“I want to keep my intellectual property safe. I don’t want to be copied, and I don’t want my supplier to appropriate my designs. How do I handle IP protection in China?”
That must be the number one fear of people who want to develop a new product, especially if they plan to have it manufactured in China. The trade of pirated and counterfeit goods amounted to nearly 500 billion USD in 2013 according to OECD (so must be far higher now), and stories involving theft of IP by a Chinese company are common, as we related in 10 Examples of China IP Theft.
IP protection in China is a complex topic. In this guide, we’re going to clarify where the major risks lie so that you can plan on mitigating them.
Two words of caution
- We are not lawyers, so we point to relevant articles written by lawyers when that add value. We have worked on many new product launches, and we are covering this topic based on our experiences as well as our clients’ experiences.
- We wrote this article/ebook about China because manufacturing a new product in China is so common. And we focus on electrical and/or mechanical products, where China is still a dominant player. We are not suggesting that Chinese suppliers are the only ones who may have the ambition of playing on the same field as their customers. For instance, look at how Taiwan-based Asus ended up competing with Dell.
The risks come from your own suppliers and sub-suppliers, and from outside your supply chain.
And your IP is at risk when you are developing your product, but could be at even more risk later once you place large orders.
Here are the most common types of product IP risks and issues we have seen:
Risk Profile 1: Being copied early in the product’s lifecycle
That can be particularly damaging if you count on generating ‘buzz’ about your product launch. If you already have a competitor, or, worse, if your copycat is already on the market before you, the conversation is quite different.
1. Being copied early from within your supply chain
A supplier sees your product, believes it will be successful, and starts selling it independently
When a supplier knows their market well, they can be tempted to appropriate the unique and promising designs sent to them by inventors. That’s not very common, except with ODM suppliers (more about them below).
In some cases, the supplier reaches out to some of their customers and asks for feedback – pretending they had the idea and produced the designs. If a big customer promises to place purchase orders, the unfortunate inventor is left in the cold.
Generally speaking, in China, companies very seldom copy a concept if they don’t see evidence of market traction. However, if you set up a Kickstarter campaign before you get into mass production and you end up raising large amounts of money, your supplier will see the market will be buying the product as fast as you can make it. And they can slow things down for you, while they prioritize another distribution channel. You are putting your project at risk by creating such temptations!!
An employee (yours or your supplier’s) takes your idea and tries to get to market with it before you
That’s not very common, but it may happen.
On the innovator’s side, it is more likely to happen if an employee has an idea that is turned down and decides to pursue it on his/her own, but then the damage is not as great (since it’s not really a copycat).
On the supplier’s side, there is little limit on what an enterprising salesperson might decide to do on their own. It is a risk, but we can’t remember any instance of this happening. Probably because convincing another factory, or getting financing to get through the development & manufacturing, is not easy at this stage.
Other sub-suppliers and parties in the supply chain take the idea and try to compete with you
If your whole project hinges around a critical component, for example, an advanced and specialized camera module, that component’s supplier might like your idea and launch it by themselves.
There is also a risk with the contract designers and engineers you may rely on to get some of the work done. Let’s take an example.
A Spanish client designs its own toys and collectables. They noticed that a network of small retailers started selling their new collections systematically before even the collections were officially launched (with expensive TV ads etc). They never found if the leakages came from their company, their supplier, the toolmaker, or the company preparing the clay prototypes, but they suspected the latter.
We cover the legal Tools that are likely to reduce your risks later on.
Certain suppliers have a deliberate strategy of attracting customers with an innovative product in order to copy it
Beware of the low-priced manufacturer who makes certain promises to tempt you to work with them (especially if you aren’t using a watertight manufacturing contract). As Dan Harris makes clear on China Law Blog:
In the last couple years, we have seen a massive increase in Chinese manufacturers taking on new customers with the SOLE intention of selling the products of those new customers. We are seeing a large increase in Chinese manufacturers low-balling their pricing to lure in foreign companies simply to flip around and steal and start selling the foreign company’s product. If you are getting manufacturing pricing that is too good to be true, it probably is and you are probably dealing with a manufacturer that wants your business just so it can steal from you. And as we mentioned in the email above, once the Chinese manufacturer has gone to market with your product, it will usually increase your pricing sky-high or simply refuse to make your product for you any longer.
2. Being copied early from outside of your supply chain
Someone sees your online presence (Facebook ads, website, etc) and copies your product
Some companies, many of them in Shenzhen, have specialized in scanning the market for hot new products and releasing a cheaper version of those products within a few months.
Here are some examples of products that were copied by copycats checking the web and market for innovative products…
Flip ‘n’ slide mousetrap
We covered such an example, the ‘flip n slide mousetrap’ (made in the USA), in this article. You can see it and some of its copycats here:
You may also remember the executive desk toy, the fidget cube. This is another product that got copied in China and was on sale before the entrepreneurs who’d invented even managed to get to market themselves:
Stikbox selfie stick phone case
Traditional selfie-sticks aren’t rare, however, one inventor with an innovative integrated selfie-stick phone case idea who’d launched his Stikbox concept on Kickstarter was shocked to see it on sale before he’d even found a manufacturer and was even criticized by consumers for pricing his original product higher than copies were on sale online for!
What can you do to combat copycats like this?
There’s not much you can do about this, unfortunately. As the article about the Stikbox makes clear:
Startups and foreign manufacturers are embracing a new reality—someone in China is going to make a knockoff of your unique invention, almost immediately. All any company or entrepreneur can do is prepare for it.
A trademark may not help, as they usually pick their own brand name. A patent can help if it is granted, but that’s not always an option.
If you can manage to keep your product “under the radar”, your risks are lower.
Someone sees your product on Kickstarter, Indiegogo, etc and copies it from there
This point is quite similar to the previous one. Let’s illustrate it with an example:
An American client of ours developed an innovative accessory for photographers. It was CNC machined with a high-quality finish. A Chinese company saw their crowdfunding campaign and came out with a similar but inferior product. They used a casting process instead. Their product’s finishing aspect was poor, but the price was half of that of the innovator’s offer. Many comparison videos appeared online, and the copycat took a lot of business away from the innovator, who eventually could not make a profit and withdrew from the market.
Here, again, the risks come from China but the fact that you manufacture your product in Europe or in the USA will not protect you.
Risk Profile 2: Being copied later on in the product’s lifecycle
Let’s face it. If your product is successful, sooner or later some other companies will join the party. Naturally, you want them to join as late as possible, and you want their products to be as different from yours as possible.
1. Being copied later from within your supply chain
Suppliers are attracted by your growing volumes and they try to find out who your customers are so they can undercut you
This can take several forms, from ‘troublesome’ to ‘disastrous’.
First, it can be a mild threat. In many, many instances, we noticed that a supplier showcased their customers’ products openly. It might be in a trade show (very common) or online (in many cases, a customer’s own photos are re-used by the supplier). It is not very risky, as the worst that usually happens is a request to pull out those photos/samples and an angry clarification by the customer.
Second, let’s look at the way it can hurt the customer badly. The temptation is sometimes very strong for the Chinese supplier to bypass the importer in a more active manner, with a much higher risk. The supplier hopes to make a much higher margin. By looking naively at the selling price, they can conclude that they can raise their margin from 5% to 50%…
The temptation is sometimes so strong that they put the whole relationship at high risk. In The Danger of Developing your Custom Product with an ODM Factory, China legal expert Dan Harris described it neatly:
When they claim “there is no chance our Chinese manufacturer will ever be able to compete with us.” I often give the following example:
We had an outdoor equipment manufacturer (“USA Company”) come to us after its Chinese manufacturer (“China Manufacturer”) had stopped making outdoor equipment for USA Company. China Manufacturer had not only stopped making outdoor equipment for USA Company, but it had also registered USA Company’s brand name as a China trademark in over a dozen different categories/classes (this was before China prohibited this sort of thing by agents). China Manufacturer’s plans were to sell the outdoor equipment to the two large hardware store chains to whom USA Company had been making the overwhelming bulk of its sales.
China Manufacturer completely struck out in its efforts to sell its own products to the two large hardware store chains. China Manufacturer went to those chains and offered to sell its product for about half the price of what USA Company had been charging, but both hardware chains basically threw it out because China Manufacturer had no plans and no ability to maintain constant stocking of the products and no plans and no ability to repair the products and no plans and no ability to handle returns and other customer service needs. China Manufacturer’s plans to sell directly into the US market were essentially a joke.
Nonetheless, China Manufacturer had done huge harm to USA Company’s business. USA Company had to scramble to find a new product supplier (it succeeded) and it also had to figure out how to get its products manufactured and shipped out of China without violating China Manufacturer’s trademarks (it did, by securing a trademark for small engines and then prominently plastering its name on the small engines of all of its outdoor products).
The moral of the above story is that you cannot count on your Chinese manufacturer not trying to compete with you even if doing so makes no sense at all.
2. Being copied later from outside of your supply chain
A manufacturer sees your success in the marketplace and decides to compete directly with you with a copycat product
Let’s say you start as a small customer. Your order sizes increase over time. They reach 5,000 pieces, then 10,000 pieces. It’s obvious your product is selling well. That’s when some Chinese manufacturers (of your whole product, or of a component that is part of your product) may start searching for your brand online. They might look for your selling price. They might wonder what distribution channels you use.
If the path to selling your product seems relatively straightforward, you are running the risk of seeing your supplier become your competitor. In many cases, they are so naïve they think they can keep your product unchanged, including your brand name. In other cases, they believe there is no harm in selling your product in countries where they assume you are not selling.
Your suppliers are, very probably, not one of the companies I described earlier (specializing in copying hot new products with very short lead times). They need a good dose of explanation of what you consider acceptable and unacceptable. And, of course, you need a legal agreement, as we covered below.
Another company in your country decides they want to compete with you, selling the same type of product
In many cases, other companies in your own country are those who copy your product. They might have it made in China, but they take the initiative and they are pulling the strings.
For example, a few years ago, one company in the US asked us to look for a supplier of a specific type of boots (originally developed by another US company, who had no patent). Then, one year later, yet another company in the US asked us to look for the exact same type of boots. They were all trying to copy the same brand, who got copied by more and more competitors — most of them based in the US, it seems. In addition, one of the copycats ran into an issue when their Chinese manufacturer registered their trademark in China. After all, they saw their customer was not very respectful of other companies’ IP rights…
Furthermore, if you sell on Amazon and are successful, some software applications will show your product as a “hot product” to go after. It’s even possible to know what keywords you target, so your competition can rank for all the exact same customer searches as you!
If you optimize for rankings in Google, some services such as ahrefs.com will give an estimate of your traffic and will show competitors what their best options are to rank next to, or even ahead, of you. Not to mention, anybody can pay Google and show an advertisement at the top of the search results page to people who search for your product name — even if you own that product name’s trademark!
As a result, it is easier than ever for a copycat product to invite itself into the discussion you are having with your customers…
An unscrupulous customer tries to get a cheaper version of your product from elsewhere.
We saw this a number of times in the apparel space. A retailer sent a team to the Canton Fair, looking for a specific product in the hope of bypassing the importer. Note that, in many cases, the retailer had no idea who owned the product’s IP rights, so they are not misbehaving.
Legal Tools for Reducing IP Risks
If you make good use of the right legal tools with the right parties at the right time, you reduce your IP risks. Be sure to seek legal advice before proceeding with a Chinese supplier.
We wrote a general overview of the points that we feel are most important for IP protection in China, based on our past experiences.
Labor contract with your own staff
Make sure all the people working in your company sign an agreement about IP ownership – you pay them, and all their ideas and design work are your company’s property.
In particular, that can be an issue when you work with contractors who do some design or engineering work for you.
Basic due diligence on potential suppliers
Many American, European, and Australian companies make a simple mistake: they start discussing their product and sharing IP with potential suppliers – often found on Alibaba.com, MadeInChina.com, GlobalSources.com, or a trade show, without verifying that company.
In many cases, they end up working with a 3-person trading company or a tiny manufacturing company. That might be a good fit for your project, of course. Or it could be a source of ongoing concerns and frustrations. Remember, a small company that has very little to lose is more likely to engage in fraudulent activities, and it may not have all the engineering resources you expect.
Non-disclosure, non-use, non-circumvention agreement with each potential supplier & consultant
You are probably used to signing non-disclosure agreements (NDAs) in your country. When dealing with Chinese suppliers, re-using your existing template is often useless for two reasons:
- It may be unenforceable – ideally, it calls for litigation in China based on Chinese law;
- A supplier may keep your IP to themselves (no unauthorized disclosure) but use that information to compete with you.
In addition, sending your IP to many potential suppliers – even if they sign a very good NNN agreement – is dangerous. Some suppliers have no concept about the need to restrict the sharing of your confidential information! So, you should do your basic due diligence first and only share your IP with a few parties you have vetted.
- China NNN Agreements by Steve Dickinson
- 28 Problems Due to Information Mishandling by Chinese Suppliers
- Stop Your IP and Key Information from Leaking when Manufacturing Overseas by Steve Dickinson
- Will A China NNN Agreement Protect Us If We Start Assembling Products There?
Development agreement with manufacturer(s) and consultant(s)
As I mentioned above, if you pay for design/development work, you probably want to ensure you own the resulting intellectual property. You want to have the freedom to work with any manufacturer to have that product made. You want to have the latest versions of the design files and the bill of materials in your hands. You want the consultant or manufacturer to have the capability of doing what they are tasked to do.
All of these are very basic requirements, and yet Chinese companies often have a different understanding. For example, they might do the component sourcing for free, but they see the result of that work (the bill of materials) as their own.
In addition, Chinese suppliers are used to working without documented agreements, and that has a lot of implications. They might subcontract some of the work, such as writing the firmware or designing & making a mold, and their subcontractor might refuse to give them the corresponding source code or the 3D drawings.
To prevent such divergence of understanding and expectations, a product development agreement is a must-have.
Related article: China Product Development Agreements by Steve Dickinson
Manufacturing agreement, often called OEM agreement
Let’s say you have done a great job clarifying who owns the IP rights, you have all the engineering files in your hand, you can pull the tooling at any time, and so forth.
You still want a contract that governs your ongoing relationship with your supplier. The manufacturing agreement covers the most common scenarios and risks.
- Overseas Manufacturing Contracts (OEM, CM and ODM) by Dan Harris (note, the definitions we usually employ for ODM vs. OEM are different, as you will see later on)
- How To Create A Valid Manufacturing Contract In China To Protect Your IP
Trademark in the countries of sale
You don’t want anybody else to make use of your brand elements. You will probably not forget to register your trademark, as soon as you have decided on your product name & logo.
Most innovators do this well. And savvy companies that will try to copy your product, and that have a good chance of making a dent in your market share, will often assume you have filed for those trademarks, as well as some copyrights. They will typically come up with a not-very-good product name and not-very-good marketing copy, as well as a not-very-well-finished product. They will usually count on their much lower pricing point to steal the market from under your feet.
Trademark in China
Even if you don’t plan on selling in mainland China, you probably want to file for a trademark in China. This way, no other company can prevent you from manufacturing or shipping your products.
It’s possible to record your trademarks with the Chinese customs authorities. Subsequently, every time goods with your trademark clear customs when being exported from China, China customs write to you to confirm if these goods are being sold by the trademark holder. If not, the customs will seize the goods in order to protect the legitimate manufacturer.
Another benefit is, it allows you to go after counterfeiters in China.
- How And Why To Trademark In China by Fred Rocafort.
- How China Trademark Licensing & Customs Recording Protects Your IP by Angel Ho
If your product is innovative to the point where you can be granted a patent, that’s a great opportunity and it will reassure investors.
However, it is typically very expensive, so you should probably wait until your product development is over (or close to finished) and go for a provisional patent for your main target market first.
I remember a friend told me about a case where a startup worked on a prototype and filed a patent for it. Then, they worked on the second prototype and, again, filed a patent. They did the same for the third prototype. And for the fourth prototype. And they ran out of money for their project and had to fold.
Don’t go to that extreme! Set a realistic plan for your new product development and work with a lawyer based on that plan.
Related reading: New Physical Products: Patents Should Come After Market Success
Choose your market strategy wisely (upmarket or price-competitive?)
We have seen two approaches that can work well.
- Position your product upmarket
- Be price-competitive from the start
Both have their pros and cons.
Position your product upmarket and defend it
Many people look at great success stories like Dyson and want to emulate them. By being the first to launch a very differentiated product (e.g. a bag-less vacuum cleaner that doesn’t lose suction over time) and patenting the technology behind it, you position your brand in the consumers’ minds and you keep that high-end image (and the margin that goes with it) for a long time.
The same thing applies with the iPhone vs. Android — the iPhone was first, and Apple of course positioned it as a premium (sometimes even luxury) product against the cheaper Android headsets. Fast forward to today, and Apple is making most of the profits on that market.
However, this strategy doesn’t work well in small markets, or when the gap for would-be followers is not very high.
Some other companies copied both Dyson and Apple, who had to pay an enormous amount of money on legal fees. It nearly killed Dyson’s venture. Enforcing your IP rights in different countries sounds good, but sometimes it is not realistic for a company that is launching its first product. That’s especially true if you are facing not just 1 but 3 copycat products…
Be price-competitive from the start
An obvious advantage is the lower allure of copying your product. The margin is not very high, so why go and fight in your market?
And, if a clone shop does go after your market, the price difference will probably not be very large, which means your superior marketing (including message sophistication and your positioning as the inventor, but also your ability to target the right niches on your target market, your ability to get distribution deals, etc.) can help you make the difference.
However, it is not very easy to pull off, mainly for two reasons:
1. Not making much margin is very dangerous. You will need more capital to start mass production, and you are likely to have more orders (which means more production is needed, which means higher production runs and more capital are needed). You will still incur marketing/distribution costs, you may have to finance returns and stand by your warranty, and so on. Many hardware startups make the mistake of underestimating how much margin they need just for their project to break even.
2. You probably need to do very good design for assembly (DFA) and design for manufacturing (DFM) in order for your unit costs to be low. And, similarly, you will need to design for reliability (DFR) in order to minimize your warranty costs. All that slows the product development down and costs more (it is ‘non-recurring engineering’ and it needs to be financed).
One way around that is to release a simple version of your product in small numbers on your market and to finalize your more advanced version (on which you will make a higher margin). Each situation is different, so think carefully about this…
Selecting a supplier with the right business model for your needs
First, let’s clarify what we mean by ODM, OEM, and CM factories:
- Original Design Manufacturer (ODM): the supplier has already developed a product and has been manufacturing it. They own the engineering files and the tooling (if any). An innovator can show them a way to improve on an existing product, and the resulting intellectual property cannot be fully owned by the innovator.
- Original Equipment Manufacturer (OEM): a factory that specializes in making a certain type of product. An innovator sends them design files and requests the OEM to work on developing and industrializing that design. With the right agreement, some/all the IP rights can belong to the innovator.
- Contract Manufacturer (CM): will also work on designs from a customer; is generally not specialized in a specific product type; is more likely to charge for technical work and for setting up the supply chain; is much more likely to let the customer own the IP rights.
Working with an ODM can be very tempting, as they might already have developed a module of your product, or a product relatively similar to what you want to launch.
It also comes with very high risks that you need to be aware of. They might see you as a free source of great design suggestions. They might get you to provide critical user feedback on their prototypes until they decide you have outlived your usefulness, at which point they stop communicating… while they are getting your product idea into production for their other customers.
At the other end of the spectrum, working with a CM involves much lower risks, but you will need to finance all the engineering work, the qualification of suppliers, and the tooling. More control doesn’t come cheap.
Requesting quotations safely
After you’ve found a supplier make sure to ask for quotations in several steps. The safest path in the context of IP protection in China is usually this one:
- Do the engineering on your side
- Make a few small changes to the custom parts and ask for initial quotations based on those revised drawings (from which nobody can infer what product you are about to make)
- Sign an NNN agreement
- Keep working on vetting the potential suppliers
- If all indicators are green, share the exact drawing/s with your “best choice” supplier
Finally, once you are working with a supplier and if you have suspicions, you may want to ‘test’ them. You can create a fake buyer identity (with a made-up logo, a made-up website and email address, etc.), contact your supplier, and ask if they can make the same product for you. You can gauge their reaction…
Compartmentalizing the supply chain
If all the suppliers of critical components (custom plastic parts, PCBA, battery, packaging…) all know each other and know what the end product is, that might not be in your best interest.
On the positive side, they will be more likely to make the right decisions. For example, we worked on a high-end headphone that combined wood and plastic parts. If the glue supplier knows everything about the project, they are more likely to suggest a type of glue that allows the plastic to be bound to wood.
However, there are several drawbacks, too:
- Some suppliers might think “this type of product sells for a high price” and charge more for their components.
- A supplier might see the high market potential and might be tempted to take advantage of the development work they do for you. They might collude with your other suppliers to resell your product on other markets…or even to your competitors or directly to your customers.
- Letting a supplier ship the goods out can lead to giving that supplier many temptations to circumvent the innovator. For example, if you let your supplier ship the goods to your company in the USA, anybody will be able to see who your supplier is with a simple search on a website like Panjiva or ImportGenius.
How to double down on IP protection in China and make sure all the different parties don’t know the full story?
The most common approach is to rely on an assembly center that puts it all together. If your product is simple, it might just be a kitting, inspection, and testing operation. Outsourcing to an assembly center with an export license provides these benefits:
- If you employ the strategy of relying on an assembly center to isolate the specialized component suppliers and keep them in the dark, the assembly center will typically be the shipper.
- You can work with your freight forwarder to ensure the forwarder’s name is on the bill of lading. (However, be careful, as some large service providers such as forwarders and auditing agencies resell their data.)
But then, it also means the assembly center will know who the component suppliers are, and what the end product is. So, as with manufacturers, you need to qualify them carefully. As we wrote above, a contract manufacturer will provide you with more control at this point.
The concept of the ‘black box’ approach to manufacturing/assembly
When an assembly center or contract manufacturer receives your components from various suppliers without them knowing the full details of your complete product, perhaps not even who you are (if the assembly center/CM buys on your behalf), and also not seeing who else supplies you at the same time, this is a ‘black box’ manufacturing/assembly approach.
The assembly center, as mentioned earlier, is aware of your company’s identity and product IP, but your sub-suppliers are never exposed to this information. That can be a powerful tool for protecting IP when manufacturing in China.
Here’s how this works:
How about working with an assembly center outside of China?
You may want to have that assembly center outside of China. However, there are pros and cons to this approach, too:
- You may feel much safer if it is in your own country. However, remember that there are China-based, non-Chinese-owned contract manufacturers, so you can still take advantage of China’s wages and keep your risks low.
- If some of the components are custom-made, there is a high risk of quality issues. Finding out about them while the components are still in China is a big plus. Sending defective goods to China is far from easy.
- If the assembly is done in your country, and if the transformation is sufficiently substantial to allow the product to be declared ‘made in [your country]’, that may give you a solid marketing advantage. However, remember that your supply chain will still be impacted by issues in China since many/all of your components come from there.
Additional IP risk-reducing strategies
In addition to selecting a supplier with the right business model to suit your needs and compartmentalizing the supply chain to minimize the risks of IP misuse, there are a few other risk-reduction strategies you might consider to bolster your IP protection in China:
1. Keep control over the number of critical components being distributed to suppliers and sub-suppliers.
By only providing them with enough to fulfill your order, they’re limited from producing extra that could be sold elsewhere.
Here is an example of this in use by electronic giant HP (source here):
One of Sunningdale’s clients, Hewlett-Packard, only supplies them with a certain number of print-heads for the ink cartridges they make for the company.
Without an excess of that key component, there is no way Sunningdale can manufacture any surplus ink cartridges.
2. Use a unique way to encrypt important information on technical files that restricts access to viewers who don’t have the ‘key.’
For example, a German company places false measurements on each drawing and includes a code that means, for example, “add 7% on all measurements”. Viewers without the code will not be able to replicate the parts easily.
3. Chinese copycats will struggle to copy your product’s app.
If your product includes electronic parts and if a key part of your customers’ experience comes from a customer-facing app, the typical Shenzhen clone shops will have a much harder time replicating that experience.
4. Alter the product in an unpredictable way that copycats won’t consider.
An example of this is a cookware brand that adds a special substance to its products that serves no purpose other than to demonstrate its authenticity. This means a product that doesn’t include this substance was probably made by an unauthorized manufacturer. A simple chemical test is sufficient to prove this.
5. Provide an essential part of the product from another country.
Take e-cigarettes & vapes as an example. The hardware is usually made in South China, whereas the flavor substances are usually made in countries like the USA or Italy.
6. A complex product isn’t always the best protection.
Some people suggest that making a complex product is a good thing, as it will be harder to copy. We don’t agree with that advice, which in most cases is detrimental! Going for harder tech just for the sake of making it harder to copy also means taking much higher business risks before you get to market. If you run out of money before you can even complete your product development or before you launch, of course being copied is no longer a risk to worry about…
7. Don’t be overly slow and keep developing the next version.
Otherwise, you will always be running after the copycats. You want them to keep running after you, instead.
8. Smart labeling can be used to enhance traceability.
Software exists to create barcodes that can’t be copied. For example, a company called Scantrust gives its customers software that will confirm whether their QR codes are genuine or counterfeit.
Special Case 1: Tooling
Innovative products often require custom tooling, for example, molds for parts made by plastic injection, metal casting, extrusion, and so on. By “tooling” we also include the PCBA testing rigs, assembly fixtures, go/no go gauges, and other types of tooling that have to be custom-made for your production.
The tooling probably embodies an important part of your IP rights. You don’t want other companies to have access to it. You need to protect it.
The first questions to ask are, ‘where is the tooling designed?’ and ‘where is the tooling made?’. If a specialized tooling shop is involved, that’s one more party that can leak sensitive information. Have they signed a NNN agreement and a development agreement?
In the end, if your supplier chooses to work with a tooling shop, they should be accountable for what happens. You need to ensure a legally enforceable agreement gives you the right to pull the tooling at any time with minimal lead time, among other important conditions.
The buyer may want the manufacturer to “be a partner” and to invest in tooling. In that case, who owns the tooling? Can the supplier re-use it for other customers? Can the buyer pull it? This can be a very complicated topic.
Once the tooling is made, the main risk is that the supplier re-uses your mold for other customers without your authorization. It reduces the useful lifetime of the mold and it is an unapproved use of your IP.
There are several ways to reduce that risk.
The most common, in addition to signing a manufacturing agreement that covers this topic, is to add your brand and/or product name inside the mold itself and to work with a service provider (or your assembler) to take custody of the tooling between 2 production runs.
Special Case 2: Electronic Products
If your product includes some electronic parts, there are a few important considerations to keep in mind.
You need to keep the following elements confidential:
- The design files (PCB layout & schematic)
- The BOM (list of components)
- The firmware
- If there is a user-facing app: all the related code, as well as the cloud server settings
From there, companies that develop a new electronic product often ask certain questions, such as:
How to make sure we have the latest versions of the design files?
(Answer: to reduce your risks, you need to work with the right people and you need a development agreement with them. To double-check, you can verify if the latest change in design is reflected in those files.)
How to make sure the product cannot be easily reverse-engineered by looking at the components?
(Answer: that’s a very complicated question. You can try to hide/obfuscate the components. If you buy very large volumes, you can probably request that some component suppliers don’t add any marking.)
Are there any radical ways to hide the components, for example by putting the PCBA in epoxy?
(Answer: adding epoxy does make it harder, but there are ways to remove epoxy, for example by using thermal shock. The most radical approach is to have the assembler grind the markings off.)
The PCBA supplier will see all the components used; how to reduce the risk that they get tempted to compete with us?
(Answer: as we mentioned above, you can compartmentalise your supply chain so that the PCBA supplier doesn’t know the function of the product. If they have no idea what the end product is, the temptation is much lower.)
How to prevent the PCBA supplier from getting their hands on the firmware code?
(Answer: the firmware, in its compiled form, is very hard to decrypt. And the firmware can be flashed by parties other than the PCBA supplier — by a component supplier or by the assembler, depending on the production quantity. Besides, the most valuable IP is generally in the software/application, rather than in the firmware.)
Do the manufacturers need to know how the software/application works, for example, the code on our cloud server or in our mobile application?
(Answer: it is good that the final assembler knows what the product’s functions are, and it is good if they can run some tests that replicate typical usage. But you don’t need to have them see the software code.)
Can you add the last piece of firmware by yourself, and let the manufacturer add only what they need to test that the product works well?
This is a way to ensure only you have “all the pieces of the puzzle”. However, it comes with a downside — the manufacturer may be unable to conduct certain tests and may not detect certain issues.
Why is China so often associated with theft of intellectual property?
Simply because it is prevalent there. There is a deeply held belief that there is no harm to society at large if innovations are made available to people at a lower cost. This can justify all types of infringement, all the more so as the infringers don’t particularly fear their own legal system.
How did it get to the point where Jack Ma declared: “the problem is the fake products today are of better quality and better price than the real names”?
To understand why let’s look at the Chinese term “shanzhai / 山寨”.
Since the early 2000s, it has come to describe the act of copying an innovative product with a mindset of “there is no such thing as proprietary IP, let’s grab all good ideas that we can sell on the market.”
In some cases, the counterfeiters displayed creativity and ‘improved’ on the original product by adding features they thought their domestic market would value. That’s probably what Jack Ma had in mind.
In most cases, though, shanzhai products are inferior copies that sell at a much lower price point.
And how can some Chinese companies, often located in Shenzhen, reverse engineer and launch copycat products very fast?
Let’s look at another Chinese term — “Shenzhen speed” (深圳速度). In the early 1980s, skyscrapers were built at a pace of 1 floor every 3 days. The whole city took pride in the speed of its construction sector and in other avenues of life. As the city where fortunes were made the fastest, Shenzhen attracted the most ambitious people from all over the country. With very few “locals”, people were not entitled. They had to work very hard and make their own success.
Today, a product designer can find hundreds of thousands of hardware components in stock, ready to be put together into a prototype. The supply chain in the Shenzhen-Dongguan-Huizhou area is extremely deep. It allows for very fast product development and production launches. They are also experts at using inexpensive cross-border e-commerce options.
That’s how they can see a nice product idea on Indiegogo and start selling & delivering it 2 months later…sometimes before the original innovator has even started manufacturing themselves!
As you have seen, there are multiple elements to a strategy to enhance your IP protection in China.
If you pick the right type of manufacturer, the risk of them becoming your competitor is much lower. And, if you avoid creating a lot of ‘buzz’ on the internet about your new product too early, there is a lesser risk of another company aiming to launch a copycat product right away.
Legal tools are an investment that might not always be 100% effective, but they will probably be helpful at one point if your project is successful. You need to be wise. Understand the highest risks and work with a lawyer to mitigate them. In particular, for 90%+ of startups, spending a lot on patents before being successful on the market is a mistake.
The longer you keep your product ‘under the radar’, the less exposed it will be to competition from similar and cheaper products.
To be less exposed to competition from counterfeit products, you need to act vigorously. That’s when the investment in legal fees will show its value.
In the end, to reduce the impact of any competition, you need to invest time and money in:
- Brand recognition + a positive brand image
- Providing value to your customers that a Chinese company cannot provide, such as frequent and small deliveries, a warranty, education to buyers and end-users when needed, etc.
- Not relying on search results in Amazon or Google, since copycats can bid and even outrank you for your product.
- If necessary, launching several versions of your product, including one that is simpler and cheaper, to prevent a competitor from coming on your market and having an easy time capturing market share.