Business Values Hidden in a China OEM Agreement

An original equipment manufacturer better known as OEM contract is used by a company that takes components of products from one or more companies in order to build one product which it then sells under its own brand and company name. Many OEM relationships fail to meet the definition of the term because the dynamics of the OEM are changing. It is interesting to know that OEMs are not the original manufacturers; they customize the original product.

Protect your R&D with the right OEM contract

OEM agreements hold huge importance especially when you manufacture your products in China. The most significant benefit of China OEM is you have complete control over your IP. The hard work you’ve put in R&D of your product remains safe as all the IP rights belong to you.

Match the original specification of your product

Have you ever installed a new replacement part that didn’t quite line up with your existing components? This is unlikely to ever happen with an OEM part. All intellectual property used to manufacture the product, including trademarks, patents, copyrights, and other business secrets should be licensed to supplier, for the limited purposes of complying with its obligations under the agreement. All your parts and components are created and tested to match the original specification, and are sure to be high-quality. They will be compatible with your equipment and perform according to factory specs.

Reduce the cost of production

A professionally drafted OEM manufacturing contract with well-crafted damages provisions will convince your China manufacturer that it will be better off complying with your contract than violating it. All OEM policies allow for this, even though it is often buried in the fine print. Owing to economies of scale, OEM products significantly reduce the cost of production. Moreover, the company purchasing these products can use them to build systems without running their own factory.

The Following is a Checklist of OEM Agreement:

Components – The kind of material the China manufacturer is going to use must be clearly mentioned in the contract.

Manufacturing– Review consignment terms, contracts, and Standard Operating Procedures (SOP).

Price– There would be a clear provision in the contract that will state the manufacturing price.

Order placement– This section will define how the orders should be placed.

Quality control and quality assurance– The end-product will be of the standard guide provided by the foreign companies.

In the opinion of the China trademark attorneys, extra time should be allotted to cover negotiations for OEM design and customization plus, other related matters such as technology transfer, cost and IP security. The contract manufacturer can pass along additional outsourcing cost reductions to the OEM. China OEM manufacturers offer you the flexibility to sell your product at a desired price and terms.

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How China OEM Agreement Safeguards your Business Interest?

There are many complex issues inherent in overseas manufacturing. Having a well defined manufacturing agreement can greatly mitigate these issues. According to the professionals of the Chinese law firm, in spite of China’s number one position as the finest manufacturing base in the world, Chinese products have become a matter of grave concern for retailers as well as consumers.

How does OEM work?

OEM is essentially when a company designs a product from the ground up and then contracts another company to manufacture it for them. This happens, for instance, when you design a brand new widget, launch it on a crowdfunding site and need to get it produced.

Why OEM is the best shield of defense in China?

There is no doubt that manufacturers in China will likely to offer you fine service from the very start compared to the domestic manufacturers. But there is no shortage of horror stories about mold and tooling disputes with Chinese manufacturers. That’s why it is highly important for the US and the European companies to correctly pick and frame OEM agreement in China.

Based on the data and design you give, an OEM manufactures your product. The interesting thing is they do not design any of the products as their responsibility is only limited to the manufacturing process. You face few or no Intellectual Property (IP) or contractual restrictions that might prevent you from moving your product to a different factory if you need to.

The very first thing your China lawyer will advise if you have products manufactured in China is to go for an OEM agreement. This contract comprehensively addresses various factors such as:

  • Product and IP ownership
  • Sub-supplier requirements
  • Timeliness requirements
  • Quality requirements
  • “Penalties” for breaching
  • Non-compete, non-circumvention, non disclosure requirements, trade secret requirements
  • Mold/Tooling ownership

By opting for an OEM you can be sure all your parts and components are created and tested to match the original specification, and are sure to be high quality. OEM may refer to the company that buys products and then incorporates or rebrands them into a new product under its own name.

Final Thoughts

Common product categories in the OEM industry include those that have high volume outputs and some degree of product differentiation. Professionals of the Chinese law firms are of the opinion that earlier OEM was the preferred choice of the big name MNCs with massive order requirements. However, the trend has changed a lot and now OEM production is also becoming popular among smaller clients.

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