In its traditional definition, an original equipment manufacturer (OEM) is a company whose goods are used as components in the products of another company, which then sells the finished item to users. An OEM product may be designed and manufactured to specifications other than those specifications of suppliers primary products. Things can become complex when signing out an OEM agreement in China.
It is advised to spend the time in up-front effort required to select a reliable provider. Here are the few things you must keep in mind regarding OEM agreement-
Products and specifications: The products to be manufactured should be well-defined in the agreement, along with product specifications. Using their negotiating power, often Chinese companies demand from the foreign company the right of exclusivity. It means, the foreign firm will offer them exclusivity or part of Chinese territory in supply contract. It is advised to the foreign companies not grant this exclusivity.
Supply according to your requirement: There is a possibility that your OEM demand may change on a daily or even a weekly basis. Your provider should be able to supply you items according to your demand. This term should be stated clearly on the OEM contract. The provider you have selected should be able to provide you products to your need and any sort of failure should be treated properly.
Quality of the product: As you have signed an OEM partnership, it is quite expected that the end-product should be of standard quality. Typical terms include-
I. Access often on short or no notice to production sites
II. Random testing of each batch of products before dispatch to buyer
Further, the parties may, depending on the value of the contract, provide for a representative of the buyer to be on-site on a full-time/regular basis, for the purposes of assisting in quality control.
Specific point of delivery and payment:
While going for an OEM partnership with a Chinese company it is a matter of utter importance to perfectly specify the spot the goods are to be delivered. The specific location has to be mentioned clearly in the contract. As far as payment is concerned, the common practice is for the payment period (usually 30 days) to begin on the date the goods are inspected and approved in the port of origin, rather than on the shipping date or acceptance date of the goods at the destination.
IP protection and non-competes: This is an essential point in any contract with a Chinese company in light of the well-known difficulties faced by foreign companies in protecting intellectual property in China. Intellectual property and non-compete clauses are especially important with OEM agreements. This insure your product is not competing with a similar product in the market and also there is a common ground on which party owns portions or all of the IP.