Companies relying on China’s low wages and dynamic domestic growth to underpin their manufacturing strategies are “in for a rude awakening”, according to a new report.

China faces a range of new challenges thanks to slowing economic growth, rising wages and costs, more complex value chains and increasingly sophisticated and demanding consumers, suggests consulting firm McKinsey & Co.

Meanwhile, these changes are taking place against the backdrop of an “almost inevitable decline” in the relative role of manufacturing in the Chinese economy as the country grows richer.

“Manufacturing growth is slowing more quickly than aggregate economic growth, for example, and evidence suggests that the country is already losing some new factory investments to lower-cost locations, such as Vietnam, sparking concern about China’s manufacturing competitiveness,” McKinsey said.

The report identifies four key challenges: rising factor costs, rising consumer sophistication, rising value chain complexity and heightened volatility.

On factor costs, McKinsey said multinationals producing labour-intensive goods, such as textiles and apparel, were “actively seeking to diversify” beyond China to reduce costs and reduce political and supply chain risks.

And the report added: “Despite the variation across manufacturing sub-sectors, companies – Chinese-owned and multinational alike – can’t escape the need to raise their game and move up the value chain by boosting productivity, refining product development approaches, and taming supply-chain complexity.

“Those that do should prosper in the years ahead, while those that rely on yesterday’s model of rock-bottom wages and stratospheric domestic growth rates are likely to fade.”