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.
- 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.
- 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.