Security of your IP is a great concern these days, especially if you’re manufacturing an innovative product that is selling well. For this reason, some businesses choose to ship their China-made components to the West and do assembly there. But could a China NNN agreement protect your precious product to the point where you can work with a Chinese assembler and make your products ‘at source’ which could provide certain benefits?
In this post, we’ll explore how an NNN (non-disclosure, non-use, non-circumvention) agreement could protect you in the case of assembling an innovative patent-pending product in China.
Assemble in the West or in China?
Your components are Chinese-made so one way or another you’re going to ship items from China to the West. While assembling your product in the West means that no one in China sees your full product or has access to its designs (assuming that your component suppliers are only provided with enough product information to manufacture their individual components), it could be problematic if components arrive with defects or at a lower quality level than expected.
In this case, returning them to China may be impossible or very costly and time-consuming. Also, you will likely have paid your supplier/s before they shipped, so trying to get a refund of some kind retrospectively will be very difficult.
So, what if you could work with an assembler/contract manufacturer in China and have the assurance that QC inspections could be performed on incoming inputs or full products before they’re shipped to you, vastly reducing the chances that you receive sub-standard products?
This would be convenient, but you’ve still got the issue of trust. Can you trust an assembler with your full product IP that they’d need to assemble the product?
Chinese businesses are savvy and take note of which products appear to be popular in the West. Therefore, if you go to the wrong company with your hot-selling product your risks are increased that your IP will be copied without authorization. By necessity, they will have the information about the bill of materials, and it would be easy for them to make a higher quantity and sell it to your competitors or customers through a backchannel (for example through another company owned by their cousin).
To be fair, though, there’s a risk of an innovative product being copied regardless of where you assemble it.
Your patent (for your main market’s countries) will be helpful, provided it is granted.
A copy may not be as ‘good,’ but could still cause you trouble
In many cases, the companies that will try to benefit from your market success will not make a product as nice as yours. Their product might be 50% cheaper and be of lower quality, however, you might struggle to compete with the cheaper ‘knock-offs’ as it becomes very difficult for your company to justify the price premium to consumers in such a scenario.
For example, one of our clients started selling an innovative accessory for cameras. It was CNC machined and the finishing was very good. They were undercut by a cheaper offer that used casting, with an inferior finishing and much lower costs.
What’s an NNN agreement?
A China NNN agreement is a more comprehensive kind of NDA providing three kinds of protection, namely:
- Non-use – the supplier cannot use your IP in any way
- Non-disclosure – the supplier cannot make public your IP or share with others (such as a friend’s factory, or via unauthorised subcontracting)
- Non-circumvention – the supplier cannot start making your products themselves and selling at a lower price to steal your customer base
Ideally, this will be in Chinese, be enforceable in China (use an expert in China business law to draft it), and would be agreed with your contract assembler before you provide any of your product IP to them.
Some tips for making the move to assembling in China
Let’s assume you have drafted your China NNN agreement (we have partners who can help you with this) and are ready to find a contract assembler in China.
Here are some tips:
- Chinese companies are notorious for leaking confidential documents to their friends, family members, etc., so you should vet your potential Chinese suppliers thoroughly before sharing the details of your product design to them to receive detailed quotations.
- Since you already have the list of components and their sources, you need to keep visibility over those suppliers. It means you can move away to a new contract assembler relatively easily. To achieve that objective, make sure you sign a manufacturing agreement with the assembler.
- Working with a Chinese-owned assembler is a bit riskier than working with a foreign-owned assembler so you need to decide if the risk is something you’re willing to take by weighing up the pros and cons. If your component suppliers always provide excellent quality and you have no reason to suspect that will change, perhaps you can continue to ship to the West and assemble there.
- As I wrote above, Chinese companies are usually only tempted to copy successful products. If you make batches of 1,000 pcs every 2 months, that’s not tempting for them. If you start placing batches of 10,000 pcs, that’s when it becomes dangerous. Therefore, it may make sense to place smaller orders with your Chinese contract assembler in order to ‘throw them off the scent.’
Any manufacturing or assembly of popular and innovative products comes with some risks. However, careful vetting and using an enforceable China NNN agreement should mean that you can work with a Chinese contract assembler in relative safety. You just need to put in the work initially to protect your product IP and find the right partner.
Have you had any issues with IP theft, or, conversely, worked with a Chinese assembler who has been a great partner? Let us know by commenting, please.