Want to Frame an OEM Agreement in China? Know the Checklist

An OEM product may be designed and manufactured to specifications other than those specifications of suppliers primary products. OEM in China referred to the Chinese company that originally builds a given product and sells it to the foreign company. It is important to all the foreign companies to make sure the contract manufacturer they have chosen is capable of delivering all their manufacturing requirements for producing their OEM products.

According to most of the Chinese law firms, overseas companies need to keep in mind that not all the contract manufacturing companies are the same. You need to keep a comprehensive checklist of questions in hand while interviewing the contract manufacturer for your OEM product. It is essential that you and the contract manufacturer are working together to successfully bring your OEM products to the market and expand your business.

It is noted quite often that many OEM relationships fail to meet the definition of the term because the dynamics of the OEM are changing. As a business owner, you have to ask the right questions before forming this valuable relationship with a Chinese contract manufacturer.

The Following is a Checklist of OEM Agreement:

  • Materials– The kind of material the CM is going to use must be clearly mentioned in the contract. Be sure the contract manufacturer you’re considering has adopted quality standards – such as the ISO 9001:2008 – which provide guidelines to ensure the contract manufacturer’s products and services are consistently meeting customer requirements.
  • Manufacturing– Review consignment terms, contract, and Standard Operating Procedures (SOP)
  • Price– Request to know the provider’s pricing formula and activity or service rates with current your product.
  • Order placement– How are orders to be placed? Purchase order or by forecast? Also, be sure and state the liability where necessary. The agreement must also define the list of products, performance criteria, tooling list and purchase order.
  • Quality control and quality assurance- Foreign companies need to have the right, after a 24-hour notice, to inspect, audit or examine the manufacturer’s operation, record, system, and facilities to ensure compliance with the OEM agreement.
  • Term– The parties will determine an appropriate term for their contract, and may make the agreement renewable on request by the buyer.

Key Takeaways

Due to the fact that China has become the world’s leading manufacturing base, it is quite obvious that businesses from all over the world want to make the most of it. An OEM agreement could prove to be the most effective tool in order to carry on seamless business operations in China.

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Rapid Automation in China the Growing Importance of OEM Agreement

The main reason why European and American companies manufacture goods in China because of its cheap labor. The cost of manufacturing increases a lot mainly because of labor wages and as China is a country with lower labor cost quite naturally European and American companies set up their manufacturing unit over here.

But for the last couple of years, it has been noted that labor cost has increased a lot in China and a significant amount of manufacturing work is shifting to other Asian countries such as Vietnam, Myanmar and Indonesia. US President Donald Trump’s initiative of bringing back manufacturing to the United States is another major factor behind manufacturing work fleeing from China.

The huge investment made by the Chinese government for the development of country’s infrastructure paid dividend as China is considered not only the cheapest destination for goods but also the indigenous companies are the most experienced and efficient in the world. Vast automation is taking place throughout China and the use of robotic technology is getting increased in the Chinese manufacturing sector. It is definitely going to be tough to substitute human workers with robots but we can expect that the automation will capture the assembly section. The foreign companies will get relief from facing the complex and hassle of facing China’s labor law.

“China continues to lead the growth of worldwide robotics adoption, primarily driven by strong spending growth in process manufacturing and cross-industry applications,” said Zhang Jing Bing, IDC’s research director for worldwide robotics and Asia-Pacific manufacturing. The more number of robots in the assembly line of the Chinese company will definitely increase the consumption of the Chinese products in the United States of America. It becomes highly important for the foreign businesses to select the right manufactures along with drafting a solid OEM agreement with your Chinese factory.

According to the market experts, manufacturing exodus from China is still a long way and this country will continue to dominate the sector in the coming years. You need to keep in mind that China is still the home of big manufacturing houses. It is only the lower-level or redundant manufacturing consignments that left China. It supremacy as the global manufacturing hub is pretty much intact. A finely written OEM arrangement could greatly improve how your business works, since you’ll sell and manufacture more of your product.

Many OEM agreements fail to meet the definition of the term because the dynamics of the OEM are always changing in China. So it would be clever choice if you have an experienced China lawyer in your team. A China lawyer can give you accurate guidance and complete control over the OEM agreement.

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