SHANGHAI - In the Minhang district of this city of 20 million, amid industrial stacks spouting clouds of steam, workers in red, blue, and yellow hard hats moved from pipeline to pipeline, monitoring the flow of chemicals that Cabot Corp.’s plant would turn into carbon black, a material used to make tires.
China already represents 18 percent of the Boston company’s global sales, but chief executive Patrick Prevost has another number on his mind: the 1 billion people he expects to make up the Chinese middle class within two decades.
“That’s a huge population that will want a roof over their head, a car to drive around, and tires to go on it,’’ Prevost said. “They will need us.’’
China’s transformation from developing to industrialized nation has already made the Asian giant the state’s third-largest export market, trailing Canada and the United Kingdom, and accounting for nearly $1 out of every $10 in merchandise that Massachusetts companies sell overseas.
As China continues to advance - gaining wealth, expanding the middle class, and losing its low-cost-labor advantage to newly emerging economies - China’s appetite for technology, advanced industrial machinery, medical devices, and other products in which Massachusetts specializes is expected to grow.
China is expanding so fast it essentially builds a city bigger than Boston every year, said Robert Theleen, chief executive of ChinaVest, a Shanghai private equity firm.
Paula Murphy, director of the Massachusetts Export Center, which helps companies expand internationally, estimates China could become the state’s top export market within a decade.
Many of the state’s marquee firms, including the financial services company State Street Corp., medical device maker Boston Scientific Corp., and data storage giant EMC Corp., already have a significant presence in China, while a long list of small to mid-size companies have established sales offices or hired local sales reps to export into Chinese markets, Murphy said.
Companies such as Thermo Fisher Scientific, a Waltham instrument maker, and Boston’s Cabot Corp. are not only shipping their products to the country, but also making them there. Thermo Fisher has nearly 2,000 employees in China to manufacture, assemble, and sell air-quality monitors, food-safety testing devices, and medical research instruments.
Cabot employs roughly 600 workers in China, including at the plant in Shanghai’s Minhang district. In the not-too-distant future, executives say, China could surpass North America as Cabot’s top market. North America accounts for 21 percent of the company’s sales.
“It’s really the highest growth country and the largest emerging market in the world,’’ Prevost said. “If you’re a global company in any industry, you cannot afford to not be in China.’’
As Massachusetts companies grow in China, benefits flow back home in the form of greater revenues, higher profits, new investment, and more jobs.
Cabot’s growth in China, for example, has allowed it to expand its research and development operations in Billerica, where it has increased employment by 13 percent since 2010 to 350 workers.
“To some degree, we make our money by being a center of finance, a center of management, a center of research,’’ said Andre Mayer, senior vice president for research at Associated Industries of Massachusetts. “It is important to have manufacturing jobs here - as well as other kinds of jobs - but it’s also very important that companies based here are doing business successfully elsewhere in the world.’’
Shanghai is China’s commercial center, a magnet for foreign investment and a place where many US and Massachusetts companies establish footholds. The Pudong District, just east of the Huangpu River, which cuts the city in half, illustrates the changes reshaping the Chinese economy.
Fifteen years ago, it was a swampy section of dilapidated buildings and marginal farmland. Today, the district is a business hub edged with skyscrapers, including the futuristic, needle-like Oriental Pearl TV Tower. Construction cranes dot the horizon, filling any gaps between buildings.
Thermo Fisher first located in Pudong in 2005, in a complex called Office Park, where Eastman Kodak Co. and yogurt maker Dannon Co. also have offices. China is among Thermo Fisher’s fastest-growing markets for air-quality monitors, lead-paint detectors, radiation-screening portals, and other instruments used by governments, hospitals, and companies. Last year, Thermo Fisher’s revenues in China grew 20 percent to more than $500 million.
Mike Shafer, Thermo Fisher’s president for Greater China, recently strolled through several demonstration labs, where potential customers can test products. He pointed to a gray air-monitoring device about the size of a printer, used by Chinese agencies to measure pollutants and air quality. Shafer said the company expects to ship more products like this from Massachusetts as well as expand manufacturing in China.
Thermo Fisher is scheduled to open a factory this month in Suzhou, about 65 miles west of Shanghai, where it will make laboratory instruments and equipment, as well as supplies such as testing trays. Roughly half the products Thermo Fisher sells in China are produced at facilities outside the country, but the company wants to shrink that amount.
“In order to beat the competition, we need to make more products here,’’ Shafer said. “Everybody recognizes this country, just by the sheer size of it, is going to create a big market with fast-growing opportunities if you can meet the customer’s needs.’’
China’s economy has grown at or near double-digit rates for the better part of a decade, expanding at a 9.2 percent rate last year, according to China’s National Bureau of Statistics. That pace has slowed recently, and the Chinese government last month lowered its growth target to 7.5 percent - still more than double the most recent US economic growth rate of about 3 percent.
And as China grows, so do personal incomes, also rising at double-digit rates in recent years, said Todd Lee, senior director of global economics at the Lexington forecasting firm IHS Global Insight. He estimates the top 10 percent of China’s urban population - about 70 million people - enjoy annual disposable income of about $8,000, up 18 percent from roughly $6,800 in 2008.
As China matures, incomes rise, and the middle class expands, that should be increasingly good for Massachusetts companies, which tend to make expensive products, such as specialty chemicals, biotechnology drugs, sophisticated medical devices, and other technologies that are in greater demand in wealthy, developed countries.
A decade ago, China ranked 14th among Massachusetts’ foreign markets, behind countries such as Ireland, South Korea, and the Philippines.
The state’s exports to China totaled less than $400 million in 2002; last year they topped $2 billion.
“China is obviously still an emerging economy but there’s an awful lot of money there, and they can buy the best when they need it,’’ AIM’s Mayer said. “We can ride that train.’’
Despite the rapid growth, companies face enormous challenges doing business in China.
They must deal with policies that dictate whether a foreign company can work independently, or must partner with a local firm - a stipulation that often requires the non-Chinese company to share technology to benefit the indigenous operation.
They face an uncertain legal and regulatory environment, in which enforcement is spotty and intellectual property is at risk.
Finally, they must compete with a growing number of Chinese and foreign companies piling into the huge and growing market.
Cabot Corp. has been in the country for two decades. At the Minhang plant, where carbon black is transformed from a liquid to fluffy particles, dried into pellets, and stored in one-ton bags stamped with the Cabot name, executives say they have learned the importance of strong relationships with Chinese partners. Most of the company’s employees here are locals familiar with how the country works.
Aaron Johnson, Cabot’s director of business development in the Asia Pacific region, said such familiarity has helped the company succeed in China. It plans to grow in China, adding a plant in Xingtai next year and tripling its operations in Jiangxi this year.
“It is a key piece of our global network,’’ Johnson said. “We’re in China because our customers are in China.’’Erin Ailworth can be reached at email@example.com.