How to Protect Yourself When Outsourcing to China

by Robert Moskowitz on September 9, 2013
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If you’re having your products made in China, or even just thinking about it, you’ll want to protect yourself from a few common problems that U.S.-based companies often experience there.

For example, U.S.-based companies like The Little Yoga Mat and 100% Pure have experienced a diversity of difficulties, from communications problems to quality concerns, in addition to the well-known danger of name brand fakes.

To make sure you don’t get hurt by such issues when dealing with Chinese suppliers, proactively protect yourself in these seven ways:

1. Ask for references and samples before you sign a deal. It’s extremely difficult to judge the reliability and skill of offshore manufacturers from afar. After you find a factory that you believe will meet your needs, ask for at least three references from companies like yours. Contact all of them.

Don’t merely query others about the quality of work you can expect from the manufacturer; make a point of asking whether the manufacturer has a history of respecting intellectual property.

Finally, before you commit to your first order, ask your potential manufacturing partner for samples of its finished work.

2. Avoid revealing all of your product specifications to one manufacturer. During the early phases of your negotiations, give your prospective partners an idea of what you want by providing a similar product from a competitor or an item that has key features in common with yours.

Even after you’ve found suppliers you like, help protect your complex products from being copied and sold elsewhere by enlisting different manufacturers to make your product’s individual components, then handle its final assembly in your own shop.

Unfortunately, this approach makes no sense with relatively simple products, like shirts.

3. Negotiate redress for any last-minute price increases. A common practice in China is for a manufacturer to negotiate a fair price for an order, then demand a higher price and/or insist on delivering a significantly different quantity of products in the 11th hour – perhaps 25 percent more or less than you asked for. These kinds of changes can wreak havoc on your business plan.

In fact, the manufacturer may count on you yielding to its demands precisely because you’re under pressure to fulfill your own commitments.

You can mitigate this problem by negotiating penalties in your purchase contract that make it unfavorable, or even unprofitable, for your offshore supplier to make such unilateral changes.

4. Haggle hard, if only to save face. As you near an agreement with your manufacturer, recognize the importance of appearing tougher than you may really feel.

Chinese businesspeople in particular will consider you to be naive — and perhaps take extra advantage of you — if they perceive you as weak or inexperienced.

Whether you’re negotiating through an agent or directly with a manufacturer in China, continue to demand transparency (for example: which factories will do your work), and your other preferences, right up until you sign the contract.

“Haggling over price is a clear rookie mistake,” says Leonard Kang, owner/operator of Christopher Lena, which imports from China about half a million men’s shirts each year. “Instead, haggle over what’s primarily important, such as delivery dates, quality, and subcontracting. Fixating on price alone will mark you as someone who can be manipulated.”

5. Pay for performance. One effective way to structure an offshore manufacturing agreement is to tie payment dates and amounts to the supplier’s actual performance. For example, if a batch doesn’t meet your specifications, or gets shipped later than your deadline, your contract should give you the right to pay a lower price or to delay your payments.

6. Guard against “quality fade.” As a manufacturing contract matures, there’s a tendency for offshore suppliers to cut corners, substitute cheaper materials, and otherwise lower their standards.

Be on the lookout for this “quality fade,” and build protections into your contract. For example, your written agreement should include detailed standards and specify what, if any, manufacturing variations will be tolerated.

Your contract should also give you the right to tour the manufacturing plant without advance notice and to inspect and approve or reject shipments as they leave the plant, not merely when they arrive at your location.

7. Get patent protection in every market you enter. As difficult as they are to enforce, patents are your primary defense against intellectual property theft worldwide. Having a U.S. patent is helpful, but don’t expect to enforce it in China or other foreign markets. Surprising as it may seem, offshore manufacturers are often allowed, by custom or by law, to reproduce your patented product and sell it elsewhere. To truly protect your property, obtain a patent for it in every foreign market you plan to enter.

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