I opened my car door and was punched with jabs of heat that felt like I was stepping into a furnace. A thick layer of brackish grime immediately coated the car’s hood. No matter how often I cleaned it, grit from the filth that blankets the whole country—created by endless construction and peasants burning garbage—swaddled the vehicle instantly.

To my left I saw a balding security guard in a golf cart signaling me to follow him toward the entrance to what seemed like the world’s largest building. I was about as far as possible from the gilded meeting room at the Okura Garden Hotel. Instead of discussing business with billionaires and millionaires, I was about to meet the backbone of Chinese society: thousands of factory workers, whose sacrifices while toiling far from home had helped the country gain much-needed foreign hard currency in the 1990s by making products for Americans.

I was visiting the 2-million-square-foot Shanghai factory of Laura Furniture, one of the world’s largest furniture manufacturers. Many of the sofas Americans buy come from this factory or from one of its sister facilities down in Guangzhou in southern China. I was there to discuss with Bob, the president of the company, how to deal with rising labor costs and an appreciating renminbi.

The combination of the two was killing Laura Furniture’s margins, Bob had told me on a crackling Skype call the previous week, and he was looking for strategies to adapt to the changing trends. He needed me to come to see their operations and help them figure out what to do.

Bob had told me Laura had faced the same problems in America two decades earlier, when rising labor costs and improved global shipping convinced them to shut their factories in the Midwest and relocate to China in search of a limitless supply of cheap labor. The problem was that cheap Chinese labor had started to disappear in recent years, as Chinese workers demanded better pay. In search of even cheaper labor, Laura Furniture had already opened up large plants in Vietnam and Indonesia several years earlier. But they found the workers there less productive and the transportation infrastructure weak, Bob had said, forcing them to consider other strategies.

I met Bob at the entrance to the factory. His meaty hand reached out and shook mine vigorously with a hard grip. Bob was in his mid-fifties and appeared to be dressed head to foot in Dockers. He looked fit; he was probably a former high school football star, I thought, although the creep of middle age and perhaps too many American portions of hamburgers and French fries were starting to show on his belly. As Bob and I started to walk the factory floor, I quickly realized I would not need to do my cardio exercises that night. It would take us 30 minutes to walk at a good clip from one end of the floor to the other.

More than 10,000 people worked on the factory floor. Row after row of women bent over long counters, sewing cushions and pillows. Men nailed armrests and stapled faux wood to make dining and bedroom sets destined for middle-American homes, the kind with gnomes on the lawn and collectibles over fake fireplaces.

The factory was worlds apart from the sweatshop image many Americans have of Chinese factories and 180 degrees from the factories I visited when I first arrived in China more than a decade earlier. No disgusting fumes swamped the work area, and no unsecured pipes dangled from the ceilings; no slave-driving managers swaggered around, prodding workers to move faster; no chains and bars locked the windows and doors.

Laura’s factory looked more like a giant, modern sports stadium or one of the dazzling airports opening up all over the country. In contrast to the outdoors, where my car was steadily accumulating an extra coating or two of dirt, the work areas were clean and brightly lit. The air was fine to breathe and didn’t make me cough or cause my throat to burn. Workers varnishing wood pieces wore face masks and were in well-fumigated areas away from the tailors. Although the workers were largely silent, it was not because they were afraid to talk; rather, they were intent on doing their jobs and hitting performance targets to get bonuses.

Bob is a real salt-of-the-earth guy. He looks at you straight in the eye when talking. You could easily picture him as the head coach of your child’s Little League baseball team or as president of your local Kiwanis Club.

As I made my way across the factory floor, still dazzled by the sheer size of the place, Bob pointed out the red safety lights at the top of each workstation. If a problem occurred on the production line, he said, a worker would hit a switch to flick on the red light, and one of the supervisors, clad in an orange smock, would come right over. Production in that work area would stop until the potential hazard was fixed satisfactorily.

Line workers and supervisors were paid not just for how much they produced, Bob told me, but also for the prevention of workplace accidents. It was the right thing to do, he said, and it met increasing worker and government demand for safer work environments via more expensive technology and best-practice management methods. It was important for Laura that workers in China felt like they were part of the Laura family, so they brought the same codes of conduct (no swearing, for instance) and regulations from their American operations to China.

Other companies across China were also installing top-notch production lines in their factories, much as Laura had done. In 2008 Aircraft maker Airbus opened a giant plant in Tianjin, its most state-of-the-art factory and its first final-assembly line outside of Europe. Luxury auto firm Mercedes-Benz announced in 2011 that it would invest a further 30 billion renminbi (almost $5 billion) to produce more cars for sale in China because it could no longer keep up with demand through imports alone.

New factories being erected across the country needed a dependable workforce and were offering huge salary increases and bonuses. This resulted in an employee’s labor market. Bob told me his biggest hurdle was recruiting and retaining talent. Unlike a decade before, when workers seemed to beg for jobs and lines of them huddled at the factory gates looking for work, he now faced too many disruptions in production because he could not find enough skilled workers. Higher costs were becoming a serious issue because salaries were going up as Laura had to fend off poaching from other factories nearby. Bob estimated that total labor costs might double by 2015; no longer were they a small part of the operating expense of running a factory in China.

Perhaps counterintuitively, the labor pool actually dried up during the great financial crisis, as Americans and Europeans increased investment in China to offset flagging sales in their home markets. The tight labor pool was evident not just at the low end in factories but also in the white-collar labor force. Technology companies such as Microsoft, Intel, and Google—even after it stopped offering its search engine in China—have embarked on huge hiring sprees or have set up research and development centers there. Citigroup announced it would triple its head count on the mainland within three years to 10,000, not for back-office needs but to cater to local clients. Pepsi, Coca-Cola, and Disney all have announced multibillion- dollar investments. Investment banks such as Goldman Sachs are increasing their business in China even as they pare their ranks in New York and London.

The result is massive competition among employers to hire workers in China—even at the height of the financial crisis, when billionaire investor Warren Buffett declared that America’s economy had fallen off a cliff. It has become so easy for workers to find jobs elsewhere that they job-hop constantly. Desperate for warm bodies, companies are throwing 20 percent or greater salary increases at workers to steal them from other firms, creating huge paydays for executive recruiters and headaches for general managers.

Bob’s human resource problems are mirrored in company after company. My firm conducted interviews in 2013 with human resource managers and senior executives at Fortune 500 companies. More than 70 percent of respondents said they had annual employee turnover of 30 percent or higher. Nearly 90 percent of the companies reported that their biggest obstacle to growth in the coming three years was not the topics the Western media reports about all the time—corruption, copyright infringement, and rising protectionism—but the ability to recruit and retain talent. In comparison, an 11 percent turnover rate in America is considered way too high and detrimental to business.

One Italian general manager of a small production facility making furnishings and accessories for retail stores told me over lunch that 50 percent of his factory workers leave within two months, no matter how much training and pay he offered them. There was always some factory owner who would offer a little more, even for unqualified workers, because demand for warm bodies was so high. The lack of trained workers was hurting his ability to hit growth targets and meet client demand for products. He was so frustrated, he could not sleep at night and was smoking more.

A New Zealand factory owner who had facilities in southern China that produced electronic road signs told me he took 10 employees to Dubai as part of a retention strategy. It failed, he said, because in job negotiations with other firms, they all touted that they had been to Dubai to demonstrate that they were worldly, globe-trotting executives. Within three months of the Dubai trip, three of the employees had left. He was shutting many of his factories in China and looking to markets like Mongolia, where employee turnover was less of a problem and costs were stable.

As I made my way to the Laura Furniture factory dining room, Bob outlined more of the problems his company was facing. Aside from labor costs going up, he explained, the declining U.S. dollar was further eroding margins and hitting his business hard. Because all of Laura’s factories are overseas, a declining dollar means his input costs for production in China or Vietnam are going up, while the end price to American consumers is staying the same or even dropping as he has to discount more to get Americans to open their wallets. Homeowners were putting off buying new furniture, and in all his decades doing business, he had never seen American consumer confidence so low.

It is an understatement to say he was angry at the calls of U.S. government officials (like New York Senator Chuck Schumer) for China to let its currency appreciate or that he was frustrated with Federal Reserve Chief Ben Bernanke’s decision to increase the money supply through quantitative easing. These wrongheaded policies, he said, just caused more investors to flee the greenback and switch their investment portfolios to commodities or foreign markets, where there were greater possibilities to receive higher returns, which further increased Bob’s input prices. He did not see commodity prices stabilizing until the greenback regained its strength and the debt situation in the eurozone stabilized, which he wasn’t expecting to happen in the near future.

Breaking it down further, Bob showed how an appreciating renminbi cut into his company’s profits. If salaries, rents, and commodity prices went up at a conservative 10 percent a year, and the renminbi appreciated 5 percent annually, that meant his overall costs would increase 15 percent a year. Rising costs would not be a big problem if he could raise prices in America, but he worried about doing so, with American unemployment still hovering close to 10 percent and consumer confidence at decade lows.

For Bob, the combination of the depreciating dollar and rising costs in China is eroding margins, which means lowering bonuses, salaries, and dividends for American senior management. He told me the problem he was facing was also happening to most of his peers in the American business community who had already shifted production to China.

Once I got Bob going about the state of the global economy, he couldn’t stop. An appreciating renminbi wouldn’t save American jobs either, as economist Paul Krugman had been saying it would on the New York Times op-ed page. “That ‘saving American jobs’ argument is ridiculous,” Bob said. “How many firms realistically will go back to America? They’re going to look for even cheaper production locales. Krugman doesn’t understand business, just theory.” As labor costs increased, Laura Furniture had opened factories in cheaper countries like Vietnam and Indonesia, but certainly not in America.

Relocating to Vietnam and leaving China completely is not a solution, Bob admitted, frustration creeping into his voice. He said Chinese workers overall have more experienced line managers and more drive and ability to produce more sophisticated products. “Our Chinese workers produce more pieces with far superior quality, given the same amount of time, than our workers in Vietnam,” he said. “In China, it seems like employees know if they do well, they can get promoted and make a lot of money in the future. In Vietnam and Indonesia, the workers do not seem to see that they can go up and make a lot of money eventually, so they move at a more measured pace.”

Equally important, the level of infrastructure development in Vietnam and Indonesia was 30 years behind China’s. “Vietnam just doesn’t have the roads and shipping facilities that China has,” Bob said. He told me Vietnam and Indonesia are efficient markets for relatively simple manufacturing, like apparel or athletic shoes, but not for more complicated or time-sensitive pieces like bedroom sets or the latest electronic gadgets. As a result, Bob was forced to keep all of his higher-end production in China, despite the rising costs, and was planning to raise end prices to American consumers as soon as he could or else take reduced margins. He was now using his factories in Vietnam and Indonesia to reduce costs at the lower end of the production scale.

The shortage of skilled Chinese laborers and subsequent rising costs made me wonder exactly how much money the factory workers in China were making now. A senior Chinese seamstress—typically a 22-year-old with four or five years’ experience—earned about $800 a month—three or four times the wages in Vietnam, Bob told me. That is an astounding number, I thought. I recalled from an internal study a colleague of mine had done to benchmark my firm’s starting salaries that entry-level, university-educated workers at white-collar firms like Deloitte and Citigroup made similar wages. I wondered how young Chinese auditors and investment bank analysts and their parents felt when they found out that factory workers sewing cushions or stapling headboards were making more than they were. A university degree was supposed to be their ticket to riches.

Bob also highlighted a trend that I, too, noticed when interviewing Chinese families around the country. Women were starting to outearn men, changing family dynamics and the role of women in society. In Bob’s factories, women tended to make more than men because they could do the higher-skilled sewing of sofa covers, which took significant training, whereas men tended to do more heavy labor, which required little training. Women also seemed more intent on working hard and beating manager expectations, Bob said.

When I asked Bob why he and other business leaders were not more publicly stating their case against Congress for their calls to let the renminbi appreciate, Bob said that the anti-China rhetoric and general frustration was so serious in America right now that he feared backlash from Congress and everyday Americans. It was better to keep his head down, he said, and lobby privately rather than publicly, in case someone decided to make an example of Laura and demonize them—even though China’s rise meant more job creation for Americans working for Laura.

Bob’s human resource situation brought home the clear, countrywide labor trends that are heralding the end of cheap China. Chinese workers, no longer desperate for any job that will put food on the table, will not settle for low monthly wages or horrible working conditions. Compared with just a decade ago, too many job opportunities are now available to them, and they are too confident about the country’s future. The government has also been pushing up minimum wages to better protect employee rights and to promote a shift away from manufacturing to a consumption- and services-oriented economy. In 2014, 26 of China’s 31 provinces raised the minimum wage by an average of 18 percent; in 2010, Sichuan Province alone raised it by 44 percent. Cheap Chinese workers, one could say, are becoming as scarce as Chinese cheap, sexy prostitutes.

Relocating manufacturing operations out of China completely, however, is not really an alternative for many companies because China’s skilled workers are more numerous and better than those in other countries and it has an unrivaled, world-class infrastructure, as Laura’s experiences in Vietnam and Indonesia have shown. The result is soaring costs, which will erode margins for American companies unless they transfer higher prices to U.S. consumers or enter new consumer markets to offset weakening U.S. and European consumer demand.

Ultimately, Bob and I developed the solution to convert half of Laura’s Shanghai factory to produce furniture to sell within China. After all, retail sales there have been growing 16 to 18 percent a year for the past five years, as incomes rise and millions of Chinese buy their first homes and move into livable housing for the first time.

By selling into China, rather than looking at it solely as a manufacturing base for export, Bob not only could tap into the wallets of China’s rising middle class but also price his furniture in renminbi. Even if the currency continued to appreciate as the central government indicated it would, he would not have to worry about raising prices or fear currency fluctuations. The other half of his factory would continue to produce for export from China, but Bob knew his real growth opportunities were going to come from selling to the domestic Chinese consumer. The market was evolving so rapidly that no furniture player had been able to consolidate market share across the whole country, which was his goal. Successfully penetrating the Chinese market would not only save jobs back in America for Laura but also create new ones.

Bob’s story at Laura Furniture is far from rare. Over the past three years, as America muddles through a jobless economic recovery, more and more brands have been converting their factories in China from producing mostly export goods to making products to sell within China.

Jacob, the Asia-Pacific marketing head of an international office products firm, told me, “It is just not viable anymore to produce cheaply in China, but it is also impossible in the short term to replace China as a main manufacturing hub. Other countries simply do not have the infrastructure, skilled workers, and mid-management needed to replace China completely.” He told me he had decided to keep all of his manufacturing facilities in China but was converting his sales forces to try to sell within China. He was hiring new employees to oversee development within China and signing deals with sales-channel partners all over the country. So far, his initiatives had become profitable. As Jacob left my office, he said, “It will take other countries another generation at least before they can truly rival China in manufacturing prowess. They just don’t have the workforce or infrastructure to compete.”

Labor pool changes are disrupting China’s manufacturing sector and forcing business models to evolve. Newer firms, like the ones run by the entrepreneurs I met at the Okura Garden Hotel, are building new brands that can charge a premium for their products and services and be sold to consumers who are not price sensitive. Other firms like Laura Furniture are able to adapt by converting factories to sell within China. Yet thousands of smaller Chinese factories, including many furniture makers, have closed down in the past three years due to paper-thin margins and an inability to tap credit lines. The industry is consolidating; smaller producers are unable to make money as the appreciating renminbi decimates their margins, and profits become dependent on volume and production efficiency rather than low price.

Massive, efficient players like Foxconn, the Taiwanese electronics manufacturing behemoth that makes many of Apple’s and Dell’s products, are leveraging economies of scale to shore up market share and grab even more. The scope of some of their operations is hard to imagine.

In the past two years, Foxconn has relocated 350,000 of its factory workers from Shenzhen in southern China to a massive new factory in Henan Province in the central part of the country. This move is comparable to moving the entire population of New Orleans (343,829 in the 2010 U.S. Census) to New Mexico. They have more employees than the entire population of Iceland (319,062, according to a 2009 World Bank estimate).

Foxconn has been rumored to be investing billions of dollars in setting up factories in South America to find cheaper options, but it has relocated its manufacturing in China to other places in the country rather than shifting out completely. To combat rising labor costs, it announced plans in 2011 to install 1 million robots in its Chinese factories to replace workers over the next several years. Foxconn’s factories in China are more like midsized American cities than factories, and they dwarf Laura Furniture’s facility. In addition to factories, companies such as Foxconn have to establish local dormitories, hospitals, and leisure areas.

Foxconn was compelled to improve conditions and raise salaries after a public firestorm in 2010 surrounding 18 attempted worker suicides at its Shenzhen factory, which resulted in 14 deaths. Foxconn faced heavy criticism, from international groups and from Chinese media, academics, and ordinary people who commented on online forums about harsh working conditions. Foxconn responded by increasing worker salaries by 66 percent in the months following the controversy. Around the same time, Honda raised salaries at its plant in Guangdong Province by 32 percent after workers began striking.

Even with their attempts to manage increasing costs in China, in 2014 Foxconn announced it would invest $1 billion USD into Indonesia as part of a diversification of manufacturing operations out of China to other nations. Association of Southeast Asian Nations (ASEAN) countries such as Indonesia and Cambodia will continue to benefit from rising costs in China as long as they can maintain political stability, improve infrastructure, and better train labor pools.

The companies with the best-designed and best-operated compounds and the most comfortable living conditions for their employees will be the winners in attracting and retaining talent as the labor pool continues to tighten. This also creates a more expensive labor-cost landscape that boxes out factories unable to afford higher costs.

America’s economic growth for the past three decades can be largely attributed to the willingness of Chinese laborers to slave away, underpaid, in factories that make the products Americans love—Apple computers, Nike shoes, and Gap khakis. Low wages have generated massive profits for U.S. firms that chose to relocate to or source from factories in China, like Walmart, and have made consumer electronics and clothes affordable for everyday Americans. This process fueled America’s addiction to consumption while keeping inflation low, despite loose U.S. monetary policies and an unhealthy addiction to debt that traces back to the Reagan years.

For decades, this arrangement was seen as win-win for all involved, when the American business community and free-trade economists prevailed in their argument to reduce tariffs to promote outsourcing. Middle-class Americans filled their homes with product after product for stunningly low prices, while Chinese workers earned enough to eat and have basic shelter over their heads. But this arrangement started to unravel during the financial crisis.

As more Americans lost their jobs, China came to be viewed as a scapegoat for U.S. unemployment, rather than for the real reasons: poor regulation of Wall Street; a bickering political system; and average Americans’ addiction to debt, which went on for far too long. Now one hears the constant refrain from politicians and commentators on TV that China is stealing U.S. manufacturing jobs and that Americans should buy only products made in America. For these talking heads, China’s rise is a zero-sum game with the United States.

Although such arguments appeal to patriotic pride, giving in to these sentiments hurts Americans more than it helps them. Without China, many American families would not be able to afford quality furniture or the latest technology. If businesses like Laura or Apple were forced to bring their factories back to America, their prices would increase tenfold, causing rampant inflation and further hurting consumer sentiment, and it is even doubtful these jobs would build consumer confidence if they came back. Few Americans are willing to work for low wages in factories, unlike their forefathers in the textile and footwear mills of New England.

Even at the height of the financial crisis with 24 million Americans unemployed and with Occupy Wall Street protests erupting across America, thousands of farm jobs in America have gone unfilled because so many Americans don’t want to work in those conditions. However, the Obama administration has deported a record high of nearly 1 million illegal immigrants—the very people who were willing to take those jobs. Aside from plentiful jobs causing Chinese wages to rise, there are simply fewer workers because the one-child policy implemented in 1978 has resulted in an aging population today. The magazine Science found that 22.9 percent of the Chinese population was younger than 14 years old in 2000. That number dropped to only 16.6 percent in 2010. Although in 2014 many cities and provinces in China have adopted relaxed child-bearing laws, the aging population will continue to be a problem because most urban Chinese are hesitant to have more than one child because of the associated costs. Unless the government eases population control laws soon, or allows workers from neighboring countries like Myanmar and Vietnam to work in China, it is doubtful that the labor pool will grow anytime soon.

Economists like Cai Fang of the Chinese Academy of Social Sciences and Ross Garnaut of the Australian National University have suggested that China has reached the Lewisian turning point, named for the Saint Lucian developmental economist Arthur Lewis, who won the Nobel Prize for Economics in 1979. Lewis claimed that once the supply of surplus labor in developing countries diminishes, industrial wages begin to rise quickly.

Fewer and fewer Chinese employees are willing to work in factories because they, too, want to enjoy an American-style lifestyle of consumption and seek more comfortable jobs closer to their families. Changes to the Chinese labor pool are, for the most part, healthy for the economy and a sign of growth. Better-paying jobs and more efficient factories will help reduce the all-encompassing pollution that seems to plague the country and will help China overcome the mid-income gap many countries hit when the average per capita GDP hits $6,000. For China to avoid ending up economically like Mexico, where income gaps between the rich and poor are getting wider, it must continue to push for higher-paying jobs and a greater dispersion of wealth.

All these changes have created a confident labor pool that is forcing companies to deal with rising labor and real estate costs. Some companies cope with the end of cheap China by building brands and charging more for their products, as the billionaires at the Okura Garden Hotel have done; others do so by consolidating market share and becoming a volume player, such as Foxconn; and still others manage by converting factories to sell within China and other emerging markets. It is doubtful that rising costs will send manufacturing jobs back to the United States. What is more likely is that China’s economic rise will create more job opportunities and profits for American companies that can evolve with the new status quo instead of holding onto the past. History is littered with examples of companies and countries that were unable to adjust to new conditions.

As I looked around at the workers in front of me at Laura’s factory, I wondered what, aside from a shrinking labor pool and more job opportunities, had made all these workers seem so optimistic. Nearly every Chinese person I have met brims with confidence and an expectation that life will get better for them and their children. They are not blind. They see problems like corruption or pollution in society every day, but overall they perceive their lives getting measurably better and expect them to continue to do so.

This confidence did not come into being overnight or just because salaries increased in the past few years. Their optimism and satisfaction with life are the culmination of 30 years of opportunities and political reforms, which have created a freer and healthier society than China has ever seen. To see why China’s labor pool is so confident, why the economy is growing so well, and why the government implements the laws it does, it is important to look at China’s recent past.