In This Episode…
We explore product development agreements that clarify your expectations, protect your IP, keep leverage over your supplier, provide you with transparency and control over your supply chain, and make it 100% clear who is responsible for what when working with a supplier on developing a new product that is going to be manufactured in China or other Asian countries.
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✅ What is a product development agreement? A product development agreement is a written agreement that outlines who owns product IP, who performs product development tasks, and what the costs of this work should be. It is written to protect against the risks of your supplier retaining your product’s IP and supply chain information that they will be working on during the new product development process before production starts. These product development agreements are commonly used when working with suppliers in China, Vietnam, India, Taiwan, etc. Your engagement with the supplier will drive what agreement is used. For instance, if you are just white-labelling an ‘off-the-shelf’ product, then you don’t really have IP to protect, rather you’re basically distributing an already-designed product. However, the other end of the spectrum where a product development agreement is particularly relevant is if you have designed a rather unique new product that your supplier has not made before.
✅ Common risks that a PD agreement will protect against – You want to protect against the risk of the supplier pretending that your product belongs to them and selling it to competitors, or them working on some parts of the product development process and claiming ownership of the supply chain information like sources of components etc, as well as technical designs, source code, electronic layout and PCB design (for electronics). Finally, they only give you a sample prototype, but don’t release the rest of the information because ‘they worked on it so it belongs to them.’ You can see how not having access to this information could lock a buyer into using the one supplier which is not a great situation to be in if things don’t run smoothly later on.
This is why having written new product development agreements will dispel any ambiguity. If a supplier has worked on product designs, for example, they will make the assumption that they own this work unless it’s made clear that you will own it at the start of the project.
✅ Is working with a contract manufacturer best when developing a new product? This depends on the product type as there is a big difference between a simple product, such as a standard type of cable, and a unique flying car, for example! We have discussed the differences between OEMs, ODMs, and Contract Manufacturers before on the podcast. Here are some scenarios that illustrate where the different supplier types are relevant:
- Simple products where you require little in the way of changes: You can go to an ODM or OEM who has already made these and buy them directly.
- A product that is similar to something else on the market, but has a number of unique features or design attributes: An example here is a smartphone or tablet with some unique features you want to add. Going to an OEM who specializes in that product type is a better option than a CM, as a CM will likely need to develop and source everything from scratch costing more time and money, whereas an OEM can tweak their existing designs for which the cost has already been amortized, making them a more efficient choice due to their R&D and manufacturing expertise for this kind of product and existing designs and supply chain.
- New, unique product ideas which don’t have an existing equivalent: This is where working with a Contract Manufacturer is beneficial as they are used to sourcing, developing, and manufacturing products from scratch which is possibly required for a unique product as they will make everything transparent to you and owned by you, simply charging you for the work. Also, if you have concerns over IP protection for your new idea, OEMs and ODMs traditionally aren’t the best at treating IP confidentially and have form for developing innovative new products and then no longer picking up the phone once they have the full product ready to go. This can be mitigated by signing the right product development agreement with them, but there’s still more risk of them showing designs to someone who shouldn’t see them such as by subcontracting to factories they have a relationship with who were never approved by you.
✅ The anatomy of a product development agreement –
The three key phases that tend to be boiled down into the PD agreement (and manufacturing agreement in the case of industrialization) are:
- IP protection (PD)
- Supply chain information (PD)
- Industrialization (PD/Manufacturing)
A key component is IP protection, so discussing with a lawyer who is experienced with the laws of your supplier’s country is helpful here. Things can get pretty complicated, especially where ownership of IP is shared between you and the supplier. This blog post from China Law Blog explains this well: China Manufacturing and Product Type Chaos.
It should also cover the supply chain, outlining the desired level of visibility you require over the suppliers and sub-suppliers involved. The supply chain aspects are often forgotten over the technical aspects.
Industrialization is a key point to include, too. Lawyers tend to forget it. Product development is getting all the design engineering and supply chain setup done and confirmed with a ‘looks and works alike’ prototype ready and frozen product design. But you can’t go into mass production yet with a final PP sample or golden sample like this as the production process needs to be developed, tooling needs to be fabricated and validated, and the NPI process needs to be followed to confirm that the product can actually be made using the processes and materials, etc, and then products are checked, and finally shipped.
Examples would be tooling, where the main risks concern your IP and avoiding being trapped into using the one supplier, so that’s usually addressed in the development agreement. Whereas setting up manufacturing lines and testing jigs etc would probably be in the manufacturing agreement.
Whether these last points fall into the product development or manufacturing agreement will depend on the lawyer’s templates, but they need to be addressed one way or another.
✅ Key points that a development agreement needs to clarify – You need to clarify what kind of products are going to be developed, the scope of the agreement, confidentiality (often an NNN agreement has been signed but it can make up a part of the development agreement) assuring that suppliers can’t leak or reuse IP in ways that aren’t allowed, and who will do what (this will depend on the product type as you may work with a supplier who is a specialist and so it makes sense for them to perform the development work). In the case of developing a relatively complex new product where several parties may be involved, such as a design house, manufacturer, supplier of certain components or modules, etc, they all need to sign Product Development agreements (which may differ from part to party) outlining their responsibilities and who owned the IP, etc.
In the case of a fairly simple product where you go directly to a manufacturer who can do all of the product development for you, it’s important to get a development agreement signed as early as possible before sharing any information and starting work that makes it totally clear that you will own the IP.
A warning – Chinese suppliers will often perform product development and sourcing work ‘for free,’ but when you ask for the IP later on they will refuse to release it and claim ownership. This practice is assumed by them, therefore it is safer for you to clarify to them that this isn’t acceptable from the start.
✅ The difference between owning Intellectual property rights and the ‘deliverables’ – Deliverables include the 3D CAD drawings, BOM, etc. If you don’t have these deliverables, do you own the product even if you own the IP rights? You will not have control over changes to the product and the sub-suppliers your supplier has used. Your supplier will still have all of the control and, despite owning the IP, you will be trapped into using one supplier unless you do all of the sourcing and development again which would be very costly. The control and testing plan development and who pays for this is also something to consider covering, too. Therefore, the development agreement should allow for the ownership of deliverables, too.
✅ Retaining the ability to switch to another manufacturer as a worst-case scenario – If things go wrong having the ability to walk away is very beneficial, so guaranteeing your ownership of the IP required to do so is key. Creating and signing the right product development agreement is a part of project planning, and during the vetting process, you should have ascertained if the supplier is aligned with your way of thinking and can be trusted.
✅ Wrapping up – A quick summary of what the product development agreement is: It’s about setting expectations, keeping some leverage, and are legal tools to provide you with transparency and control over your supply chain.
Related content where you can learn more about product development agreements…
- How To Protect Product IP When Working With Contractors & Factories In Different Locations? [6 tips]
- How Far Does An NNN Agreement Need To Go To Protect Your IP In China?
- How To Create A Valid Manufacturing Contract In China To Protect Your IP
- China Manufacturing and Product Type Chaos
- International Manufacturing Agreements and the Questions We Ask
- The NPI Process [Podcast]
- How and Why To Switch Chinese Manufacturers [eBook]
- Sofeast’s partners (includes a specialist law firm)
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