One of the most important decisions a new company (or established one) with a product to sell will make is selecting a manufacturer. While some companies may decide to keep production local, most will choose an international factory for mass production, typically in Asia, depending on your product.
As you’re probably aware, there are many factories available who can make a product for a few cents less than the competition. However, this doesn’t guarantee quality products; therefore, the price becomes irrelevant. Many business owners, over the years, have seen that it’s not uncommon for a factory to quote a lowball price to get an order, and then things start going wrong. The product isn’t delivered on time, and even when it is, the quality didn’t meet the expectations of the customer.
Outsourcing the manufacturing of your product to an overseas company that you’ll probably never meet face-to-face is not for the faint of heart. You have to perform your due diligence and carefully evaluate each potential firm. After all, they’ll become your primary supplier and a crucial part of your overall business.
The first place you’ll probably start looking is the Internet. Some of the sites you’ll find are actually companies who specialize in helping you find suppliers. As you become more knowledgeable, you may find firms and sites of your own which cater to your specific market.
You should contract with a company that has sufficient financial resource when things go south. This seemingly simple principle is often overlooked because a lot of U.S. buyers contract with third-party sourcing companies unaffiliated with the CM that owns the factory. Note that a lot of Chinese companies do not have an official English name and thus should identify themselves with their legal name in Chinese together with their English name in the supply agreement.
Another important factor to keep in mind is the bill of materials (BOM), which is a list of components to be used in fabricating the product. Including a precise BOM as a part of the supply agreement is a must when you plan to reply on the CM to procure raw materials and product components. This will help prevent CM from substituting in cheaper materials at its discretion and will reduce product defects and recalls.
In the past, many CMs in China insisted on no product warranty. Today, more and more CMs are willing to offer product warranty against product defects for which the CMs are responsible—i.e., design defects for which the U.S. buyer is responsible are not covered—and you should definitely consider asking for one. You should make sure to include detailed product (and packaging) specifications and quality control and inspection procedures as part of the supply agreement. Given the distance between China and the ultimate delivery location, it’s common to have an inspection both before and after product delivery. Think about what an inspection will entail—every product vs. sampling, parameters for an epidemic failure, etc.—and try to link payment to the CM with the inspection result.
Be sure to get the CM agree in the supply agreement that you own the mold/tooling at all times and include a detailed mold/tooling list. If you are transferring existing molds/tooling to the CMs, ask for a deposit and specify the amount in the supply agreement. Also, consider including a liquidated damage provision, which specifies a pre-determined amount of damages if your mold/tooling is not returned promptly to you when requested. A reasonable liquidated damage will put you at a strong position to secure a quick judgment from a Chinese court. It also gives the Chinese court a basis to freeze the CM’s assets before you secure a judgment, the threat of which would almost always result in the return of your molds/tooling.
Don’t take for granted product rights and trademarks. You might have already registered your patents, trademarks or copyrights in your major markets and in China. Such registrations can prevent the export of counterfeit goods from China, and prevent a competitor from registering the same intellectual property in China.
In conclusion, you need to do your homework and be an informed business owner. Learning about the laws in China is a big plus. If you ever find yourself in a situation where litigation is needed, you may want to resolve the dispute by litigation in Chinese courts. The best way to resolve a dispute under a supply agreement with a Chinese CM differs depending on the type of dispute. If the CM cannot meet the product specifications or misses delivery deadlines, you may want to work it out with the CM first. If that proves impossible, you can seek monetary damages and arbitration in a jurisdiction outside of China governed by U.S. law would be your best option. Because China is a signatory to the New York Convention on Foreign Arbitral Awards, foreign arbitral awards are readily recognized and enforced in China. In contrast, China has no obligation to recognize and enforce U.S. court judgments.