How to Move Your Manufacturing from China AND Protect Your IP

With no sign of peace breaking out any time soon on the U.S.-China trade front, an increasing number of businesses are turning their eyes toward alternative manufacturing destinations, such as Vietnam, Thailand and Mexico. Such relocations present all sorts of new and  different headaches, but I suspect that before long many folks will look back at their China days (perhaps as they lounge at a beach in Ko Samet or Da Nang or Cozumel ) and ask, “why didn’t we do this sooner?”

Business is business, and whether the beaches near Bangkok are better than those near Beijing (they are, of course) or the coffee in Saigon is better than in Shenzhen (it undisputedly is) or the people are friendlier in Puebla than in Shanghai (they are!) is ultimately of no consequence when thinking of the bottom line. The point, however, is that once companies get a handle on the challenges of relocation, many will see the “new” kids on the block are actually pretty good places to do business. They may have preferred to stay put in China and avoid the hassles of moving—but when all is said and done, they will see that, give or take, the Vietnams, Thailands and Mexicos of this world are just as viable and in a whole host of ways even better, all things considered.

Unfortunately, one area where things are not likely to get better for foreign companies is intellectual property rights (IPR) protection. That may be hard to believe to those who have had their products blatantly counterfeited in China, but IPR protection is in many respects even less robust in the lands across the Red River. According to the U.S. Chamber of Commerce’s IP Index 2018, China’s score on protecting IP is almost half that of the United States and Britain, but considerably higher than Vietnam, Thailand, and Indonesia, with Mexico and Malaysia essentially ranked the same as China). Myanmar is not ranked, but presumably its score would be rather low, given that it only passed its trademark law this year.

These Chamber of Commerce rankings necessarily reflect mostly in-country written legal protections. They do not much account for the likelihood of your own manufacturer or your own employees or anyone else stealing your IP, nor do they reflect whether the theft of your IP will include your product showing up on Alibaba or on some other international online marketplace for sale around the world. On these things, China is still by far in the unofficial first position. These rankings also do not reflect how the likelihood of your IP being protected in China depends on whether your product is central to China’s security or technological future. Nonetheless, the other countries to which so many foreign companies are increasingly moving their manufacturing are not IP paradises by any means.

As when in China, in the face of a reduced ability to rely on the legal system for protection, savvy businesses must do all they can to protect themselves—and protection starts at home. Through preventive efforts at their manufacturing facilities, businesses can go a long way towards minimizing IP theft and related risks.

What sort of prevention are we talking about? Obviously, you want to guard against unauthorized (i.e., third shift) production by your suppliers. You will also want to prevent sensitive prototypes from being photographed or extracted, as well as digital files with design specs from being leaked. You will also want to exercise strict controls over any materials that could help criminals improve the quality of their counterfeits, such as genuine accessories.

Clear, comprehensive guidelines are a cornerstone of product security in China and everywhere else. If you have experienced professionals on your payroll, they can draft those guidelines, but you should not wing it. Copying and pasting something you find online may not account for country- or factory-specific conditions. For instance, in some locations, legal protections or labor agreements may prevent workers from being directly recorded by CCTV. If that’s the case, you will need to find a workaround (and they exist) to monitor staff at key locations.

Having established guidelines, the next step is to ensure staff actually comply with them. Though some factories do a good job monitoring themselves, most don’t. This is why you need specialized compliance audits, by professionals who understand the underlying risks.

Beware of lazy auditors who sit for a couple of hours in an air-conditioned conference room, sipping coffee while ticking off checklist items based on self-serving answers from staff. Proper auditing requires getting your hands dirty—literally. Rummaging through trash is an essential part of any product-security audit. It’s no fun looking around a garbage dump in the middle of a tropical summer, but the finds can be worthwhile. I once audited a factory in Cambodia that was contractually barred from working for my client’s competitors. As we walked around, we saw nothing fishy in the main office, production floor or warehouses. But a casual peek inside a wastebasket in a side office revealed trashed work orders . . .  . from a competitor.

Just as is true with China, (see China Trademark Theft. It’s Baaaaaack in a Big Way) you also need to register your IP with the relevant authorities. And oftentimes most importantly, your contractual framework with your supplier must include product-security considerations, such as your right to audit facilities and provide remedies for IP-related breaches. You also need country-specific NNN Agreements and Manufacturing Contracts for each new country in which you are having your products made. See The 101 on International NNN Agreements and Overseas Manufacturing Contracts (OEM, CM and ODM). You may also need a Product Development Agreement, a Product Ownership Agreement, and a contract protecting your molds and tooling. With all the tariffs and duties coming (and even occasionally going), it also makes sense to have your manufacturing contract delineate who will ultimately be responsible for paying what.

Bottom Line: Moving your manufacturing from China does not change the need to protect your product and your IP with appropriate auditing,  proper trademark, patent, and copyright registrations, and country-specific manufacturing contracts.