TightWind is written by Kyle Baxter. Stay Hungry. Stay Foolish.

Labor is getting more expensive in China, so manufacturing companies are racing to find ways to reduce costs:

But what it does not reveal is that manufacturing in China is about to get far more expensive. Soaring labor costs caused by worker shortages and unrest, a strengthening Chinese currency that makes exports more expensive, and inflation and rising housing costs are all threatening to sharply increase the cost of making devices like notebook computers, digital cameras and smartphones.

Desperate factory owners are already shifting production away from this country’s dominant electronics manufacturing center in Shenzhen toward lower-cost regions far west of here, even deep in China’s mountainous interior.

That’s precisely what I’ve hoped would happen. China is a nation of contrast—while the east is rich from manufacturing and exports, the landlocked western interior of China is still incredibly poor. China is almost two nations, one developed and one developing.

But development based on unskilled, cheap labor inevitably leads to higher standards of living and increasing wages. Over time, the “cheap” part of it disappears, so manufacturers move elsewhere in search of low costs. As this happens, areas that were dependent on unskilled labor for economic growth must transition toward skilled labor. This is China’s largest challenge—their incredible economic growth is a result of labor that’s laid dormant for decades suddenly coming online all at once, but they must now move from unskilled to skilled labor. In other words, they must move up the supply chain from merely putting things together to manufacturing intricate parts and to even designing them.

As manufacturers move toward other regions and countries with lower wages, the same process plays out. I’m hoping this will have the same effect on China’s interior, but there are natural barriers for it. Using unskilled labor in China’s east is easy: it’s close to the coast, so moving goods to port is cheap. The west doesn’t have this same advantage. Anything manufactured there will have to be moved by truck or rail to the coast.