Nobody disputes that Chinese factories that make OEM products for American and European companies are increasingly looking to make their own products for selling directly to consumers. Nobody disputes that online marketplaces have made this much easier.
And yet, without fail and probably at least twice a week, we get emails from companies stunned to have learned that their Chinese factory has registered “my trademark” or “my patent” in China and is selling “our” product for 25-75% less. Our China lawyers have gotten more such emails/calls in the last year from companies whose China factories are directly competing with them than in the three years prior combined. We also still get emails from companies telling us they “like” or “trust” their China supplier so much that it does not even make sense for them to spend money trying to stop this company from competing with them or that even asking their trusted China partner to sign anything would be viewed as an insult.
When companies tell me no contract is necessary I usually simply wish them the best of luck. When companies tell me they are worried about asking their Chinese company to sign anything, I tell them Chinese manufacturers expect to sign contracts and they view foreign companies that do not require them to do so as suckers. But what I want to tell the companies planning to rely on their good and trusted relationship with their Chinese suppliers is that pretty much all business relationships start with trust because who goes into a relationship with someone they either hate or know to be dishonest? You want a contract to memorialize your good relationship. You want a contract when you are in agreement and therefore have something to put on paper in the form of a contract. Contracts cannot be written if the two sides cannot agree.
With online selling having become so easy for Chinese factories, your product has never been more at risk for competition by the very same factory to whom you provide your molds and your know-how and your technology. Chinese factories know this and many are agreeing to manufacture products at money-losing prices simply to acquire the knowledge that will allow them to sell those same products directly themselves.
Some of these Chinese factories will not create duplicates of your products for their foreign buyers — be they your competitors or your customers. They instead take what they have learned from manufacturing for you and use that information to compete directly with you. Since you will essentially be educating your Chinese manufacturer on how to compete with you, you need contracts and IP registrations that will at least limit what it can do when it does.
Chinese factories are becoming increasingly confident about selling their own products online and therefore more willing to risk losing their foreign OEM product customers to do so. Add to this that nearly all of the online retail platforms are focusing on helping Chinese manufacturers sell directly and you should be able to see exactly where all of this is leading.
What can you do to slow down and reduce this sort of competition? I suggest you read the following:
- China NNN Agreements
- China Product Development Agreements
- China: Do Just ONE Thing: Register Your Trademarks AND Your Design Patents, Part 1
- China: Do Just ONE Thing: Register Your Trademarks AND Your Design Patents, Part 2
- China Manufacturing Contracts: OEM, CM, and ODM Arrangements
- China Manufacturing Contracts, Part 2: ODM Arrangements
- China Manufacturing Contracts, Part 3: An Original Development Manufacturing Agreement that Works
- China Contracts That Work
Despite the need to have a contract (or multiple contracts) with your Chinese supplier, and despite the need to always be alert to what your Chinese supplier is doing with your product and in your product marketplace, there is still room for a good relationship and having such a relationship is important. Think of the contract as a way to bolster your good relationship with your supplier by reducing the issues on which there will be disagreements.
Trust yet verify.
What are you seeing out there?