Know Your Source When Manufacturing Overseas

There is a growing trend to move supply chains from China to other countries and we expect this trend to accelerate as COVID declines in the West. For those still sourcing products from China, there is increasing concern about Chinese suppliers exploiting forced labor of Uyghurs and political prisoners in detention centers to produce consumer goods for export. There is also increased concern regarding the reputational and other risks inherent in sourcing from China and especially inherent in sourcing exclusively from China.

What the FDA says regarding the dangers of not knowing where your drugs come from, also applies well to the current world of international sourcing:

Buying drugs from unlicensed sources is risky business. It puts your patients at risk of consuming drugs that may be unapproved, counterfeit, contaminated, or ineffective. If you purchase drugs from illegal sources, you are breaking the law and you may be subject to criminal investigation.

Though you may currently have or are looking for suppliers that meet your targets for price, quality and lead time, it is critical to conduct further due diligence on the supplier to fully “know your source.”

1. Is Your Supplier Authorized to Produce Your Product?

In many countries, a business is only authorized to conduct business within the limits of the activities listed in its official business scope. When a supplier operates outside the bounds of its officially authorized business activities to produce your product, problems can arise with the supplier’s ability to issue proper tax invoices and custom clearance documents. A review of the supplier’s government issued business license and tax registration documents will reveal if the supplier is authorized to produce the products you wish to order from it.

Complicating the issue further is when the supplier is not the actual manufacturer, but instead is a middleperson, trading company, or agent. Our international manufacturing lawyers advise our clients that it is best to assume your vendor is a middleman until proven otherwise, and not the other way around. Whether your supplier is a middleperson or not is relevant because if you are dealing with an authorized supplier, you should review the official documents of both the middleperson and the actual manufacturer company.

2. Is Your Supplier an Intellectual Property Thief?

If you are purchasing product that involves IP not your own you will need to make sure your supplier has valid licenses to that IP. A review of the licensing agreement between the IP owner and the suppliers will clarify this.

If your supplier is producing product with your IP, it is critical you register your trademarks with you China’s Trademark office so your supplier doesn’t become a thief. As we recently wrote in How to Stop China Counterfeits: Register Your China IP with China Customs:

Because China is a first-to-file country, until you register a trademark in China you have no rights in that trademark. But a trademark registration alone will not limit the spread of counterfeit goods. A trademark registration merely gives you the legal capacity to enforce your rights to that mark and it should properly be seen as just one of the pieces in your overall IP strategy. The same holds true for your products protected by a Chinese registered copyright or patent.

For any company concerned about counterfeit goods coming from China, the next step should be registering your trademark with China Customs. This is not a legal requirement but a practical one: though Customs officials have discretion to check every outgoing shipment for trademark or copyright or patent infringement against the Trademark Office database, in reality they only check against the Customs database. No separate registration with Customs means no enforcement by Customs.

3. Is Your Supplier Cutting Corners?

As business slows down for some manufacturers, there are greater chances they will violate both your company’s and also global compliance rules, which could lead to complications such as contamination. In tough times, suppliers have been known to covertly switch to using cheaper materials, which not only lowers your product’s overall quality, but can include downright dangerous materials. Who can forget the China-produced melamine milk powder scandal during the late 2000s? And manufacturers from more than one country have been found to use “black plastics,” a substance sourced from recycled electronics that contain phthalates, flame retardants, and heavy metals that can cause serious reproductive and developmental problems in children.

4. Is Your Supplier Using Forced Labor?

Socially responsible sourcing is (and should be) a priority for many companies. Stakeholders have pushed the increased acceptance of their companies to emphasize their triple bottom line, focusing on social and environmental concerns along with financials. Knowing your source protects your company from sending funds to companies that aid and abet genocides, utilize child labor, or support concentration camps.

Though recent news out of China has highlighted the forced labor of Uyghurs , forced labor can be found in several countries and in the production of a startlingly range of goods. See Forced Labor Strikes Back.

According to Anti-Slavery International:

At least 24.9 million people are thought to be in trapped in forced labour worldwide. Of them, 16 million are exploited in the private sector, linked to the supply chains of the international businesses supplying our goods and services.

Slavery exists in all stages of the supply chain, from the picking of raw materials such as cocoa or cotton, to the manufacturing of goods such as mobile phones or garments, and at later stages of shipping and delivery to consumers.

The reality of this is children forced to mine cobalt for use in the latest mobile phones, or women forced to produce coffee for one of our best-known brands. Almost 20% of the world’s global cotton production is linked to China’s forced labour of meaning almost every high-street garment company could be implicated.

Taking steps to ensure your supplier is not using forced labor in any part of the of its supply chain nor committing other illegal acts protects your company against reputational damage and provides better supply chain continuity. More importantly, it tells your customers, employees and the world that your company has taken a stand and will not participate in validating this sort of conduct.