The article by Jim Hemerling of Boston Consulting Group divided the sourcing of components and products from China into three stages: Wave 1.0, China for low cost; Wave 2.0, China participates in innovation; Wave 3.0, China as global center for procurement.

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The first wave of Chinese sourcing was driven by Western companies' competitive search for low cost components and finished goods, with numerous U.S., Japanese, and European companies establishing corporate beachheads in China, according to Hemerling.

Wave One sourcing from China took off when manufacturers demonstrated they could produce quality products for less money, more often than not using the buyers' own designs, said the article.

Gradually, many Chinese suppliers moved far beyond being arm's length suppliers, in a wide range of industries, from consumer electronics and IT equipment to automotive manufacturing.

They started to innovate and collaborate with their customers on component and product design, marking the transition to sourcing 2.0, the article said.

That was evidenced by China's skyrocketing investment in R&D. China was the world's second biggest investor in R&D after the US in 2006, estimated the Organization for Economic Cooperation and Development,according to the author.

Using purchasing power parity as its measure, OECD estimated that the U.S. would spend $330 billion on R&D, China $136 billion, Japan $130 billion, and the EU-15 a combined $230 billion.

The author also referred to the establishment of more than 700 R&D facilities in China by multinationals, citing statistics from the 2005 World Investment Report by the United Nations Conference on Trade and Development.

The article went on to claim that sourcing wave 3.0 is underway, citing the IBM announcement that it is moving its global procurement headquarters to Shenzhen as the most visible sign.

"Today's China is the center of an economic maelstrom that grows larger and more powerful (and increasingly complex) every day," the author said.

R&D centers originally set up to support product localization for the Chinese market are now going full force in developing new products for the global market, according to Hemerling.

These rapid changes, which will continue to accelerate, mean that many Western companies have to rethink their global procurement operations, the article said.

The author made specific reference to the electronics as a combination of low cost R&D capabilities and deep multi-layer networks of electronic suppliers clustered together has turned China into the dominant global electronics hub.

But wave 3.0 does not stop within the electronic industry. The author also mentioned General Motors which has relocated its power-train electronics procurement offices to China.

Other companies and industries will follow suit, Hemerling predicted.

An evaluation of China sourcing operations of leading multinationals by the Boston Consulting Group indicated that many are still struggling with sourcing 2.0; only a few have started to come to grips with wave 3.0.