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.
American companies are attracted to China for their manufacturing requirement. 2018 will be another fruitful year for the US importers and the Chinese manufacturers. With a comparatively cheap labor force, competitive pricing and a wide variety of manufacturers and products to choose from, this country is an ideal destination and will remain so in the current year. Although there are many important parts involved in getting your product(s) manufactured in China, the most important is your contract. As more and more overseas businesses are likely show their interest in China, there are so many key factors foreign businesses need to keep in mind such as:
- Do not use a U.S. style NDA (non-disclosure) agreement
- Use an NNN (non-disclosure, non-use, non-circumvention) agreement written to deal with the specifics of OEM manufacturing in China
- Draft the NNN agreement so it is enforceable in China
Comparing to the countries like USA, UK, Australia and others, the legal procedures and laws in China are completely different. Chinese legal system works in a way that is contrary to the other parts of the world. An American NDA with jurisdiction in Chicago is not likely to have any impact on a Chinese company. What you need is not really a China NDA at all, but an NNN Agreement that protects you before you have actually chosen a particular manufacturer for your product. This sort of agreement can go a long way towards preventing potential or future manufacturers from stealing your design.
Because of this, it is suggested to draft a China binding NNN contract. The NNN agreement should be the entity to which you are directly sending confidential information. Assuming that the Chinese company is the proper counter-party, you should be sure to follow the terms of the NNN Agreement. Only send information to the Chinese company. The agreement stands for Non-use, non-disclosure and non-circumvention.
NNN agreements should clearly define which rights are being disclosed or licensed, their nature, and their scope. Always have a written contract for all business activities in China, and the language should be Chinese. Keep in mind that your contract is not translated into Chinese from another language or from Hong Kong to the mainland, because the meaning of a translated version could be ambiguous and could hold entirely different meaning. That’s why China lawyers suggest to draft the NNN contract completely in Chinese language.
China’s knockoffs come in many different forms, and can affect businesses large and small. Factories will make products that physically resemble ones made by prominent brands. A solid NNN agreement will comprehensively restrict your Chinese manufacturer to use your idea or product. The NNN agreement not only incorporates non-disclosure provisions, but it also has provisions that restrain a Chinese manufacturer from misusing the sensitive private information that it has gathered as an outcome of its working relationship with the overseas company.