Checking a Product’s Intellectual Property Rights Before Buying

A reader asked me how to conduct due diligence relative to the intellectual property rights of the products offered by Chinese suppliers:

I am to sell accessories in a specific market. I have stumbled on many Alibaba listings where:

1. Product in question is a brand name
2. Product in question is under different (made up?) brand name
3. Product in question does not have brand

The problem here is when they don’t disclose the brand, or they show a different brand because you never know if that product’s design is registered. You never know unless you are aware of such brand producing such product. For example I am aware of iPhone and all counterfeits that look like iPhone but when it comes to some kitchen product which I have never used, then I can’t be sure.

Microplane zester/grater is an example. Microplane is actually a brand, not a feature, technique etc. and this one was easy to find on Google. But what if Google is not sufficient or does not give a clear idea of the situation?

Unless I know it’s a brand, I can’t know if the design is protected or even if the product has a patent. That’s why I am looking for a system, guide, or software that would make such research easier to follow, reduce the risks, and save time and energy.

This is an interesting problem. Many other buyers probably share this frustration. And I don’t know of any easy way of reducing such risks.

  • Checking if a brand is owned by another company is usually easy.
  • Checking if a patent has been registered is complicated and expensive. To make matters worse, some patents are only registered locally and not internationally.
  • I guess lawyers can help and check the issues of trademarks and copyrights.

Anybody has an idea?

Do Chinese Factories Really Migrate to Inland Provinces?

One of the very clear trends over the past 15 years in China has been the migration of exporting factories from the Pearl River Delta to the whole coast, and then (to a much lesser extent) to land-locked areas.

However, my prediction is that this migration trend will slow down considerably, and for a simple reason: in many industries, it makes more sense to be located within the existing cluster of competitors rather than far away from them.

First, let’s look at the exceptions — those industries for which production is very widespread. Here are few examples:

  • Wood furniture
  • Jeans (denim)
  • Steel

What is special about these exceptions? The source of materials is spread out, so the processing & assembly factories are also spread out.

In most industries, though, production is clustered around a city. Here are just a few examples:

  • Lighters in Wenzhou (80% of the world’s output, according to Financial Times)
  • Socks in Zhuji (a third of the world’s production in Datang district, according to Wikipedia)
  • Ceramics in Chaozhou
  • Printers and consumables in Zhuhai
  • Knives in Yangjiang
  • Electronics in Shenzhen and Dongguan
  • Stones in Xiamen

You will notice that all these clusters are all along the coast. The raw materials / components suppliers have set up factories close by and won’t move. Processing industries requiring heavy equipment can’t relocate inland easily!

Based on my company’s data, more than 90% of export-oriented production is still in the following coastal provinces: Guangdong, Zhejiang, Fujian, Jiangsu, and Shandong.

The real migration has been from South to North. For simple consumer goods, Zhejiang has nearly caught up with Guangdong, and Fujian and Jiangsu have also become major players.

On paper, relocating a factory to an inland province presents many advantages:

  • Lower wages and lower staff turnover (more local workforce)
  • Lower electricity cost
  • Lower price for buying or renting factory space
  • Less disruption around Chinese New Year
  • Welcoming local authorities
  • Closer to raw materials (e.g. wood in Guangxi province)

However, there are also many disadvantages:

  • Higher cost for getting components from coastal areas or overseas
  • Higher cost for getting finished products to port – can be higher than international freight
  • Much fewer skilled managers, engineers, maintenance and QC specialists, and production operators
  • Relocating a factory is a very strong one-off disruption
  • All relationships with the local government need to be built from scratch

Here is my conclusion on this trend:

  • Relocating to an inner province makes more sense in labor-intensive industries, and for those factories that plan to sell part of their output on the domestic market.
  • A very small proportion of existing factories will relocate.
  • Factories in Jiangxi, Anhui, Henan, Shanxi, etc. are mostly new operations.
  • Costs are rising everywhere! A bowl of noodle is cheaper in Shenzhen’s industrial areas than in Chengdu.

Do you agree?

Maturity of Manufacturing Areas in China

I noticed that inexperienced importers tend to look at obvious signals (prices, response times, quality of English…) when communicating with potential suppliers. But they often overlook the location of the factory.

The export manufacturing industry really emerged in China in the early 1980s in Shenzhen. For example, most office buildings that are in the Huaqiangbei area used to house manufacturing operations. Then the exporting factories went to Dongguan city, to the rest of Guangdong, to Zhejiang and Fujian… and so on.

What is pushing new factories further and further away? Labor availability and cost, as well as other factors.

The dynamic goes like this: as costs rise, many importers need to go to less mature areas. note that this strategy is more difficult in industries:

  • With final processing/assembly concentrated in one cluster
  • With raw material / components concentrated in one cluster
  • Dependent on particular engineering and production skills

Let’s look at the lingerie industry for example: production shifted from Foshan and Dongguan to Shantou, and from Shantou to Quanzhou. Shantou and Quanzhou are cheaper than the Ho Chi Minh area!

This industry has several clusters because the equipment is cheap and the skills necessary for simple productions can be learned fast.

If I am allowed a broad sweeping generalization, here is how I see things:

Area Pearl River Delta Zhejiang, Jiangsu, Fujian Other areas, mostly inland
Maturity ++ +-
Understanding of export customer requirements ++ +-
Number of engineers + -
Price level + +- -
Quality level + +- -

I often need to explain to my clients that, for many products, the Pearl River Delta is the best area for production thanks to the following attributes:

  • Wide range of component suppliers within 2 hours around the factory
  • Ability to source small batches (flexibility and speed)
  • Abundant skilled workforce
  • Access to excellent logistical infrastructure
  • Proximity to many potential customers (other manufacturers that buy parts)
  • Ease of attracting and retaining expats

Do you agree?

Explanations of Compliance Requirements When Buying in China

Best Quality & Sourcing Articles

Here are some interesting or useful articles that I found recently.

Product Testing and Certification when Buying from China

Fredrik Grönkvist wrote a very good guide for importers who are not familiar with their country’s compliance requirements. This article includes:

  • How to find what testing is applicable
  • What determines the cost of testing
  • What importers must do vs. what is of lower importance

And he wrote three other in-depth articles and CE markingREACH, and California Prop 65.

How to Improve Quality in a Chinese Factory (video on Youtube)

David Collins, a manufacturing veteran, gives a great overview of the tools at the disposal of manufacturers that want to improve their quality level. (Disclosure: I am a partner in David’s company.)

China Product Development Contracts: The Questions We Ask

Dan Harris outlines the questions each importer should clarify before engaging in a new product development with a Chinese supplier. I have helped a lot of importers who didn’t follow such a process and lost large sums. Very helpful!

The Postal Service is losing millions a year to help you buy cheap stuff from China

Sending products one by one, from Chinese factories or from a warehouse in Hong Kong, directly to consumers can be very inexpensive. Particularly for delivering to American consumers, as explained in this article.

What Products are Very Hard to Buy Outside China?

I have talked to importers who can only purchase their products in China, and other buyers who can’t find anything they need in China. How is that possible?

Actually the situation is very different depending on the industry. I tried to provide a rough classification below.

Some product categories are very difficult to purchase outside of China:

  • DIY and power tools
  • Products (toys, sport gear…) integrating electronics
  • Low-cost hard goods, especially in plastics
  • Low-cost molds and industrial tooling

Some product categories can only be purchased in China if the importer needs hundreds of thousands of pieces in a short amount of time

  • Consumer electronics
  • Complex garments (jackets, certain bras…)

Some product categories can only be purchased in China if the importer needs a high mix of products and small production batches at a low price:

  • Any product that relies on a low-automation and high-flexibility process: manual welding, cheap plastic injection molds…

More and more food products from China are exported all over the world at very low prices:

  • Honey
  • Garlic
  • Seafood

Some products are better sourced out of China:

  • Some textile products (e.g. simple garments made in Bangladesh, certain embroideries made in India…)
  • Some products based on specific materials (e.g. gloves out of latex, sourced in Malaysia)
  • Equipment that requires high accuracy and long life cycle (e.g. flow meters for gas/oil, sourced in Japan.

Overall, my feeling is that if we remove textile from the equation, other low-cost Asian countries are positioned on niches “between the elephant’s feet”.

What do you think?