I always find comments like these amusing because it's exactly what people said of the Japanese in the 60's and 70's. And in exactly the same way, the Chinese (and other up and coming players) are innovating: just not in the areas that some people are looking. It starts with undercutting the market with low labour rates, but as times move on and the populace has higher expectations in terms of living conditions, the companies have to innovate on production. The Japanese transformed automobile production -- and not with low wages and crappy knock off goods. They absolutely ate everybody's lunch on efficient, quality construction. They built better cars and the rest of the world spent 10 years playing catch up.

It's this complacency, and in many cases a lack of respect, that allows this to happen. Make no mistake, they are doing great things in China right now and if western companies don't react quickly enough, their lunch will be eaten again.