It is becoming increasingly more common for US companies to outsource manufacturing to suppliers in China. As the relationships between American and Chinese businesses mature, it is only natural that more projects are undertaken together. Now it is normal practice for US companies and Chinese entities to “co-develop” products intended for sale by the stateside company.
There is a huge amount of variation and the level of involvement from each side in these types of relationships. Whether the US company is providing a finished product and the Chinese entity scaling it for mass production, or the American side is handing over a notebook sketch for the Chinese side to turn into a finished product, this is the most risky stage of outsource manufacturing in China.
This stage is so risky because many US businesses fail to enter into any sort of development agreement. The lack of a comprehensive contract can lead to one of two problems.
The first is that the Chinese company will completely develop the product, using their tools and resources, and when it is complete, they will claim 100% of the IP in the product. This is a completely valid position for them to take, and they will often gain control of the IP, leaving you at their bidding if you wish to remain the sole buyer.
The second is that the Chinese company does not deliver. Many of these factories are not professional product developers and do not have the tools and education that are available to developers in the US. This can lead to products that are not fully functional, never completed, completed too late, or completed at a much higher price point.
In order to avoid these issues, a binding agreement should be drafted that addresses the following issues:
- What product is being developed
- What each side will contribute for technology and specs
- What will happen with the IP rights after the product is complete
- Who is responsible for the costs of development
- Timelines and milestones