Over the past several weeks, I have spoken to literally thousands of students, university professors and corporate executives about China and doing business here. Not surprisingly, interest in the country has never been higher.

China’s continued economic growth and the upcoming Olympics are two obvious reasons, but my sense is that China watchers have begun to realize that China is in transition, and they have a myriad of questions about how the country is evolving. China, the land of low labor costs and the world’s manufacturer of cheap, low technology products is giving way to a new China:  that is rapidly moving up the value added chain and becoming a large producer of more sophisticated, higher margin products.

This upward movement in manufacturing is being driven by four factors: higher wages, higher raw material prices, an appreciating yuan, and government policies which have reduced tax rebates for exports. The effect has been to drive China’s manufacturers out of low-technology, highly labor intensive products where profits are already low and are being squeezed, and into higher technology, more sophisticated products with higher profit margins.

After five years of double-digit growth in China’s Gross Domestic Product (GDP), per capita incomes are up across the board. At the beginning of this century, China was a $1 trilllion economy with per capita incomes of under $1,000. By 2007, the country’s GDP had grown to over $3 trillion, and average per capita incomes had increased to approximately $2,500. The government estimates that there are about 900 million people in China’s rural population. If we assume that this segment of the population earns $500 per year on average, then the remaining 400 million people in China are earning over $7,000 per year. Per capita incomes in major cities are even higher. Shenzhen is now $10,628; Guangzhou, $9,302; Shanghai, $8,594; and Beijing $7,370. Clearly, products that were profitable for Chinese factories to produce at the turn of the century when the country’s average per capita income was considerably lower can no longer be produced profitably today.

On top of rising income levels and expectations, raw material prices have increased dramatically since 2005, and the yuan has appreciated by over 15 percent against the dollar. Manufacturers of higher technology, higher value-added products at least have some chance of passing higher raw material costs on to customers. Producers of low technology products typically do not. Likewise, a more valuable yuan makes low technology, highly labor-intensive products that much more expensive on global markets.

The result of rising wages, higher raw material prices and an appreciating yuan has been a giant margin squeeze for Chinese manufacturers, particularly those that have been overly dependent on exports to the United States. (The yuan has actually declined in value against the Euro since July 2005 when China allowed its currency to float within a narrow band.) We are now seeing the economic reaction to the significant changes in manufacturing input prices that have occurred over the past several years.

China changes so quickly that there are advantages to seeing the country through a fresh set of eyes. Often, the best insights into how China works are provided by those who are the newest to it. This view was re-enforced by a recent column in The New York Times, Seeing the Sights of Industrial China: 2 Factories, 2 Futures, written by business columnist Joe Nocera.

Joe is now visiting China for the first time. He had received a copy of my book, and wanted to have a general conversation before he got on the plane for Shanghai, his first stop. By Joe’s own admission, he knew little about China, but was looking forward to the trip and seeing the country first-hand. What I found most interesting about the article is that the two factories he discussed he visited on his first two days on the ground. It didn’t take him long to get into the swing of things! By juxtaposing the two factories in the way that he did, he provides an unusually fresh, clear and insightful picture of China in transition.

Shanghai Jinjue Fashion Company, a manufacturer of inexpensive clothing, fit Joe’s image of a typical Chinese factory to a “T.” As he describes it, Mr. Jin, the board chairman, is the “classic low-cost, tight-margin, squeeze-every-penny manufacturer, the kind of entrepreneur who has been the backbone of China’s astounding economic rise—and who has been the primary beneficiary of the low yuan, which has spurred the market for China’s cheap goods.” Problem is, Jinjue is now in trouble. Hurt by rising labor costs and an appreciating yuan, it is no longer competitive and orders are now going to factories in Vietnam and Mexico. With higher costs and an underutilized factory, Jinjue is losing money.

Li Xianshou, founder of ReneSola, a manufacturer of silicon wafers used in solar panels that recently listed on the New York Stock Exchange, is another story. When ReneSola was established in 2001, it assembled solar panels, which it then sold to companies in Germany and Japan that made the wafers. As Joe’s article relates, Li soon discovered that:

assembling the panels was the lowest cost, lowest value part of the solar industry.” “It is a commodity business,” he said. “And it can attract a lot of competition.” So in 2005, he decided to take the big leap. He got out of the solar panel business and into the more profitable solar wafer business.

Now instead of competing with other Chinese companies, he is competing with German and Japanese companies—where his cost advantage is huge. His company has created a technology for using recycled wafers and other materials ,which is helping him avert the shortage of polysilicon, the material from which the wafers are made. He employs 3,300 people, up from 20 in 2005, and pays his line operators upward of $500 a month. From a standing start three years ago, ReneSola is among the world’s top five suppliers of solar wafers.

Two different companies; two different Chinas; two different futures.