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.
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.
An OEM product may be designed and manufactured to specifications other than those specifications of suppliers primary products. OEM in China referred to the Chinese company that originally builds a given product and sells it to the foreign company. It is important to all the foreign companies to make sure the contract manufacturer they have chosen is capable of delivering all their manufacturing requirements for producing their OEM products.
According to most of the Chinese law firms, overseas companies need to keep in mind that not all the contract manufacturing companies are the same. You need to keep a comprehensive checklist of questions in hand while interviewing the contract manufacturer for your OEM product. It is essential that you and the contract manufacturer are working together to successfully bring your OEM products to the market and expand your business.
It is noted quite often that many OEM relationships fail to meet the definition of the term because the dynamics of the OEM are changing. As a business owner, you have to ask the right questions before forming this valuable relationship with a Chinese contract manufacturer.
The Following is a Checklist of OEM Agreement:
- Materials– The kind of material the CM is going to use must be clearly mentioned in the contract. Be sure the contract manufacturer you’re considering has adopted quality standards – such as the ISO 9001:2008 – which provide guidelines to ensure the contract manufacturer’s products and services are consistently meeting customer requirements.
- Manufacturing– Review consignment terms, contract, and Standard Operating Procedures (SOP)
- Price– Request to know the provider’s pricing formula and activity or service rates with current your product.
- Order placement– How are orders to be placed? Purchase order or by forecast? Also, be sure and state the liability where necessary. The agreement must also define the list of products, performance criteria, tooling list and purchase order.
- Quality control and quality assurance- Foreign companies need to have the right, after a 24-hour notice, to inspect, audit or examine the manufacturer’s operation, record, system, and facilities to ensure compliance with the OEM agreement.
- Term– The parties will determine an appropriate term for their contract, and may make the agreement renewable on request by the buyer.
Due to the fact that China has become the world’s leading manufacturing base, it is quite obvious that businesses from all over the world want to make the most of it. An OEM agreement could prove to be the most effective tool in order to carry on seamless business operations in China.