How do you protect your product IP and business interests when doing your product development and manufacturing in Asian countries?
This is a common concern for entrepreneurs, hardware startups, and SMEs, and rightly so…after all, you don’t want to go through the hard work of developing your new product idea and bringing it to market over many months only to be undercut by copycats. You also want to control your project, and not have suppliers taking advantage of you if they have too much power over your project.
Here are 5 key pieces of advice for anyone who is concerned about this topic, so follow them for more peace of mind!
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1. Don’t let worries about being copied consume you and put you off from manufacturing in China.
Most copycat companies are those in your own country who see your idea online or somewhere else and then employ Chinese manufacturers to make a fast copy. The belief that copies are mainly from Chinese companies is actually unfounded. It’s true that some Chinese manufacturers look for hot new product ideas and quickly make a watered-down (shanzai) version of a product with cheaper materials and fewer functions, perhaps. This is uncommon in India, etc, because they don’t have as many manufacturing companies that have the ability or entrepreneurial skill to make quick versions. (03:26)
2. Don’t immediately take what IP and patent lawyers say at face value.
Speaking with lawyers when manufacturing abroad is wise, however, if you follow all lawyers’ advice to the letter you could spend tens of thousands of dollars on patents, trademarks, etc, before your product is even on shelves. The Apples of this world can afford that, but entrepreneurs and SMEs?
Here’s what you should be spending money on first… (10:59)
Doing market research and raising funds the smart/safe way.
First, start with some in-person market research to refine your idea and get an understanding of what price can be accepted.
Use the market research findings to iterate the product making positive changes based on the feedback, zero in on a certain demographic or interest, testing social media platforms to see which is most successful for the product, and collect all of this data and create a market research document to show to investors who will hopefully see that you have done your homework and that your project is less risky than others they might have seen. If doing this, hopefully, you can raise money from investors without needing to go through crowdfunding.
On the other hand, doing market research by putting your product on crowdfunding sites like Kickstarter, Indiegogo, and YouTube will increase the chances of being copied at this early stage, especially if you raise a lot of money – this will be noticed by Chinese companies and will be a signal to copy it.
If spending money on ads to raise awareness and funds, be careful not to price the product too low or you may not recoup what was spent on promotions.
Once the outside investors have checked your data and confirmed that your product has promise and is largely de-risked, then it’s worth speaking to the lawyers about steps to take to protect your product IP. (11:55)
3. Don’t get bogged down with questions about IP rights from investors.
Investors may ask you questions about how you are going to protect your IP when manufacturing in, say, China, and may show some concerns about copycats. But those who know how to launch a hardware startup successfully just want to know if you have a plan to protect IP. But just because they ask questions about things like patents doesn’t mean that you have to rush out and spend thousands of dollars on registering one. The right investor is likely to be far more impressed with you following a smart market research strategy (as explained before) to keep your product more hidden while still making progress and then going to them to raise funds for tooling and the other things that will get you into production. (21:18)
When to register trademarks?
They are much cheaper to register than patents and can be helpful, especially if you select a relevant and noticeable name. It would be wise to register them in both your own country and China (if manufacturing there). You can do this at an earlier stage than you would register patents (if you ever decide to patent products at all). (23:46)
4. DON’T add a category to your product name.
Adding a category to your product make that describes what it does is a mistake as it makes it easier to copycat your product and call it the same thing. Then users searching for your product will find the copycat products which no doubt are boosted by ad campaigns, influencer marketing, etc. The copycats will also probably be cheaper, too, driving customers to wonder why to spend more on yours. (24:29)
5. Use the right agreements.
Anyone you discuss your product in a decent amount of detail with should sign an NDA. Suppliers should use also sign NNN agreements to prevent them from becoming or enabling future competitors. If dealing with Chinese suppliers, use the correct template for agreements that makes them enforceable there – Chinese courts are unlikely to enforce foreign agreements, even if they’re correct and enforceable in your country. Hong Kong and Singapore companies will be bound by English common law, so your domestic agreement is probably OK (check with your lawyer).
When working with suppliers you need to have a product development agreement stating who pays for what, what milestones there are, validation and verification steps, who pays for tooling, will you be provided with native files immediately, who finances the project either in part or in full, what does the supplier get from the project, if anything. The ‘Western’ approach is that you pay a supplier, say a contract manufacturer, for the work that they do and that’s it – you own all of the IP, BOM information, product development work, etc. This means that you can leave and go to a new supplier without being locked in if you choose as long as you pay for the work your supplier has done. (This is the way we work with our clients at Sofeast and Agilian Technology our contract manufacturing subsidiary).
But the ‘Chinese’ approach is that they may not charge you for some things like product development which is good for your bottom line, but then they assume that they own all or part of the product IP and other deliverables. This means that you become partners and perhaps ultimately you are just a distributor of your own product idea which they have assimilated to become their own IP. They may also refuse to give you BOM information because they did the sourcing ‘for free,’ or even play tricks like pushing up prices knowing you can’t argue and leave easily, meaning that you are tied to them and can’t change manufacturers. Can you also be sure your product is compliant if you don’t know what is going into it, for example? This outlines the importance of signing an enforceable product development agreement. (27:11)
How agreements can help with supply chain transparency and protecting your business.
Agreements can help you to gain information about your supply chain from your supplier in Asia because you can specify that they must provide this information as one of the conditions of working with you. The need for enhanced supply chain transparency has come up in various European regulations such as the Ecodesign regulation that is part of the drive to manufacture more sustainable products; also in the USA’s UFLPA (Uyghur forced labor protection act) which aims to remove products that have been made in parts of Western China due to concerns over forced labor there. Obviously, US importers need to know that products don’t have any parts coming from that area of China. (34:03)
P.S. Related content…
- IP Protection in China when Developing Your New Product [Importer’s Guide]
- How To Create A Valid Manufacturing Contract In China To Protect Your IP
- Will A China NNN Agreement Protect Us If We Start Assembling Products There?
- Chinese Copycats: A Real Problem For Entrepreneurs?
- Exploring Product Development Agreements For Importers [Podcast]
- Correctly Using A Non Disclosure Non Use Non Circumvention Agreement [Podcast]
- How To Get Transparency And Control Over Your Supply Chain? [podcast]
- My Supplier Won’t Provide Important Supply Chain Information!
We are not lawyers. What we wrote above is based only on our understanding of legal requirements. QualityInspection.org does not present this information as a basis for you to make decisions, and we do not accept any liability if you do so.