3 Manufacturing Agreements You Need to Require While Doing Business in China

China is the most competitive manufacturing nation, with cost competitiveness being a significant factor. Although there are many important parts involved in getting your product(s) manufactured in China, the most important is your contract. Foreign companies doing business in China usually maintain three types of manufacturing agreements with a Chinese factory:

1. Original equipment manufacturing (OEM): Used when a foreign buyer purchases a product already being made by the factory and simply adds its own branding to it;

2. Contract manufacturing (CM): Used when a foreign buyer has a fully developed product design, which is then brought to a factory for commercialization and mass production; and

3. Original design manufacturing (ODM): Used when a foreign buyer approaches a factory with a basic design and specifications, but the factory actually makes the commercial design and ultimately the production.

In the complex world of the outsourced manufacturing, it becomes really hard to maintain sharp distinction among the above stated agreements. There are many ways these agreements get blurred. Here we are representing some of the case studies.

(a) At beginning of the manufacturing agreement, most of the companies ask China lawyers to keep all the three types of manufacturing agreements ( OEM, CM, ODM) while drafting the contract. It is not impossible to keep all of them in the agreement, but the problem is at the end it gives a complex outcome. The end result is hard to comprehend for most of the foreign companies. There are two basic problems if you keep all three agreements in one contract-

  1. The clients need to make a decision with every factory and with every product
  2. The client must specify in each case which of the three categories apply

In this sort of contracts, the general tendency for both sides is to default to a single result. It is needless to say that this choice is highly in appropriate and unable to offer proper protection to the foreign buyers.

(b) All the three categories of manufacturing agreements have their own characteristics. For better understanding here we are furnishing easy examples.

In the case of OEM arrangement- The foreign companies often demand changes and alterations to the Chinese factory’s standard product. The major question is who will own those changes. The entire scenario is quite complex.

In the case of CM arrangement- The foreign buyer often demands the Chinese factory to modify the design to make for more efficient production. The question is who has the actual right over the modified product.

In the case of ODM arrangement- The foreign buyer and the Chinese factory normally work closely together in developing the new design. When two design teams work together, who has the right over the resulting product?

(c) You need to keep in mind that in the world of manufacturing, intellectual property is the applicable concept of property. It becomes really complex to actually decide the ownership and right of the end product. Property right issue becomes harder to understand while you put when you put all three arrangements in a single contract.

China and United States of America four basic forms of intellectual property are-

  1. Patent
  2. Trademark
  3. Copyright
  4. Trade Secrecy

China attorneys often face cases where both sides (Chinese company & foreign company) claiming their rights over the end product. But when conducting the investigation, we have found neither of them has any claim over the product. In terms of formal intellectual property protection, any individual can enjoy the liberty of copying a design and the Chinese factory is free to produce products according to that design and the foreign company can produce the design by another factory.

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