Because of the exceptional cost savings, American businesses that sell physical products through online or brick and mortar stores, prefer to manufacture their products in China. Putting your manufacturing unit in China can be advantageous in many ways. China has the lowest labour costs in the entire world for manufacturing employees. Lower costs of living make China’s low wages manageable for the common manufacturing worker, and their factories are thriving by producing goods for the entire world.
Especially for mass-market products, low production cost means that you have enough supply to maintain competitiveness in the market. Some companies also choose to outsource to manufacturing facilities in China to ease the distribution process to other countries. When the manufacturing process is properly handled elsewhere, your company can focus its resources on research and development for future products. While there are lots of pros about getting your items manufactured in China, you need to keep in mind there are many pitfalls of doing business over here.
Opt for the NNN Agreement in China-
The most common mistake, American and other companies commit is to sign out an NDA agreement instead of an NNN agreement. It is a Non-Disclosure, Non-Use and Non-Circumvention agreement (NNN) that includes the normal protections of an NDA including non-disclosure and non-use provisions but in addition to those, also non-circumvention protection.
Must have Provisions in a China NNN Agreement-
- NNN agreement should be written to be enforceable in a Chinese court with jurisdiction over the Chinese defendant.
- It will need to be written in English and Chinese and we will need to be able to make slight edits (such as changing the supplier’s name in English and Chinese) so you can re-use the document (for the same product) but for different suppliers.
- An NNN agreement must include a sum certain contract damage provision that a Chinese court can and will enforce by ordering seizure of the defendant’s assets.
How does NNN Agreement Protect You?
- NNN agreement prevents your Chinese manufacturer the distribution of your IP to 3rd parties
- Stops Chinese supplier from using your IP for any purpose other than manufacturing the product in question for you
- Prohibits a supplier from selling direct to your clients
Do keep in mind that the U.S. model non-disclosure agreement will not work in China. Non-use means requiring the Chinese factory to agree by written contract not to make any use of your idea/concept/product in a manner competitive with you, the disclosing party.