Foreign companies should think about what China is going to be like in 2020 to tap its future growth, rather than make decisions based on the status quo, said an influential management consultant.

Paul Laudicina, managing officer and chairman of the board with the US management consultancy A.T. Kearney, said by 2020 the world will add 1 billion people with an annual purchasing power parity of US$10,000. That will mean a middle class of 2.3 billion people, 31 per cent of the world's total population.

Out of the 1 billion new middle class spenders, 90 per cent will be from developing countries, 620 million of which will be Chinese.

"That's why you have the volume of foreign direct investment (FDI) increasing here, because China is going to become the world's biggest market, not just the world's biggest factory," said Laudicina, who was selected by Consulting Magazine as one of the world's 20 most influential consultants last year.

China has ranked No 1 on A.T. Kearney's Foreign Direct Investment Confidence Index since 2002, and its score reached a record high of 2.1917 on a scale from 0 to 3 in 2005.

"You cannot operate successfully unless you are prepared to change with the environment," said Laudicina on his first trip to China after being elected as chairman and managing officer of the consultancy in September.

One way to do that is to see what challenges the country has and help it address those issues, he said.

China, which has grown into the world's fourth largest economy mainly due to explosive development in the manufacturing industry, faces challenges of rising labour costs, shortage of resources, and an environmental bottleneck. Growth in service industries and enlargement of the number of affluent people are keys for China to achieve sustained growth in the coming years.

From 1985, while the world's manufacturing jobs declined 11 per cent, China's fell by 15 per cent, due to technological innovations, Laudicina noted.

For many multinationals, China is made up of two radically different markets: In eastern coastal regions, it is as developed as some mature markets; in rural and inland regions, it is more of a typical emerging market.

"China is going to become the technological platform for innovation in terms of resource substitution, consumption and efficient use of resources," said the A.T. Kearney chief.

One advantage for the country is it can mobilize resources in "uniformity of purpose", Laudicina said, meaning that when China decides to do something, it commits all its resources.

As China's labour cost advantage continues in coming years, and its importance as a market for global companies increases, multinationals will continue to invest in China and the country's focus will turn to research and development (R&D), he said.

According to the A.T. Kearney FDI confidence index report, about 75 per cent of 1,000 executives said they would consider doing R&D in Asia and Eastern Europe. China and India were highlighted as top spots.

Laudicina said developed countries, facing labour shortage in the coming several decades, will have to outsource some low-end jobs to developing countries like China and India.

It is estimated that by 2010, the United States will be short of 7 million workers, while the gap will be widened to 35 million in 2030, so it must either export jobs or import workers, he said.

However, Laudicina warned China should pay more attention to intellectual property rights (IPR) protection and keep an open mind to innovations.

"If China does not attract foreign investors in innovation, it will take a much longer time to progress, so the IPR concern of investors must be addressed properly," he said.