets in China as foreign competitors like Nokia and Motorola-and at lower cost.

China desperately needs advances that generate jobs as well as profitability. Remember, China has a huge demographic Damocletian overhang of unemployed young people. Officials predict that in the next three to five years, Chinese cities and towns will have to provide job opportunities for some 22 to 23 million new workers annually. In other words, unlike Japan and the Asian high-tech “tigers,” China has to exploit its economies of scale in ways that will soak up the tidal wave of human capital that threatens to flood its labor marketplace. Can that be done with an industrial base that overwhelmingly defines itself by how well it emulates the innovations of others? I don’t think so. Neither does a single Chinese PhD I’ve spoken with in Beijing, Shanghai, or Singapore.

Innovators and entrepreneurs who think of China as a “build to order” hub of the global supply chain aren’t wrong; they’re just being overly simplistic. Demographic, industrial, economic, and, yes, technical trends all point to a China whose economic growth is dependent not just on its low-cost appeal but on its accelerating ability to tweak, enhance, and build upon the innovations of others.

Tomorrow’s best brands may not be Chinese, but the most intriguing brand extensions-and brand competitors-won’t just be “Made in China”: they’ll be designed in China, as well. How will we know? Because we’ll be copying them.

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