Just read a great post on China ODM manufacturing at the always helpful Quality Inspection Blog. The post is The Danger of Developing your Custom Product with an ODM Factory and it is on how going to an ODM factory for a custom product is a sourcing and a legal mistake.
The post notes how foreign companies looking to have custom product made in China are “tempted to go for a shortcut: working with a manufacturer that has been making very similar products (an Original Design Manufacturer, or ODM)” and discusses why this is usually a bad idea. Per the post, the pros for using an ODM manufacturer to make your custom product are speed and starting costs, both because the ODM manufacturer is already making something close to what you want for your custom product. The cons are the following:
- Changing your supplier will be difficult because it owns the design.
- You are taking a risk because your supplier may have stolen its design from another company and your product may get sued for IP infringement and banned from key online marketplaces.
- If your sales are high your supplier will tempted to compete with you.
- You will have a tough time getting favorable terms.
- Your design improvements/innovations will “feed” your supplier to be better able to compete with you.
The post then comments on how common it is for Chinese ODM factories to get valuable design input from their foreign product buyer and then go off and make the product for themselves. To help avoid this, the post recommends getting the Chinese ODM factory to sign an enforceable non-disclosure, non-use, and non-circumvention agreement.
The post concludes by saying that if you are going to have large quantities of your custom product made in China, you are better off using a contract manufacturer, not an ODM manufacturer.
From a legal perspective I cannot resist making one more suggestion. If you are working with any sort of manufacturer in China (or Vietnam or Thailand or Mexico or Taiwan or India or anywhere else) on together developing a product, you should have a Product Development Agreement with that manufacturer that is clear on who does what, who pays for what, and most importantly, who will own what in the end. And that contract must be written with your specific goals and product and country of manufacture in mind. In other words, a Product Development Agreement written for Spain is not going to work in China and a Product Development Agreement written for China is not going to work in Vietnam. For more on how to protect yourself when manufacturing overseas, check out Overseas Manufacturing Contracts (OEM, CM and ODM).
As a result of the US-China trade war and the rapidly declining economic state of so many Chinese factories our China manufacturing lawyers are seeing more IP theft and more quality problems early from Chinese factories than we have in at least a decade. Along these same lines, check out China Trademark Theft. It’s Baaaaaack in a Big Way.
Be careful out there. More than ever!