China has the lowest labor costs in the entire world for manufacturing employees. Their manufacturing capabilities have continued to grow since the inception of China manufacturing, and their factories produce private label products worldwide. China is the largest exporting nation in the world largely because it specializes in a number of different product categories. Especially if you’re looking to build custom product, you will save so much time and money by working with a manufacturer who specializes in your product category.
However, when a foreign company hires a Chinese manufacturer must ensure that the products they produce will meet the agreed quality criteria. Having a well-defined manufacturing contract can alleviate the various legal issues inherent in manufacturing in China along with safeguarding your intellectual property. You should contract with a China manufacturer that has sufficient financial resources. This seemingly simple principle is often overlooked because a lot of U.S. buyers contract with third-party sourcing companies unaffiliated with the contract manufacturer that owns the factory.
Register your IP in China
Arguably, this is one of the most important things that companies can do even before they start looking for manufacturers in China. Intellectual Property rights include trademarks, design patents and copyrights. Foreign companies are still at risk from IP ‘hijackers’ – for example, Chinese suppliers that file their foreign client’s IP without their permission. Align your IP strategy with your business strategy. Identify business goals, protectable IP, regional requirements, potential partners and capacity to expand into your target markets. IP rights are important—take the time to identify your IP to determine what can be registered and/or enforced in China as early as possible. Make IP protection a core responsibility of the entire China management team, not merely a function of the legal or brand protection teams, and adjust internal information flows and reporting structures to reflect those responsibilities.
Product Development Agreement
A product development agreement contract protects you and your work, as well as helps you obtain the final product you may want. Additionally, the agreement helps the designer by addressing and resolving disputes and aiding you in getting paid. A good product development agreement generally includes provisions addressing the following:0
- The product to be developed.
- The technology the foreign company and the Chinese manufacturer will contribute.
- Who will provide the product specifications and in what form.
- Who will own the IP rights to the resulting product.
NNN Agreement in China–
Instead of drafting a pure NDA agreement, foreign companies should be opting for a Non-Disclosure, Non-Use and Non-Circumvention agreement (NNN) that includes the normal protections of a NDA including non-disclosure and non-use provisions but in addition to those, also non-circumvention protection. China NNN agreement prevents your Chinese manufacturer the distribution of your IP to 3rd parties. It stops Chinese suppliers from using your IP for any purpose other than manufacturing the product in question for you and prohibits a supplier from selling direct to your clients.
Over the past few years, the Chinese government has taken significant measures to improve the framework for IP protection. Nevertheless, it is important for the foreign companies to take a strategic approach from the very beginning to safeguard their intellectual property in the best possible manner with the help of experienced China business lawyers.