If you are a manufacturer deep into planning for the turnaround, now is a very good time to be thinking about your China strategy. Certainly, the Chinese economy has had its fair share of problems -- exports down 20% in the first quarter, thousands of factories shuttered and more than 20 million migrant workers jobless. But May brought the third month of expansion in Chinese manufacturing. China's Purchasing Manager's Index stood at 53.1% in May, the third month it was above 50 and indicative of economic growth.

"Companies may want to be more proactive there earlier. People in [my] market are weaker so that gives me some opportunities. My competitors may be distracted with their own problems," says Steven Ganster, managing director, Technomic Asia, a division of Tompkins International. "If I have the balance sheet and the guts, it may be a good time for a disruptive strategy. At a minimum, we need to plan for recovery."

Observers such as Ganster say China's $584 billion stimulus program has had a quick, visible impact on Chinese domestic spending. While much of the U.S. stimulus package will go to prop up weakened balance sheets, Ganster points out, the Chinese stimulus is going to infrastructure and the promotion of revenue growth.

"They cut taxes on small cars and literally the next month, you saw a sharp uptick in the sale of small cars. They offered discount coupons of approximately 13% on various home appliances and computers for the rural market. It gave a nice benefit to the rural market but it also helped to boost production and clear out inventory of suppliers on the east coast [of China]. There is also more traditional investment in roads and things of that kind."

Ganster adds that the Chinese stimulus investment has a long-term, strategic component aimed at promoting innovation and R&D. Similar to steps the government took at the beginning of the decade, he believes, this stimulus has the potential to take China to the next level of productivity and competitiveness.

Total Cost

Many U.S. companies came to China years ago because of lower wage costs and economic incentives for exporters. In 2000, the hourly wage was approximately 80 cents while it is $1.70 to $2.25 today. Duane Bolinger, a managing partner with BBK based in Shanghai, says China continues to enjoy other economic advantages such as the quality of the labor force, infrastructure and IT and a broad supply base. For very labor-intensive, low-margin industries such as shoes, says Bolinger, rising labor costs in China already have prompted companies to move production to lower-cost nations such as Vietnam or Malaysia.

But if companies came to China for cheap labor, they are staying to participate in the country's huge domestic market and increasingly looking at selling their Chinese production in Asia. For more capital-intensive industries, recent data show more than 80% of multinationals have no plans to move any capacity outside China. Access to China's huge domestic market accounts for much of that, says Bolinger, but also multinationals have spent a lot of money to build supply chains in China and are not eager to duplicate that effort.

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