How to Protect against Copies when you Manufacture in China

For certain types of products (electrical, plastic injection etc.) Chinese manufacturers are often the best source. Production can be performed with relatively high quality and a relatively low cost. However, one of China’s major weaknesses is its lack of respect of intellectual property rights.

It means many importers have to face a challenge: the emergence of copies of their proprietary products.

I made a list of strategies and tactics that should help you reduce this risk.

1. What to do at the sourcing stage

You need to prevent dangerous situations, and it starts at the sourcing stage.

1.1 Supplier selection

Work with foreign companies rather than Chinese companies if possible, and with large Chinese manufacturers that export most of their production rather than smaller and more domestic-oriented suppliers if possible.

This way the supplier will have a better understanding of, and a greater respect for, your IP rights.

1.2 Get suppliers to sign a contract

Forget about NDAs. China business law specialists can draft a contract that addresses the real risks facing importers. You can read more details here on the China Law Blog.

Naturally, do this before communicating any technical information to anybody.

1.3 Register your intellectual property rights

Consult a lawyer about the need to register your IP in the form of trademark, patent, etc. It is quite common for a Chinese company to register a foreign company’s IP.

1.4 Don’t send product information to many companies

Qualify one factory before communicating your product information. Check their references if possible. Audit their production facilities. Check their design & engineering capabilities if you need custom development.

Here is one risk to avoid. Let’s say an importer asks two Chinese manufacturers to develop a new design. But only one gets the order. Here are two ways this can go wrong:

  • The manufacturer that gets the order might try to produce the same design and sell it to other customers.
  • The other manufacturer feels that he can do what he wants with the design. Since he did the hard work of developing prototypes, he will try to make money out of them through sales to other customers.

The downside of this approach is lower flexibility and higher business risk, since you are not developing a backup supplier.

1.5 Keep your supply chain as disjointed as possible

Purchase components from several factories, and keep the final operations separate from the rest of the steps, so that very few people can see the whole. This might be difficult in textile, for example, but easier with an electro-mechanical product.

For example, certain freight forwarders can handle the kitting, labeling, and/or packing. The Supply Chain Council can put you in touch with the right company if you are looking for this type of service.

2. The special case of molds and customized tooling

In case the manufacturer needs to create/buy tooling that is customized for your product, the risk is that they themselves keep using your mold to supply (or become) your competition. Fortunately, you can implement a few tactics.

2.1 Ensure a mark is placed on your molds

In Dan Harris’ words:

Identify the heck out of your molds by etching or engraving (in Chinese) the fact that the mold is your property and, if possible, do this both where it is obvious (to deter others) and where it is well hidden (to deter those who might try to remove your markings).

2.2 Get the molds wrapped up between two production runs

At the end of the final inspection (before the goods are shipped out), the inspector can wrap the molds, use proprietary adhesive tape, and then place some type of seal or a proprietary sticker on the wrapping.

The importer then instructs the supplier to only unwrap the whole package when the next production batch is to take place — but before the unwrapping the supplier must take a photo of the whole package with the day’s newpaper next to it (just like terrorists do to prove that someone is still alive at a certain date).

This sounds a bit complicated but it is not that hard to explain if you show photos of an example.

2.3 Transfer the molds to a separate place between 2 production runs

If your supplier is not cooperative and you don’t trust them, it makes sense to transfer the molds out of their factory. It is not a simple process.

3. Other strategies to reduce risks

Depending on the type of products you purchase, it is probably possible to get creative.

3.1 Controlling some components

Here is an example (source here):

One of Sunningdale’s clients, Hewlett-Packard, only supplies them with a certain number of print-heads for the ink cartridges they make for the company.

Without an excess of that key component, there is no way Sunningdale can manufacture any surplus ink cartridges, Mr Chan says.

3.2 Find ways to encrypt important information on technical files

For example, I was told a German company places a code on each drawing. For example, a certain code means “add 7% on all measurements”.

3.3 Make it impossible for one component supplier to make the whole product

For example, design 2 parts that control each other. (Obviously this is feasible for certain products with embedded electronics but not for garments or classic furniture.)

3.4 Don’t show your designs to everybody on trade shows

As I wrote before, here are the strategies that two friends who have sensitive IP use on a regular basis:

  • One exhibits on a small booth at the Canton fair, and shows only his latest developments in silicon kitchenware. When people stop and show interest, my friend takes their name card, asks a few questions, and says “we’ll be in touch” (he takes the time to check them up before sending them photos, prices, and so on). And he makes sure no photo is taken on the spot. Two people can easily monitor a 9 sq.m. booth.
  • The other one exhibits on the toy fair in HK. They have a big booth, with a third of the space open to the public and the rest as a private showroom. Only companies they trust are allowed in the showroom where the really unique designs are displayed.

4. Make enforcement easier

Let’s say you found a suspicious case. Before you can try to enforce your IP rights, you need to make sure there is infringement.

4.1 Use smart labeling for traceability

There are now solutions for generating barcodes that can’t be copied. For example, a company called Scantrust gives its customers a software that detects whether their QR codes are genuine or were copied.

4.2 Alter the product in an unpredictable way

I heard of a cookware brand that adds a weird substance in the formulation of its products. There is no reason to include that substance… which means a product that doesn’t include this substance was probably made by an unauthorized manufacturer. A simple chemical test is sufficient to prove this.

5. Make the infringers’ lives harder

Now let’s say you are sure a certain company is copying your product (or your own suppliers are selling your products without your approval).

5.1 Using lawyers

Whether you have a contract or not with the infringer, a lawyer can frighten them (for example with a demand letter) or sue them.

5. 2 Complain to the retailer or distributor

For example, you can complain on Taobao and they usually take pages/accounts down quickly if you can produce the evidence they require.

5.3 Give information to your country’s Customs

In some countries, customs fight counterfeits very seriously. If you can get information about the importing channel that get the copies into your country and if you registered your IP, you might be able to block the containers.

6. If there is nothing you can do…

In some cases, the only solution is to accelerate the pace at which you launch new products. In other words, always be one or two steps ahead. We discussed this in a past article about the product life cycle.

What do you think? Any other strategies?

How to Prevent your Chinese Suppliers from Subcontracting

I wrote before that the vast majority of Chinese manufacturers routinely subcontract some orders. The problem is, they usually do it without disclosing the reality to their customer.

Why do they subcontract production to another factory? Sometimes it is a necessity to meet the customer’s tight deadlines. And sometimes it is a way to cut costs, by placing production in a cheap workshop that has virtually no control over quality. This can result in a quality disaster (very common), a PR disaster (if the goods are made in a prison, by kids, or in a place that burns down), and/or an IP rights disaster (when many factories are learning how to make your product and then start to sell it to anybody).

As a result, more and more companies made this practice forbidden. Think of Walmart and their “zero tolerance policy”, or Nike and their tough supplier contracts.

But how can your company prevent its suppliers from subcontracting? I jotted down some ideas below.

1. Work with the right people

This may sound a bit touchy-feely, but the factory owner(s)’s attitude is extremely important. If he is not motivated by your business and is very focused on his short-term financial needs, he will take short cuts. Even if the factory is large and very structured. Even if the owner is from Taiwan or Hong Kong. Make sure you are a good fit for the factory.

2. Know the factory’s capacity regarding your type of product

For example, a factory only has one line that can make your product and your order quantity will make it busy for 6 month. Or your peak buying season is the same as that of their other customers (e.g. they make BBQs for North America). This factory is probably not a good fit for you.

3. Don’t compress timelines in an unreasonable manner

If the factory needs 15 days to get all the components, and then 30 days for its own production, you can’t compress these lead times (unless, naturally, you show them how to plan and execute better). If you set a shipment date that can’t be pushed back and you hold production because some approvals are not finalized, you are placing the manufacturer in a position where they have to subcontract.

One useful tool is the production plan. You can request that your suppliers describe in an Excel file how many operators and how many machines will work on your order, for what daily output (if possible at the level of each process step), and for what ETD.

4. Challenge the reasons why they can’t produce faster

Very often, the owner wants to buy the parts from his friends/family. The better solution is to double- or triple-source the parts that have the longest order lead time.

Similarly, a simple value stream map exercise can show where the bottleneck(s) are located in their production. In many cases, elevating the bottlenecks is not complicated and not expensive. But the managers are often unaware of what holds their production numbers back!

5. Qualify and develop backup suppliers

If two manufacturers are ready to make your order, you have a good option in case your best choice is short in capacity. More details here.

6. Make use of legal tools

It is common to sign a contract that makes it forbidden to subcontract. If your contract is legally binding in China, and if some other customers don’t have such a contract, the manufacturer might think twice before subcontracting your order.

7. Monitor and enforce

Take advantage of inspections during production for two purposes:

  • Checking quality and catching issues early
  • Verifying that all production is taking place in approved facilities

For even stronger monitoring, conduct unannounced  factory visits.

8. Keep an eye on production inputs

Do you direct the use of some suppliers? This is an opportunity to get information (through these sub-suppliers) on the rate of ordering and the delivery address(es). If you don’t want to manage your supply chain this way, you can do it easily with some labeling/packing materials.

What do you think?

What IT System for Managing Quality Inspections to Choose?

I have talked with people from many different companies that employ an inspection team. The way their quality department is organized can differ a great deal. But some elements are the same across 98% of companies.

When it comes to technology, I see all kinds of solutions:

  1. Many companies use Excel spreadsheets and emails.
  2. Others make use of an existing all-purpose software, such as support ticket software, repair software, project management software, etc.
  3. A few have invested in custom development of their own IT system.
  4. Yet a few others have adopted a existing IT system that was developed specifically for quality inspections (one of which is our solution, Syncontrol).

Whatever technology is used, three areas need to be managed.

1. The planning

Some importers require their suppliers to book inspections formally (this is possible for large buyers, but not realistic for smaller buyers). Others push their suppliers for a date (this is obviously more time-consuming).

Ideally you have standardized conditions for suppliers to respect as well as booking forms and confirmation emails.

In case you subcontract some inspections to a third-party agency, you need to have a way to pass the information to them and get the confirmed information back in your system.

Finally, you need to allocate your inspectors in the most efficient way possible. Ideally you can have a view of the whole, with details per day and per area.

2. The technical information

Many people have told me that “QC inspections are not rocket science”. And I agree. Nevertheless, a quality manager needs to be able to adjust many parameters:

  • What items to group in 1 lot
  • What inspection settings (level, AQL limits…) to choose
  • What can be checked in 1 day of work
  • What inspector can be sent to check what products
  • What product information to give inspectors
  • How and when to send approved samples — and what they can (and cannot) be used for as reference
  • What checkpoints to apply, with what sampling
  • What equipment should be provided by factories vs. brought by inspectors
  • What potential defects to look out for, with what severity

3. Human resources

Inspector expenses can quickly get out of hand. Have you set up a fair set of rules, and have you got a way to verify its effectiveness?

Ideally, an IT system would also manage the following issues:

  • What are each inspector’s competencies?
  • Does each employee do a good job? Can they see a few KPIs relating to their work?
  • Is there a minimum level of rotation of inspectors among your supplier base?

Have I forgotten something important? Ideas/suggestions are most welcome!

How Much Does a Sourcing Employee in Shenzhen Cost?

Small importers — many of them Amazon sellers — want to focus on product development and marketing. They want someone in China to take care of production, and that includes finding the right suppliers and managing them on a daily basis.

Unfortunately, there is a big disconnect at three levels.

1. High cost

The buyer wants a sourcing agent with at least 5 years of experience in sourcing, good English, and some experience in quality inspection. However, people with this profile generally expect to earn 8,000-15,000 RMB a month. And they are not an expert in logistics or in drafting contracts.

Why are salaries so high? The minimum salary for a worker in Shenzhen is around 2,000 RMB, but a skilled worker earns multiples of this amount.

To be sure, some junior sourcing employees earn somewhere between 4,000 and 8,000 RMB. But very few of them are capable of managing a company’s sourcing operations end to end while making few mistakes. Don’t expect them to be respected by suppliers.

2. Opacity and hidden commissions

More than 90% of “sourcing agents” will get a commission from the factory’s side and won’t tell the importer about it. It is rooted deep in business practices here. The small agent in his apartment does it, and the largest trading company in Hong Kong also does it.

Not only does it add substantially to the importer’s costs, but it means the “agent” works for the supplier and will often defend the supplier! This is compounded by the fact that he/she will get much more face time with suppliers than with their employer/client.

Worse, sometimes the sourcing employee will find suppliers but will not disclose them to the importer. He/she actually becomes a trading company. This serves several purposes:

  • The importer is left in the dark and knows nothing about the supply chain. They can’t stop using the agent even if the price goes up very fast.
  • The buyer can’t even question the factory about the middleman’s commissions. It means the “agent” might make a 50% margin on some products.
  • The factory can’t communicate directly with the buyer and show that they are perfectly capable of dealing directly with export customers.

3. Legal matters

Paying an “employee” or a “contractor” in China without setting up a proper company here is illegal.

It may become a serious problem if your operations grow and you end up forming a Chinese company, as Dan Harris wrote in China’s Legal Landscape:

An American company will hire, say, three “independent contractors” in China. The Chinese government will come to the American company three years later and say, “What are you doing? You have three employees but haven’t paid employer taxes for the last three years or withheld employee taxes. We’re going to say that you’re doing business in China because you have these three employees, so you owe company income taxes. And by the way, employer taxes and benefit taxes equal, like, 40% of what you paid them in salary for the last three years. And we’re going to charge you interest and a penalty. And if you don’t pay, we will shut down your business here and we may not let you leave the country.”

It is also a problem if the “agent” steals your designs and sells them to your competitors. You will never be able to sue him/her in China, even if you signed a contract, since you were doing something illegal in the first place.

In some cases, the solution is to work with a professional sourcing agent that charges you for the time spent on your orders.

When this is not economical due to the small amount of your orders, you are better off taking care of the sourcing and procurement processes yourself. It is actually not that difficult. Make sure to find a good supplier, use an inspection company to confirm quality, and get a good freight forwarder to manage logistics.

Chinese Robot Manufacturing Industry: Don’t Expect Too Much

Best Quality & Sourcing Articles

Here are some good articles that I found over the past few months.

‘Made in China': the smart revolution blueprint set to bring Beijing into the digital age

After Germany’s “Industry 4.0″ strategy, China unveiled an equivalent document entitled “Made in China 2025″.

“The ambition is to turn China into a “strong” manufacturing nation within a decade, with the priority on digitalisation and modernisation of 10 sectors, including aerospace, railways, new-energy vehicles and new materials.” But are they really focusing on the right things in their development strategy?

Men of steel

Beijing wishes to see leading robot manufacturers appear in China. However, “of the 56,000 industrial robots sold in [China] during 2014, only 16,000 came from local suppliers”, all high-end automation systems are foreign, and Chinese equipment has a poor reputation when it comes to reliability.

Will Your Hardware Startup Make Money?

Based on a fictional new product launch, the author gives us a great breakdown of the typical costs involved in a “hardware startup”. It also illustrates that, in consumer electronics, volume is key to reaching profitability.

Factories Aren’t Dying To Take Your Order And Other Hardware Startup Follies

An investor reminds hardware startup entrepreneurs of a few realities regarding China manufacturing: many factories are not interested in spending months of development for a new and untested company; MOQs are often too high; it is best to audit the factory carefully and then to have a representative close by.

Free Resource: 40 Random Tips for Emailing China Suppliers

Most Chinese people prefer to use QQ or Wechat (instant messaging platforms) rather than email. They are just not very good at using email in a professional manner. To avoid long back-and-forth discussions, or worse misunderstandings, I highly recommend this free e-book from Jacob Yount.

Not Necessarily Signs of a Bad Supplier 

Jacob Yount lists 6 signs that are clearly unprofessional in North America or in Western Europe, yet that are common among good and bad Chinese suppliers alike. (By the way, I wrote before on this same topic here.)

Managing the Production Process in China – Part I and Part II

Fredrik Gronkvist wrote a good overview of the whole purchasing process with a Chinese supplier, for small oversea buyers.

China Contracts: Make Them Enforceable Or Don’t Bother

Contrary to what most businesspeople think, a carefully drafted contract can be enforced in China against a Chinese company. Steve Dickinson explains how to increase your chances of getting a fair trial.