China's advantage as a low-cost and manufacturing-for-export base is diminishing for multinational companies and only those who can integrate China into their global supply chain will succeed, a new study reports.

Companies that see China as both a growth market and a market for lower-cost labor and sources, and integrate these operationally, reported an average two-thirds more profit than those focused on just one of those objectives (29.6 percent against 17.8 percent), said the study, released yesterday by management consulting firm Booz Allen Hamilton and the American Chamber of Commerce Shanghai.

Despite the returns that this approach can generate, only one out of four companies is able to combine a strong in-country market growth effort with their manufacturing and sourcing operations.

The first study in an annual series, titled "China Manufacturing Competitiveness 2007-2008," is based on a survey of 66 foreign manufacturers in China, including those from the United States, Japan and western Europe.

It found that while a stronger yuan and rising wages were pressuring manufacturing margins, failures to deploy operational best practices and to fully leverage China as both a growth market and source of labor and products are also limiting profits.

"The manufacturing philosophy employed by many foreign multinationals in China in recent decades is in need of an overhaul," said Ronald Haddock, vice president of Booz Allen Hamilton. China's changing cost and currency structure have forced companies to rethink how they structure operations here and how they perceive China in their global strategy, he said.

"We're seeing globalization at work and China's role has changed," he said. "We believe that the future depends on the choices that companies make ... not the environment itself."