Protecting Your IP in China Part 1: Legal Contracts
A really important question we get asked, especially for small to medium-sized businesses looking to manufacture their products in China, is how do we protect our IP?
You’ve gone through the work of creating great designs that are unique to you and you want to make sure they are protected. How do we do it?
We use a three-pronged approach to protect your IP in China. Our three prongs work together to ensure that you can relax knowing that you are fully protected.
The first prong is making your contract legally binding in China?
-
- First – in Chinese for the Chinese court systems. You are dealing in China with Chinese factories, so this is of the utmost importance. Many of the contracts we see are written in English and then translated into Chinese and are clearly not going to be upheld in a Chinese court (if it unfortunately ever got to that). So, we take a ‘Chinese first’ approach to ensure suitability for the Chinese court system. We then translate contracts into English so you can also understand it.
-
- Second – financial penalties for specific breaches of contract. Your contract should state that manufacturers are financially liable if certain contractual conditions are not met. This liability should be for a specific amount of money that is large enough to act as a deterrent for the factory but reasonable enough to match the nature of the breach. This demonstrates that your contract has been written by somebody who understands the Chinese court system and will help prevent contractual breaches.
Ultimately, the last thing anybody wants is to have to go to court, and certainly not in a foreign country. Writing your contracts correctly will help stop 98% of breaches before they happen.
Protecting Your IP in China Part 2: Building Solid Relationships
A question we get asked a lot is how do we protect our IP in China? In the previous blog, we discussed the first prong of our three-pronged approach – making your contracts legally binding in China.
The second prong is equally important and focuses on creating strong and lasting relationships with Chinese manufacturers from the start. In Chinese, these relationships are called “guan xi,” and are extremely important.
Chinese manufacturers want you to have:
- A successful business
- Successful products that the market loves
- A relationship where you can grow together
- More consistent and larger orders over time
Their success is dependent upon your success. Unfortunately, many foreign companies hold onto a suspicion that Chinese factories are simply out to take advantage of them. This is wrong and will only weaken and complicate what should be an ongoing and mutually beneficial relationship.
You also need to show that you are serious and won’t expect Chinese manufacturers to put in a lot of up-front effort to set up your product, only to later shop around for a slightly cheaper manufacturer once manufacturing is up and running.
Demonstrating a longer-term commitment to growth also helps manufacturers stay loyal and not seek ways to sell designs or to market products in competition with yours.
Here are some ways to set up a strong relationship from the beginning:
- Think long-term – years or even decades. Chinese manufacturers will feel if you are only thinking “How do we get this first sample made?” or “How do we get this first order made?” without longer-term planning. Many factories have hundreds or even thousands of people contacting them asking for samples and asking questions that go nowhere. It’s a waste of their time. Instead, go into your Chinese manufacturing journey with the intention of creating ongoing relationships. It will benefit you in the long run.
- Demonstrate legitimacy in what you are doing and that you understand their position and what they are doing. You need to show manufacturers that you are serious, that you are not a one-off purchase, you expect high quality, and that you have expectations. However, you should also show that you are doing everything on your end to market, promote, and sell your product and that you want to grow together. Also, just as you may be gambling by working with them, they are also taking a gamble by committing their resources to work with you. Showing that you understand their risk, as well as yours, will help solidify a meaningful relationship. And, if it looks like things are going well, show that you intend for this relationship to be ongoing.
Plan to visit them in China (even if it can’t happen for a while). Relationships with Chinese manufacturers should have an element of personal connection. Having a face-to-face sit down with them on a business and social level to understand their factory, see their setup, praise their expertise, and observe what they have done will go a long way in creating a positive relationship. Having an opportunity to eat with them to discuss your future is an important cultural exchange. Even just showing your genuine intent to visit will help Chinese factories see that you are a genuine partner and that you are not looking to disappear three months after you place your first order.
Protecting Your IP in China Part 3: Spreading The Love
It’s time to continue our series on protecting your IP in China.
In previous posts, I’ve mentioned that we use a three-pronged approach to protecting your IP when manufacturing in China. The first two prongs covered:
- Ensuring that your contracts are legally binding in Chinese courts.
- Building strong, long-term relationships.
Having these in place will go a long way to not only protecting your IP but will also help you have a positive experience working with Chinese manufacturers.
However, there is a third element that will add a further layer of protection to your IP. We call this third prong “Spreading the Love”.
We call it “spreading the love” because we are literally talking about taking the different components of your cherished product and spreading them amongst different manufacturers. For example, you may have a product made up of ten to twenty components. There’s a PC board, a lens power cable, the outer casing, the packaging, etc. “Spreading the love” means strategically dissecting your design into these separate components so that, on their own, it is not worth the time or effort for manufacturers to copy them because they have no idea what they are for. Only the information necessary for manufacturing that single component is handed to the factory and these factories may not even be in the same city or even the same province.
Once the components have all been manufactured separately from each, they are brought together at a final, trusted and fully vetted factory that then assembles your product. However, this factory specialises in assembly, not manufacturing so, while they can assemble the product, they are not set up to copy or reproduce your product. Often, they will not even know what your product does, because the only information they have is specific instructions on how one component connects with another. Because of this, it would not be worth their time and effort to attempt to reverse-engineer something that they still don’t fully understand.
A lot of the products and the designs that we deal with also have a software component to them. The software runs through the hardware and gives the product life. This software can be encrypted before it leaves your team so thatwhoever is installing the software can’t look into the software and see what it does.It simply becomes another piece that needs to be assembled.
So, by “spreading the love” between multiple manufacturers and then using a final trusted factory that specialises in assembly, you have added another powerful layer of protection and made the cost of copying your IP (time, effort, resources, money) too high.
But what if you are still nervous that your product is going to get knocked off? You’ve seen them in marketplaces all over the world, high-ticket items selling for incredibly cheap by some random street vendor. It happens, right? The Louis Vuitton bags, the Ray-Ban sunglasses. Shouldn’t you be worried about that?
Something we tell our clients half-jokingly, but also with some seriousness, is your goal should be to have, one day, someone trying to knock off your products. But why? This doesn’t sound right! Surely you don’t people trying to steal your IP. A perfect example is Dr Dre Beats headphones. You can find them in almost every market across Asia. It’s a problem. Absolutely. But, why is it a problem?
It’s only a problem because they’re selling hundreds of millions of dollars of merchandise and they have created something that millions of people want. People want to copy their product. It’s a problem because they have been successful. And you should want your product to be so successful that others will start to notice. It’s a sign that you are doing something right.
However, for now, this is not a problem that most small to medium-sized businesses need to worry about. And, if it ever does become a problem, it’s a ‘good’ problem to have because you will have become so successful that others want to do what you are doing. So, for now, we would recommend you protect your IP as much as you can by using our three-pronged approach. And then, focus on what you do best by creating and marketing an incredible product that the masses will love.