Foreign Product Sourcing: Do These Four Things

Got an email the other day from an in-house lawyer friend whose company is getting ready to source products from China and Thailand. The email asked me what the company needed to know “to protect their butts in Asia” I told them they needed to know/do the following four things.

1.  Choose a good factory. This is the sine quo non of foreign product sourcing. I am always saying that my law firm’s international manufacturing lawyers can write the world’s best contract, but if the party on the other side is a thief, the contract will have no value. How do you pick a good factory? The first thing is to make sure you have actually picked a factory, and not a broker claiming to be a factory. The best way to pick a good factory is to go and look at it yourself. The second best way is to have a qualified person you trust go and look at it. The third best way is to rely on the views of others. No matter how you choose the factory, you should (before you send it any money) have someone experienced conduct basic due diligence on that factory. It is amazing what a relatively inexpensive due diligence review can reveal.

2.  Use an OEM Agreement suited for your situation.  You need a good written contract between you and your supplier that is written for the country from which you will be getting your product. An off the shelf manufacturing agreement for the United States or the UK is almost always going to be worse than no contract at all. This agreement is the road map between you and your Asian supplier and it should do at least the following four things for you:

  • Make clear to both you and your product supplier the terms and conditions of your relationship.
  • Inform your product supplier of exactly what it must do to comply with your requirements and to stay within the law. By doing so, it will greatly decrease the likelihood of your having problems with your supplier.’
  • Protect your intellectual property from your product supplier.
  • Help reduce the likelihood of litigation and help position you well should problems arise.

3.  Set up a Quality Control System.  Even with a good supplier and a good contract, you will likely still face at least some quality control problems. The big question is when you discover them. If feasible, check for quality before you pay for you product and before your product is shipped.

4.  Register your trademark in the country in which your product is being made. When it comes to trademarks, most countries in Asia (and around the world) are first to file countries. This means that, with few exceptions, whoever files for a particular trademark in a particular category gets it. So if the name of your company is XYZ and you make widgets and you have been manufacturing your widgets in China for the last three years and someone registers the XYZ trademark for widgets in China, that other company gets the trademark for widgets. And then, armed with that trademark, that company has every right to stop your XYZ widgets from leaving China because your widgets violate that other company’s trademark. Trust me when I say that many foreign companies have incurred massive damages by failing to take the simple and inexpensive step of registering their trademark in the country in which they are having their products made. See China Trademarks — Do You Feel Lucky? Do You?

If you abide by the above, your company should do just fine.

What do you think?