One of the fears of many importers is that they train a manufacturer to make their products, only to see that supplier start to sell similar goods in competing distribution channels.
The ”Made in Asia” seminar (organized every year by the French Chamber of Commerce in Hong Kong) addressed this issue with a panel entitled “Suppliers today, competitors tomorrow”.
Paul Melkebeke, Vice President Supply Asia for Samsonite, explained his company’s situation in detail. Here are my notes:
- Building a brand and a distribution network is a long-term investment, and requires very deep pockets.
- Samsonite protects their IP rights by all available manners (patents, design registrations, copyrights, NDAs…), but it is not enough.
- They typically buy 50-70% of the output of the factories they work with.
- They help their suppliers gain in efficiency and improve their quality. They know that other customers (Samsonite’s competitors) using these factories will also benefit from these efforts.
- Many suppliers compare their FOB price to Samsonite’s retail price, and think it is all profit. Many of them start their own brand and push for distribution. But retail space is not cheap in China, and these companies are not expert at this game, so they end up losing money. So far, none has been successful.
- With the internet, there is no such barrier. But there is no way for OEM manufacturers to sell through this channel, except at a very low price. This is not the way to build a brand.
- For Samsonite, China is the second largest market after the US. Chinese consumers are ready to pay a premium price, and are “as picky as Japanese consumers”!
The conclusion is that Samsonite, in spite of helping their manufacturers improve, are not really hurt commercially by suppliers-turned-competitors.
However, companies with a weak brand, and in certain categories (e.g. electronics, where components and specifications are easily compared) are under a much higher risk.
As Mr. Melkebeke said, there are legal ways to keep suppliers in their place, even if they are not 100% effective. For those interested in reading more about this, have a look at what Dan Harris calls NNN Agreements (including non-disclosure, non-use, and non-compete provisions).
What do you think?
+++++ UPDATE +++++
Interesting and very thorough follow-up post on the China Law Blog on this topic: check out How To Stop Your Chinese Supplier From Becoming Your Competitor.
I think legal contracts are next to useless in most cases unless you are a Samsonite or an Apple. For SMEs, the only sustainable strategy is relentless innovation.
Yes, relentless innovation definitely helps!
Contracts may be difficult to enforce for smaller companies for China business, and probably most emerging markets. But I believe that you can enforce a ban of import in Europe and probably in the US as well if there are IPR infringement or clear contract infringement. By either banning import or going after the importer. But a lawyer will be able to be clearer on this
First, I fully agree that companies sourcing in China need to consider their suppliers as potential competitors. Contractual protection is important but insufficient.
We purchase a variety of auto/truck replacement parts in China and have used several tactical approaches to protect our hindquarters. First, we spread our business to multiple suppliers; for a given commodity we will dual source the high volume “A” movers and split up the “B” and “C” movers to individual suppliers. That way we haven’t tooled up a full line competitor. This adds a degree of overhead, and loses a bit of economy of scale…. but it’s the price of safety.
Second, if you are primarily selling B to B, it is important to have enough customers that your supplier would have a difficult time selling around you. When we first started we had one customer who
accounted for over half our volume; We were quite vulnerable. We have since built the business
so that our biggest customer is only about 20% of our volume. Now, the suppliers will find that if they try to skim the big accounts, they might gain 20% of the business but they will lose the 80% from us.
And, no matter what you do, you may still be exposed. We lost one supplier when one of our big customers decided to go direct to China; they purchased the entire company. Realistically we couldn’t
have prevented that… our pockets weren’t deep enough to buy the whole factory. Similarly, even if you have great relationships and trust with your key supplier, it only takes one key employee leaving to start his own enterprise to put you at risk. Stay vigilant!
Great tips, Brad. Thanks a lot.
I fully agree with your conclusion. When you outsource production, you lose some control over your supply chain. There is no way it is 100% under control.