By Dan Harris
I regularly read of the Quality Inspection Blog because it consistently provides actionable and accurate advise to companies looking to have their products manufactured in China. It’s written by Renaud Anjoran, who has more than a decade of China sourcing experience and he just gets it. Last year, Renaud wrote a post, entitled, How Can Inventors Develop a Custom-Made Product in China? I somehow missed that post but I learned of it today when a potential client looking to have its IoT product made in China told me that what I was telling him about IP in China “completely matched” what Renaud had said in this post.
It did and here’s what Renaud and I agreed upon:
“OEM factories generally don’t invoice customers for new product developments — that cost is factored in the product price.
Chinese companies tend to believe the IP rights of the products they have developed are theirs — even if they assure you that’s not the case when you interview them. When the time comes to give you critical files, they might say no.
What this means in real life — and trust me when I tell you that our China lawyers see this all the time — is that you will have spent years thinking up and prototyping your product in your home country. And then you spend many months working with a Chinese factory to develop your product further so it can be easily and cheaply produced. And then: you have nothing. No rights to your own product. No molds or tooling that relates to your own product. And maybe no files on your own product. You are back to square one. In the meantime, the Chinese manufacturer that now possesses all of these things can easily go off and sell your product to whomever it wants or manufacture it for whomever it wants. The latest trend here (of which we will be writing shortly is for Chinese manufacturers to design patent your product in these situations (and in many other situations) so as to slow you down even further.
Now if you are wondering why or how this so often happens, I will tell you via an example. We had a company that made a unique water bottle. This company had spent a year or so developing the product and prototyping it in the United States. It then went off to China for further development work on its “revolutionary” product. It found a leading water bottle manufacturer “willing” to further refine the water bottle for “free.” Six months later the finished water bottle was ready and the two companies sat down to negotiate pricing. The U.S. company wanted to pay around $2.50 for the water bottles, basing that price on the pricing for fairly comparable water bottles priced elsewhere, along with the proviso that the Chinese company could not sell these same water bottles to anyone else. The Chinese company wanted to charge around $7.50 for the water bottles, allegedly basing this price on its need to “make up for all the time and money incurred in developing it.”
The U.S. company came to us and there was pretty much nothing we could do beyond tell this already pulverized American company that the reason the Chinese manufacturer would not budge even one RMB from its pricing was because it did not want to sell the water bottles to our new client under an exclusive arrangement at all. And why should it? It now had everything it needed to make these water bottles and sell them to whomever it wanted. In other words, the Chinese manufacturer had no further need for the U.S. water bottle company.
You want to pay your China manufacturer to help you develop your product. Because if you don’t pay your Chinese manufacturer to develop your product, the Chinese manufacture WILL believe (not just tend to believe) that the product the two of you developed together belongs to the Chinese manufacturer and not to you. And guess what? You will not have any good proof otherwise. And you also, of course, want a China-specific product development contract documenting what you have paid and who owns what. That is unless you have no problem giving away your product and its associated IP.
Dan Harris is founder of the Harris Bricken law firm, a boutique international law firm focusing on small and medium sized businesses that operate internationally. China is the fastest growing area for the firm. Dan writes ChinaLawBlog.com as a source of China legal and business information.