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How can I be sure my China supplier is only selling to me, not to the public as well?

Posted: 2012-10-29

Full Question

How can I be sure that my China supplier is not selling via the internet or backdoor the products that I am purchasing? I want to be sure they are selling only to me and not to the public at the same price.

Answer

Based on my experience dealing with these issues in China, I would like to suggest you look at the problem from two perspectives.

  • Communications & Contracts
    Is the supplier clear about your position? Did they agree contractually?
  • Tools for monitoring the supply chain
    What actions are you taking to verify that the supplier is respecting the terms of your agreement?

Communications & Contracts

If you have not set up a Non-Disclosure Agreement/ Non-Compete (NDA/NC) clause, you can pretty much assume that the supplier is going to run extra shifts and try to sell products out the back door on line. This can cause significant gray channel problems for you.

So if you are serious about a NC or NDA, the first step is to have it in writing and under signature. Here is what my Chinese lawyer; Sophie Mao at ChibridgeLaw has to say about this topic:

No matter how well drafted, after all, NDA is a piece paper and can’t enforce itself. So do not expect too much protection from NDA. However, I still think NDA is necessary if any IP is involved. Beyond the obvious desire to state directly that IP infringement is forbidden, and thus letting the supplier know you are serious about IP, an NDA is a good tool to protect yourself if the following item is included in your NDA.
The NDA should specify the legal consequence of breaching the agreement. In other words, as long as the penalty is reasonable, liquidated damages provisions are enforceable in Chinese court and it will save you lot of trouble as it is hard to prove how much loss you have suffered when the IP is breached. So a pre-agreed remedy makes it easier for the judge to give a ruling in your favor.

More tips:

You want to avoid the supplier coming back to you a few years later saying they didn’t read it, or didn’t really understand your terms. Therefore

  • the agreement should be bi-lingual and simple
  • Go thru the key points in person; get verbal confirmation section by section. Sign off on each section.
  • Explain the benefits of respecting the contract. If you are a client that pays on time and are not too small of a buyer (in factory’s perspective), then they will think twice about risking your business.
  • Build into your budget the costs of a few international trips to the China factory to keep an eye on things and build a good working relationship with your supplier. If you can’t afford to travel on your own or don’t want to make the trip, and then get an agent to represent you.
  • Use these trips and communications to build up goodwill with your suppliers. If you are the “annoying client” who only talks to them when there are problems, you may find the supplier all too happy to sell your designs to another buyer.
  • If you have a brand or logo, PLEASE PLEASE register it in China AND your home market under your name. Registration is not expensive.

Tools for monitoring the supply chain

Once your NDA/NC is in place, you should “trust but verify”. Here are some tools.

  • There are third party investigators like CBIconsulting that will monitor your supply chain for infringement.
  • If you have members of your team who can read Chinese, check out sites like TMall.com to see if your product is for sale.
  • Pay attention to the supplier’s websites, trade show booth and such to see if your items are out in the public.
  • Have somebody you trust call up the supplier as a potential buyer and see if they offer to sell your goods.
  • If you have the products made with tooling/ molds which you have paid for and belong to you, visit the factory (or have a third party) monitor the tooling. If you paid for 100,000 units, but the wear marks on the tooling indicates 200,000 units….most likely you are getting ripped off.

Black Box assembly option

If your product can be compartmentalized, consider setting up a “black box” assembly operation. Essentially, the third party warehouse serves as a black box and quality gate. The components and even finished goods can be shipped to an Assembly/Inspection center where final assembly and final packaging is performed under a secure US management system but at local China labor rates. As the suppliers don’t see the finished product and assembly schematics, they are not in a position to knock off the product. Quality control issues are dealt with on-the-spot before goods are shipped out of China.

Here is a video about protecting Intellectual Property:

http://www.globalsources.com/ST/Videos/How-To-Protect-Your-Intellectual-Property.htm

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