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China Sourcing 101: Contracts And Negotiations- Intellectual Property

 

China sourcing tips on protecting intellectual property

During my 20 years living in Asia, I’ve owned a number of different business entities in greater China, ranging from China WFOE’s to HK holding companies to service companies. I’ve represented fortune 500 companies as well as startups in their dealings with Chinese suppliers. In one of our recent busy years at PassageMaker, my team was responsible for sourcing over 200 million USD worth of goods in China.

I was the point person for negotiations and contract review with the suppliers. I’ve taken Chinese companies to court (and won!) over disputes arising from poor quality, broken promises, pirated goods & late deliveries. The legal system has come a long way in China. Foreigners can get a fair shake if you know how the system works.

I have taken the liberty of creating a short series including video tutorials and expanded transcripts that goes into some detail about how foreigner buyers can protect themselves in China.

Let’s dive right in to today’s installment: “ Contracts And Negotiations: Intellectual Property.”

Reality: the contract by itself is not going to protect your idea.

For example, how are you going to know if the manager or the owner or some employee at your supplier’s factory did not pass on your idea to his cousin that owns a factory across the street?

How to Register, Monitor & Enforce your Intellectual Property Rights in China

Monitoring is possible, but difficult, enforcement is fairly straightforward and registering it is really easy. So take care of those simple steps first.

  1. Register your intellectual property in Asia, wherever it is being made, Taiwan, Thailand, Indonesia, and China of course. The good news is it is very inexpensive to register intellectual property. So if you have a brand name that you want to protect do so up front.
  2. OK, you have your IP registered, how to monitor a huge marketplace and keep an eye on my suppliers at the same time?

There’s the expensive way where you hire an investigator to actually get a job at your supplier to monitor things from the inside.

But here are some more affordable ways:

  • Where is your supplier going to trade shows? What does there brochure look like, not just their English brochure but also their Chinese and English catalogs.   Are your products and your brands starting to show up there?
  • When you visit the factory, say “I need to do some cardboard box testing, I need to make sure that these cardboard master packs won’t crumble under a drop test, is it ok if I take some pictures and measurements in the warehouse?   What does the warehouse have to do with IP? When I get into the warehouse of a supplier, I’m taking a picture of all the master packs which usually have the name of the importer, so the Asian supplier would write down “this is made in China for ABC importer Australia under whatever brand”. So I’m in there dropping boxes and taking pictures under the disguise of box testing, when in reality I’m really just cataloging who the supplier is doing business with. Then I go home and get on Google and figure out who is my supplier selling to. And if it turns out to be one of my competitors, thus breaking the contract…then I know who is being naughty and I can take action.
  • There are many inexpensive ways to monitor the marketplace for counterfeits and unauthorized sales. Just go to Taobao.com. This is a website where Asian suppliers sell things out the back door of the factory. Let’s say you rejected an order because of minor defect. Believe me they don’t just throw it away and scrap it, they’ll sell it on the gray market (unless you have a mechanism to prevent this). Taobao is a great place to see if your product is being sold out the back door.

Bonus: How to avoid having your idea knocked off at a trade show

Don’t walk around the trade show with all of your secret sauce and give it to fifteen suppliers in exchange for fifteen quotations. At the end of the show you will pick one supplier to get the order, but what about those fourteen other suppliers?

Protect your idea by using a dummy sample during the RFQ process

So be careful with your idea, to get the quotation process going, consider using a “representative product” that is something similar to yours but doesn’t expose any secrets. Maybe it’s your competitor’s project.

Black Box Manufacturing. Protecting secrets through compartmentalization

If you don’t have any intellectual property as a barrier to entry, it’s one thing to force your competitors to try to replicate what you’ve done, it’s another thing to have your supplier knock you off. It much easier for the supplier as they have already been trained up on production- at your expense!

“Black box manufacturing” is a tool for keeping the sub suppliers are arm’s length from the finished product by using a trusted 3rd party to conduct the final assembly and packaging.

Let’s take the example of a wrist watch that has a new design to see how the black box works

Let’s say the secret sauce is a cool new band made of silicon with a special logo. So in this case, the silicon band comes from one supplier, the packaging from another supplier and the watch mechanism from a third supplier. And behind closed doors at the black box, the 3rdparty put things together, puts the customer’s label on it and sends it to the customer on Amazon, or wherever. So if your product can be compartmentalized, then there are ways to physically protect your ideas.

Registering intellectual property in China for foreigners

Registering intellectual property in China for foreigners

A very common question about foreigners registering Intellectual Property in China

With regards to the certificate of incorporation, can the company holding the IP rights in question be registered in the UK? Otherwise, what options do we have?

 

The applicant for the IP in China could be any entity or individual, regardless of physical location. A lot of people don’t realize. You need not be Chinese to register IP in China.

Related Content from PassageMaker’s founder:

Crash Course: China Sourcing: 9 short video tutorials

How to Register, Protect, Monitor & Enforce Intellectual Property (IP) Rights in China

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Exclusive Video: How to Register, Protect, Monitor & Enforce IP Rights in China

Speaker: PassageMaker Founder- Mike Bellamy

As presented at Global Sources’ China Sourcing Fairs in Hong Kong (Oct 2014) and Johannesburg (Nov 2014)

If you are unable to open YouTube due to firewall issues, here are some related links for your reference: How to register, protect and monitor intellectual property (Part 1,2 &3 )

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“Pros to Know” award winners have provided the articles and video content listed above

How to organise an effective RFQ in China

How to organise an effective RFQ in China

My friend and fellow CSIC contributor Neale O’Connor is a Visiting Associate Professor at the National University of Singapore. As part of a research project, he had his students contact almost 50 suppliers in China to get quotes on USB drives.

You can find the data below. Here are my suggested takeaways from the research. While the pricing points may be of interest if you are a buyer of USB’s, for me the most interesting aspect is the way in which the quotes were received from the suppliers.

Keep in mind that the students asked all the suppliers to quote on the same specs and counter sample. Yet you can clearly see below that no two quotes share the same format. Every price is different, just as every quote format is different. Currencies, MOQ, Specs are jumbled together in way that makes it impossible for a buyer to conduct an apples to apples comparison of the supplier simply by price.

Lead times, MOQ, Specification (quality level) all impact the price. Picking the lowest price offer is most likely not the best option from the 45 choices below.

Since China doesn’t have a standard format for the factory quotes, how to plan an effective RFQ in China (request for quotation)?

Here is a behind the scenes look at how companies like PassageMaker conduct the research to find factory direct sources for our clients. The single most important factor in determining the success or failure of your sourcing program will be finding the right supplier. It sounds obvious, but making apples-to-apples comparisons of vendors at a national level can be daunting. Just look at how messy the data is from the USB suppliers below.

Phase One “Defining”

The “right supplier” is unique to each buyer. Force yourself to list all the desired attributes of the product and factory and rank them. Beyond the holy trinity of price/quality/lead-time also think of attributes like location (do they need to be near a certain port or in area where you have other vendors), Capacity, Service Attitude, Language, Intellectual Property, Warranty Terms, Factory Ownership, Equipment, Export Experience and so on.

Phase Two “Initial Research”

Initial research generates a list of 50-100 potential Chinese suppliers using existing vendors in the AVL (approved vendor list) and web directories and industry/trade show directories.

Assume the vendor is a middleman until proven otherwise, not the other way around.

Avoid factories that refuse to list the name or location of the production facility- they probably don’t own the PRC factory and are a middleman of some sort.

Focus on those factories that can clearly show production experience with your particular product or production method.

Be aware that polished English skills do not reflect production skills. Often the most polished websites are set up by trading companies.

Review the 50-100 candidates’ websites and brochures against client’s desired attribute list. But hold off on asking for price or even contacting the potential suppliers until step 3. If you start asking about price too early you will subconsciously gravitate to the vendors with the lowest price. That may or may not be the best overall option. Narrow the field down to 15 to 20 candidates based on non-price attributes.

Phase Three “First Contact”

At this point, “first contact” is initiated with 15-20 vendors in the following 5-step process.

Step one: Send an e-mail to ask for a quote. That sounds easy enough, but if you don’t follow some simple tips, you will most likely get a mess like the students got when researching the USB prices below.

Time Saving Tips:

a) Give the supplier your RFQ form to fill in which specifies the attributes you care about. That way all the suppliers are filling out the same form with the same fields. This will make it a lot easier for you to compare options.

b) For reference, also ask them to offer a quote in the standard format they use. If they don’t have a formal quote sheet, run away. That’s a red flag that they are not professional.

c) Be as specific as possible in the product description. Ask the supplier to quote to your spec. If they quote off-spec, ask them to explain in detail where their quote differs from your specs.

Step two: Are samples available? If they don’t have samples readily available, they probably don’t deal in your product on a regular basis.

Step three: Granted the sales team will be the most polished in terms of English skills, but how is their understanding of your basic requests? If you ask for information on a red umbrella and get sent a sample of a blue shoe, you are going to have problems with communication down the road!

Step four: Don’t be seduced by the siren’s song of low price. The lowest unit price can be the most expensive supplier after you factor in the cost of defects, missed deliveries and operations headaches!

Step five: Confirm the actual production location and ask for ownership papers of the factory. Be explicit that the production location may be audited and that this location cannot be changed w/out approval of buyer. (You would be surprised at the number of middlemen who will take the buyer on a visit of a factory only to change the location to a less expensive and poorer quality option after the buyer leaves)

The above research should narrow the field down to about 5 highly qualified candidates. As that point you can, with confidence, move to the final steps of negotiation, due diligence/auditing and sampling.

Related Content and Reference Material

Data from Prof. O’Connor’s research on USB pricing is listed below.

How do we choose a good manufacturer in China?

Video 1: Finding Suppliers

Video 2: Evaluating Suppliers

Video 3: Negotiations

Video 4: Project Management and Quality Control

Video 8: Avoiding Scams

QuoteNamePriceMin. OrderDelivery TermsEssential Details
1ISINO Industrial Development Co.LtdSGD4.0310002 years warranty
2Nextkey Technology Co. LtdUSD3.499100Delivery date is 2 to 3 working days after order is confirmed. Shipping cost depend son the total quantity and delivery address.12 months warranty. Quotation price valid for 4 days. Payment is made through T/T to company account. *Price quotation based on 1000 pieces.
3Hongkong Xinkang Industry Co LimitedUSD2.65Shipping fee of 1000 pcs is US$100 with door to door delivery. EMS, DHL UPS and TNT available for shipping. Delivery within 3 to 7 days.5 years warranty.
4ShenZhen Wing Digital Co.,LtdSGD0.9200Shipping terms: EMS,DHL,UPS,FedEx; FOB Price; Delivery time 4-7 days; 5 Years WarrantyFor order of 1000pc, additional 10% off with free 50 pcs
5Shenzhen Kongs Technology LimitedSGD3.431000$120 DHL delivery
6Shenzhen Full USB Co. LtdSGD1.00500 pieces– 3 Days – Free Delivery– Free printing of logo – 2 year warranty – Return/Refunds if broken along delivery
7Shenzhen Alpha Technology Co LtdSGD3.3nil-7 Days – USD 238Logo engraving included
8Zhenghong (HK) Technology Co LtdSGD4.15nil– 3 Days – Free Delivery– One Year Warranty – Logo Engraving included
9East Sky Industry Co.,LimitedUSD 3.27/USD 3.54100 units– Mass production will be done within 4-5 working days(after our Chinese New Year Holiday) – We are on Chinese new Year holiday from Jan.,25,2014 to Feb.,8,2014 and start to work on Feb.,9,2014. ***Production and delivery is 15-20 days depending on the complexity of the design (info from company website)– Our price is for 100% genuine memory capacity,if you find any upgraded USB from us, you can send back to us and we will send back to you new one. – Our quality is very good, we can control RMA rate as 0.1% or below.
10 Shenzhen Ninesong Technology Co. LtdSGD3.5503-4 days, Free ShippingPayment by Western Union, T/T, Letter of Credit, Alipay, Paypal, 3 years warranty
11Fortune Port Technology LtdSGD2.002005-7 days3 years warranty, 30% deposit in advance, Western Union, TT, LC, Alipay, Paypal
12Fuzhou Everkings Import & Export Co LtdSGD1.51003-7 days after order made, plus free samples2 years warranty, L/C, T/T, Western Union, MoneyGram, Paypal, Escrow
13GIGAFLASH LIMITEDUSD3.751000NAPrice valid 2 days from now
14VTD Technology International Co., LtdSGD4.1100Door-to-Door Delivery;Incl. of shipping insurance (coverage unstated);Excl. Singapore Import TaxPrinting on one side only;Payment must be made through Western Union;Part payment allowed:at least 30% before production begins;remainder pior to shipping out of the factory (photo verification provided)
15Nantai TechnologySGD4.251000 pcsDelivery charge $100Warranty of 2 years
16Flason Electronic Co.,LimitedUSD4.05100Not specified– Flash price is not very stable, so the final price will be subject to the day’s market price you confirm the order. – Payment terms: TT or Western Union – Warranty Term: 2 Years
17Weterm International Co., LtdUSD3.47Not specifiedFedEx shipping cost:US$135 *delivery time: 5-6 working days*both sides full color logo included *each in a poly bag *price valid before Chinese New Year Festival
18Shenzhen Baizhi Electronic Co., Ltd.USD4.841000 piecesFOBFree engraving, data pre-load and autorun
19Shenzhen Oriphe Technology Co., Ltd.USD3.181000 piecesUSD216 via FEDEXFree engraving under 3 colours
20Shenzhen Dingsheng Electronic Co. LtdUSD2.80100 PiecesLead Time: 3-4 days, Free deliveryFree packaging, Free samples
21ISINO Industrial Development Co.LtdSGD4.031000Delivery Not included2 years warranty
22Gigaflash Limited (Vida Design Ltd)USD3.851000 piecesFOB Port (HK SAR)Laser Engraving of Logo Included, 1 year warranty, With RoHS, CE and FCC marks, 7-8 day Lead Time
23Nextkey TechnologyUSD 2.598500pcsLead time for mass production: 3-4 days after payment received. Shipping cost: depends on the order quantity and delivery address.1 year warranty The price is valid for 2 days Lead time for sample: 3-4 days after payment received. Sample price is USD10 more, but we will return sample cost when you place order with us. Payment: T/T to company account
24FlashbaySGD7.841000 pieces6 days from receiving payment10 years warranty
25Industrial Co., Ltd / Shenzhen Alpha Technology Co., LtdSGD3.31000Shipping cost by DHL, CIF Singapore: $2383. Lead time: We only can provide usb to you about 2/16, as we are in CNY holiday now ,and we will come back to work on 2/9, thanks.Payment: T/T in advance to our bank account
26Bestar Industrial HK LimitedUSD4.051000 pcsFOB ShenzhenFree warranty: 2 years. Payment via TT: 30% deposit in advance, balance due before shipment.
27East Sky Industry CoUSD3.271000 pcsFOB ShenzhenProduction time: 4 – 5 working days
28SHIXIN Venture Trading Co., Ltd.USD3.55No MOQFOB Shanghai, delivery within 3 – 7 working daysPayment via TT: Before shipment.
29Xiamen HuachangUSD2.191000 pcsFOB Taiwan via EMS / DHL / China Post / HK PostInternational warranty: 5 years.
30New Rich Industry Development Co., LimitedUSD2.501000 pcsFOB Shenzhen, delivery within 3 – 5 working days
31Shenzhen USB High Electric Co., LtdUSD3.001000 pcsFOB ShenzhenProduction time: 3 – 5 working days
32Shenzhen USB High Electric Co., LtdUSD3.10100 PiecesDelivery way : DHL , UPS ,EMS and FEDES;3、Lead Time : Money can be received later 10days can delivery 4、Sample lead time : 1~3days
33 Shenzhen Honorwell Technology Co., LtdSGD3.901000 pcsusd 170 for DHL deliveryProduction time: 6-7days
34Weterm International Co., LtdUS3.22FedEx shipping cost:US$135; delivery time: 5-6 working daysprice valid before Chinese New Year Festival.(we will on holiday from 25th Jan to 6th Feb for CNY)
35East Sky Industry Co.,LimitedUS3.271000 pcsShipment cost by DHL (door to door) to SingaporePlastic box (95*45*21mm): US$0.12/pcs added on above quotation.
36SHIXIN Venture Trading Co., Ltd.USD3.55 NO MOQDelivery time :3~7 working days
37EbayUSD$4.031000 piecesAddress to be per the one on the PayPal or Credit Card (this is according to the policies PayPal and Credit.Do not ship to any international addresses à But upon enquiry (see above), they are willing to ship to30 days have receiving the item; Money back; Buyer to pay for return shipping
38Lion City Gifts located in SingaporeSGD$5.7550 piecesFree local delivery to 1 locationNett price. Free white cardboard box.
39 itforlessusa from eBay located in New York, United StatesUSD$4.031,000 piecesShips to SingaporeReturn policy within 30 days of receiving item with money back but buyer has to pay for return shipping. Payment to be made through wire transfer or western union. 1 year warranty.
40Flason Electronic Co.,LimitedUSD 4.66Within China, paid by customerWarranty Term: 2 Years
41晟济旗舰店SGD3.7No MOQWithin China, paid by customerUnconditional return within 7 days, money back within 2-3 days
42深圳市泰达兴科技有限公司SGD0.810Within China, paid by customerWarranty: 3 years
43Xia Men Hua ChangUSD2.991000 piecesFOB shanghai by EMS/DHL/China post/HK postinternational warranty . 5 years
44New Rich Industry Development Co., LimitedUSD2.50Not specifiedDelivery time :3-5 work day;DHL (CIF to your door by DHL)
45FlashbayUSD16.2725Delivery is $55.00 for any quantity to Singapore.All product prices include branding with your artwork on both the front and back (where possible). There are no origination/setup charges.