China Manufacturing industry, known as the “world’s factory”, has accounted for nearly one-third of the world’s manufacturing output over the past few years. On the popular marketplace Alibaba alone, there are millions of active sellers and buyers. Finding the right OEM in China can be a daunting task given the size of the options.
From background checks to quality system audits, building rapport, to negotiating deals, signing a contract manufacturing agreement with a Chinese supplier involves multiple complex issues.
Below is an overview of contract manufacturing in China and seven things you need to know before identifying a Chinese supplier.
Contract manufacturing in China: what’s the situation?
Despite a decline in trade activity in the first months of 2020 due to the pandemic, China’s exports rose to $237.2 billion in October 2020. This shows an increase compared to exports in the same month in 2019. Exports rose 14.5% in October 2020, compared with a 2.8% increase in September.
China has been one of the major exporters since 2013, when the value of Chinese goods exports hit a record $2 trillion. In 2015, the trade volume also reached 594 billion US dollars, a new record high.
An export-focused growth strategy has made China the largest export partner for the U.S. and European markets.
Although China’s competitive advantage lies in manufacturing labor-intensive products with significant cost advantages, China has also steadily increased its exports of high-tech products, including power devices and computers, in recent years.
Manufacturing is a major sector in China, contributing nearly 40% of GDP. The focus has shifted to advanced manufacturing, especially on the east coast of China. Labour-intensive manufacturing and low-cost production are further concentrated in the interior western and central provinces.
You can do contract manufacturing for almost any product in Shenzhen, China, which is considered the center of manufacturing in Asia due to the ease of service providers and manufacturers. The logistics company of Amazon FBA is also in Shenzhen.
Whether you are new to contract manufacturing or considering outsourcing to China for the first time, there are some important factors to keep in mind before diving into contract manufacturing. Here are the top seven factors you need to focus on:
4 Things You Should Know About China Manufacturing OEM
Protect Your Intellectual Property
Many business owners may consider their U.S. trademarks and patents sufficient to protect their intellectual property when considering contract manufacturing in China. While U.S. patents are a good start, they won’t protect your product when manufactured in China or other countries. This is why it is recommended to register intellectual property rights in China when you intend to manufacture products in China.
Trademark or TM: Registering a trademark in China is fast, cheap and easy. Trademark registration is a must for those who wish to manufacture in China and for sellers or operators in China. Unlike the United States, which is based on a first-to-file system, China adopts a first-to-file system. As a result, Chinese squatters seek out startups and continue to register their trademarks. Once the startup entered the Chinese market, the owners were shocked to find that their trademark had already been registered by someone else.
Companies like Groupon and Tesla have also encountered this problem. Some OEMs (Original Equipment Manufacturers) may also register your TM and threaten to sue you if you try to transition to a new OEM or block exports.
Patents: Filing a patent in China involves translating your application into Chinese and filing it in China prior to public disclosure.
You also need to register your intellectual property with Chinese customs, which will block products that infringe someone’s registered intellectual property in China. Products that violate the registration of intellectual property rights cannot enter or leave China, which is an effective way to prevent counterfeit products from being sold around the world.
Trademark applications are regularly published by the China Trademark Office. You can investigate this and oppose any trademark application by a squatter or competitor before registration.
Also, you must ensure that the contractor signs the “NNN” agreement. While most business owners in the U.S. and Europe are familiar with NDAs, or nondisclosure agreements, in China, NNN agreements related to non-use, non-disclosure, and non-circumvention are critical.
This document must be written in Chinese and prevent contract manufacturers from using your TM/IP, exposing/sharing your information with their “friends” and selling your products to your customers at a lower price.
Choose the right one China manufacturing partner
The success of your Amazon selling business depends on working with the right contract manufacturer in China who not only understands your requirements, but is reliable and committed to complying with the terms of the contract.
Some important factors to consider when choosing a contract manufacturing partner in China include:
Capabilities – Listing a manufacturer’s capabilities, including their current assets, technologies, and equipment, is the first step in filtering them. You can browse popular marketplaces listing Chinese sellers such as Alibaba, Made in China, Global Sources, and DHGate.
You can also visit trade fairs and conferences held in China every year, such as the Canton Fair, which showcases a wide range of products including machinery, electronics, consumer goods, textiles, medical devices, and gifts. International trade shows are also organised by the Hong Kong Trade Development Council or the Hong Kong Trade Development Council. A visit to the show will allow you to speak to various manufacturers in person to assess their capabilities. View features and services offered by contract manufacturers and ask for more information as needed.
Experience – Assess whether the contract manufacturer is particularly experienced in the industry/product area you are looking for. Investigate the manufacturer’s number of years of experience and whether they have the required certifications and licenses to manufacture.
Quality – What quality control processes does the contract manufacturer follow? Do they have industry-relevant quality certifications? Some quality certifications include ISO 9001, which shows that the manufacturer has a quality management system and has passed the certification process according to international standards.
Companies seeking to sell or located in the European Economic Area require a Conformité Européenne or CE certification and show that the product complies with EU safety, environmental or health standards.
It is important to verify that the ISO 9001 certificate is genuine by doing some background research. Doing this kind of research yourself does take a lot of time and effort as you have to understand all the elements on the certificate. You can also search for information in CNCA or CNCA’s database. Make sure the ISO certified company name, address and activities match the manufacturer’s business license.
Capacity – This is related to the volume of orders a contract manufacturer can handle and its ability to expand. If your order is very small and if they have the equipment, labor, space and equipment/technology to handle bulk orders or high volume orders, check with the supplier to see if they can meet your needs.
Equipment and Technology – The right manufacturing partner is one who utilizes the latest technology and equipment to achieve the quality you expect, especially if you require a high degree of customization. From CNC machines, CAD/CAM or CAE engineering methods, robotics to other precision tools, many Chinese manufacturers use high-end technology.
Create a clear original equipment China manufacturing or OEM contract
The purpose of drafting original equipment China manufacturing or OEM contracts is to ensure that products manufactured in China meet the commercial and technical requirements of foreign companies. An OEM contract is also evidence of a manufacturer’s compliance with the foreign company’s intellectual property and confidentiality.
It contains other details including specifications, price, packaging and packaging, design and model, equipment used, materials used, and protection of confidential information.
Other terms that China manufacturing must be included in an OEM contract include:
Termination Terms and Termination Consequences – Termination events may include, for example, violations of intellectual property or non-compete terms or the provision of inferior products. Need to include details of the consequences of termination, such as sale of finished products, subsidies for partially completed products, destruction of confidential information/logos, trademarks and other materials.
Inspection on Delivery – China manufacturing The time frame for inspection of the product after delivery and acceptance must be specified in the OEM contract. If you accept the product without inspection, the supplier will be relieved of any further liability related to non-conforming quality.
Factory exists–China manufacturing
If you can afford the cost, make sure one of your employees is regularly present at the factory in China. Having someone on your behalf at the factory in China is important to ensure regular contact and to help you ensure manufacturing is done to your quality and technology.