China is one of VeriFone Systems Inc.'s fastest growing markets

Mr. Hayes says that in anticipation of rising labor costs, the company will likely ramp up automation efforts in its factories in China. For instance, UTC has replaced some workers at a smoke-detector assembly factory in Guangzhou with machines that place components on boards, says Mr. Hayes. The machines, while expensive, eliminate labor and drive productivity, he says. As labor rates increase, Mr. Hayes says, automation would help in reducing the size of its work force in China.

UTC is also looking at factories in Vietnam and Malaysia as China becomes less competitive on a cost basis, he says. But moving production to other countries can be costly, can expose UTC to currency fluctuations and is a lengthy process, says Mr. Hayes. "Unless we saw a dramatic increase on labor costs, it would be very difficult to move factories," he says.

Because of competitive pressure, UTC isn't considering price increases.
Harman International Industries Inc., an audio designer and manufacturer, buys about 25% of its parts from Chinese manufacturers. As contracts expire, the cost of such items will increase, so Harman is looking at suppliers elsewhere, and its research and development team is looking at ways to substitute some of the parts, says CEO Dinesh Paliwal.

Harman is also working with its Chinese suppliers to help relocate them to other parts of China where wage inflation isn't as severe. He's already persuaded some component manufacturers and magnet makers to move to Western parts of China where costs are lower.
Still, Harman is gearing up to expand in China, opening two additional factories this summer, adding 460,000 square feet of capacity and 1,100 more employees. While labor is more expensive than in years past, and rising under a stronger yuan, Mr. Paliwal says the opportunities for revenue in China outstrip the rising costs.
Indeed, an appreciating yuan may be a boon for China's growing middle class and the multinational companies selling products to them. U.S. exports to China totaled $92 billion in 2010, more than double the $41 billion exported in 2005, according to Department of Commerce data.

China is one of VeriFone Systems Inc.'s fastest growing markets as consumers build wealth and adopt credit cards, says Doug Bergeron, CEO of the electronic-payments company.

Still, Mr. Bergeron says he's willing to raise prices to offset an increase in export costs. "There's no question we'll pass it along to preserve margins," he says.