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.