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How did China get so good at making chairs? To find the answer, travel 200 km from Shanghai to a cluster of villages in the Yangtze Delta. Eighteen hundred years ago, an emperor fond of its forests named the area Anji, which means "peaceful auspiciousness." Until recently, its residents farmed bamboo and grew white tea. Then, in 1982 as economic reforms took hold in China, a government factory set up to supply lab stools to a nearby university made China's first five-wheeled swivel chair. Soon local bamboo farmers pooled their savings to start factories themselves. By the late 1990s, Anji's economy centered around a single product. This year its 460 factories will produce $740 million worth of chairs (more than double the amount for 2003) and export nearly half. "One in every three office chairs in China will now be made here," says Lin Huanrong, vice secretary of Anji's newly established Chair Industry Association. And so in 2003, officials in Beijing gave the county an honorific moniker. Henceforth it would be known as Yiye Zhi Xiang, the Town of Chairs.

China has been in the furniture business for a while. The Pearl River Delta, in the south of the nation, has supplied the world with cheap beds and dressers for decades. But more recently, as new Chinese homeowners have swelled domestic demand, the industry has spread to other parts of the country. Now manufacturers are crafting increasingly sophisticated wares that allow China to compete in markets once dominated by Europe. With $6.5 billion worth of exports of furniture in the first half of this year, China looks poised to overtake Italy as the world's leading exporter. "At the beginning you could never get the right quality in China," says Judy George, CEO of upscale American chain Domain Home Fashions, who moved her production base to China from Italy in 2002. "Now they can make just about anything."

In Anji, this process is still just beginning. In 1993, Zhu Kanglin, then a 23-year-old farmer turned plastic-mold factory worker, scraped together $3,000, bought wheels, arms, foam padding and plywood chair bodies from local components manufacturers and hired 20 friends to assemble the parts into finished products. Today his Heaven Office Furniture makes 1,000 different kinds of office chairs, from "executive" models in black leather and chrome to squat cloth-clad cubicle standards. Zhu won his first export contract last year. This year, he attended the Cologne Furniture Fair in Germany and sent 80% of his $3 million output to 20 different countries. Through a screen of plastic bamboo along his office window, he points out the new factory he's building next door. He shows off a U.A.E. health insurance card, which grants him medical treatment in Dubai, where he just opened his first foreign shop. "By Anji's standards we have a small business," he says. "We're middle of the road."

Italian manufacturers shouldn't think that their Chinese competitors have things easy. Zhu and his counterparts worry constantly about maintaining their edge. Currently, most of the 26,000 Anji chair laborers are locals. They work 9-10 hour days, six days a week and make about $185 a month. But as Anji sprouts new plants, workers have become scarcer, making it difficult for manufacturers to keep salaries low. Local officials have established a personnel office to lure more migrants from less developed provinces, but their real concern is to improve the quality of Anji's wares, to make chairs better rather than just cheaper. County officials have established Anji's own R&D facility and have plans to build a chair museum. By 2012, Anji hopes to boast "more than two brands that reach an international standard," according to a mission statement on the county's website, chairstoday.com.

That won't be easy. Even in Dongguan, the Pearl River Delta town 90 km from Hong Kong where 70% of China's furniture brands originated, research and innovation have been conspicuously absent. But that too may change. According to Eric Kan, whose Hong Kong-based Oasis Global Sourcing designs and procures luxury housewares on the mainland, "Chinese factories have improved dramatically in the past three to five years in terms of their attention to detail." Kan outfitted the Sands Casino in Macau and is at work furnishing a Manhattan clubhouse for the Ciprianis, the Venetian family that owns eponymous hotels and restaurants around the world. Factories in China are now capable of producing furniture for these kinds of venues, says Kan, but they need supervision. "Today, I still have to specify what kind of glue, how many screws, what percentage of the wood's pores should be exposed by the lacquer," he says. But in the future, he predicts, China will not only nail the details on imported designs, but start to dream up their own. "Until a few years ago, China produced only 1,000 product designers a year," he says. "Now they're producing tens of thousands. This is going to change the atmosphere of the whole industry."

And here's the thing: Anji's manufacturers know they have to change. From the vantage point of Italy, Chinese firms may seem to have enormous cost advantages. But none in Anji are resting on their laurels—or think they can build sustained economic growth on price alone. Wang Yongqi, a gym teacher who started making chairs in 2000, surveys a batch of leather-sheathed dining chairs bound for Spain and sighs. "Our materials are getting more expensive," he says, "and we need more workers, but unless we can improve our designs we can't raise prices. Otherwise our clients will go to Vietnam, or other parts of China." Chairs may be for sitting on; but in a world of globalized supply chains, the winners will be those manufacturers—wherever they live—who get up and start running. Every day.

• Susan Jakes | Anji
• One town's rise from bamboo-forested backwater to manufacturing power shows why China is so formidable. But staying on top will be a challenge