Leading manufacturers in China—domestic and multinational alike—are beginning to adopt proven global-management techniques, such as lean manufacturing, to make their factories more efficient. With so many companies producing goods there today, low-cost labor isn't the advantage it used to be. Global overcapacity in many sectors and intense competition in many domestic Chinese markets have prodded manufacturers to look for new ways to cut their costs and tackle other competitive issues, such as reducing lead times and boosting the quality of products.

Lean-manufacturing approaches have started to catch on globally, so it is hardly surprising that they are finally appearing in China. Many manufacturers around the world now use the production approaches and tools that Toyota Motor pioneered a generation or more ago. Lean tools are particularly effective for identifying and eliminating the root causes of waste and inefficiency, as well as variability and instability—and in the Chinese factories of both multinational and domestic companies these obstacles to world-class manufacturing are omnipresent. When low labor costs confer huge benefits, manufacturing managers generally don't pay attention to other sources of competitive advantage. Now they do.

But to apply lean techniques in China today, manufacturers must accept compromises or trade-offs that they may...