Contract manufacturing in China: 5 expert tips that will ensure success
A sure-shot way to doing contract manufacturing right
This article was originally published on the Sourcing Allies Blog
Contract manufacturing in China is a cost-effective way for western companies to outsource production of their products or components. That’s not all. It also allows companies to bring new products to the market swiftly without wasting time or other resources.
If the contract manufacturing project is not handled well, however, businesses face the risk of damaging their financial health, goodwill and reputation. If you are planning on outsourcing manufacturing to China, here are five tips by China sourcing experts to ensure that your project is successful.
1. Register your IP in China
Arguably, this is one of the most important things that companies can do even before they start looking for manufacturers in China.
Intellectual Property rights include trademarks, design patents and copyrights. Often, customers from western countries skip this step as they are not familiar with the legal landscape concerning IP rights in China. But this is unwise if the IP rights of your product are important to your business because in China, the first company to register a trademark or patent is the first company to be awarded it never mind what the US or UK rights of that product are.
This means, if Company X has registered your trademark in China because you neglected to do so, your China manufactured products can be prevented from being exported because according to Chinese law you have infringed upon the IP rights of Company X.
Besides this, once you find a manufacturer, among other things, you must get them to sign an NNN or non-disclosure, non-use, non-circumvention agreement to protect your IP rights. Remember, a US-style NDA will not work. Additionally, the NNN agreement must be written in Chinese and should be enforceable in a Chinese court. A strong contract damage provision in this agreement will deter your Chinese manufacturer from copying your products or components.
2. Find a reliable supplier
Once you’ve taken care of important matters like registering your IP rights, you need to start looking for a reliable supplier. To cut your search short, you must first decide what kind of supplier you want. Consider aspects such as size of factory, location, production capacity, technological ability and whether you want the factory to exclusively manufacture for you while making this decision. Once you are clear what your “ideal” supplier must look like, start longlisting suppliers.
The obvious search routes are the internet, trade fairs and word of mouth. If you don’t mind the extra research you could also look at data sites such as Import Genius and Datamyne that provide a searchable database of import-export trade of several countries. Search for companies importing similar products as yours and find out who their suppliers are.
Once you have a longlist of suppliers, you could whittle the list down further keeping your “ideal” supplier in mind. You’ll need to do this on the basis of more information, of course. This you can do by calling up their offices, emailing them or checking if they have websites. (Most large factories have started maintaining websites in English. But do remember that the majority do not.) Once you have a shortlist of about five suppliers, you MUST conduct a physical check. You or a representative such as a China sourcing agent must visit the factory to:
- Check if the factory actually exists and that the supplier is not actually a middleman or trading company.
- To assess whether the claims the potential suppliers have made during your enquiries are true.
3. Draw up a detailed OEM agreement
Once you have finalised a supplier, it’s time to draw up a detailed Original Equipment Manufacturer agreement. In this agreement, you must mention the minute details of your product’s specifications, leaving no room for interpretation. For instance, if the colour of your product is supposed to be red, specify the pantone number. Similarly, if your product is a bag, specify the amount of weight it is expected to hold. This agreement should also lay out payment terms, lead times, quality requirements, quantities, certification, ownership of tooling, dispute resolution and so on.
Most importantly, just like the NNN agreement mentioned earlier, this one too must be drafted to be enforceable in China and not in a western court, and it should be written in Chinese.
4. Keep copies of approved samples with you
The contract manufacturing process may see a number of samples being made and tweaked before you approve of the final one. Ensure that you or your representatives in China as well as the factory have copies of the approved sample that they can refer to. It will help you ascertain whether the quality of each batch is consistent with the terms agreed upon and the approved sample. This is a small thing but it will prevent you a lot of stress later on.
5. Conduct regular quality control inspections
You may have a really strong OEM agreement with your contract manufacturer, but things can still go wrong and you’d want to prevent that from happening because IF things go wrong and you cite the agreement asking your Chinese manufacturer to fix it, the factory will STILL take time to make the necessary changes, which will push back lead time and delivery dates. You don’t want that happening because that means angry customers and messed up inventories. Therefore, conduct regular quality control inspections from a third party (your factory is expected to have its own internal QC system but that is different) that can be a company based in China that specifically conducts these checks for customers abroad or a sourcing agent who is handling your entire contract manufacturing process for you.