Gold: Manufacturing Contracts in China. Protect IP, Tooling & Timelines (Ep. 21 revisited)

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Hello, it's Adrian checking in with another CMD Gold episode.
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These are the episodes where we revisit some of our best and most useful conversations
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from the archive and bring them back for manufacturers and importers every month.
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This episode in particular originally aired in 2020, and the topic is one that
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remains just as important now as it was then, manufacturing contracts in China.
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Renault and I look at why some buyers still work with suppliers without a proper agreement in place.
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What a manufacturing contract can actually do for you, and the different agreements
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that may be needed as you move from protecting your idea through product development
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and, ultimately, in turn, manufacturing itself.
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We also get into some of the practical details that really matter,
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IP, tooling ownership, subcontracting, inspections, and more.
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One important note before we start, Chinese law has evolved since this conversation
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was originally recorded, so this episode should be treated as practical manufacturing
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guidance only rather than current legal advice.
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Any agreement you intend to rely on should be reviewed by a lawyer familiar
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with current Chinese law and your specific situation.
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With that said, there's a lot here that still holds up extremely well,
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so let's get into it and I'll be back at the end.
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After having read a blog post on China Law Blog recently about suing Chinese
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manufacturers who have produced products which are the wrong quality.
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This got me thinking a little bit about how we can avoid this kind of situation and
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actually about the kinds of manufacturing contracts and other legal apparatus
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that you can actually use to protect yourselves when you're working with Chinese manufacturers.
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So is it the case, Renaud, that you find a lot of foreign buyers actually end
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up dealing with the Chinese manufacturer without a manufacturing contract that protects them at all?
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Hi. So, yes, a lot of them are in this situation. And...
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This is often a mark of an inexperienced importer or it is the mark of an importer
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that has experience but has taken a lot of other precautions,
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and that doesn't think it would be very helpful.
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But in many, many cases, it's the mark of an inexperienced importer.
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And every time I say, well, how about the contract?
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A lot of people would say, well, I contracted the Chinese.
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It's not even worth the paper. It's written on and you cannot really enforce it and so on.
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And the reality is yes and no, but there's substantial benefits actually in,
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sitting down and drafting a contract and getting to a written agreement with them.
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We can get into that later today.
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Okay. And is there one thing that you think, or maybe more than one thing,
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that can cause buyers to feel secure enough that they don't even bother with
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a contract and they're almost sort of falling into a trap?
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Well, look, some of them feel they're secure because they don't really know about their risks.
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And imagine a company in the middle of the USA who's been dealing with local,
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in-country counterparts.
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Do they need to have a contract every time? Maybe not, especially if a lot of
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the transactions are a few thousand dollars.
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You're not going to involve lawyers for these kinds of things.
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And if something wrong happens, you can still sue the other party.
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There's a lot of implied agreements, right?
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When you start to deal with a Chinese supplier or a Vietnamese supplier or an
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Indonesian supplier or whatnot,
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And first, the amounts tend to be higher because there are minimum water quantities,
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because you want to fill up the container.
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The amounts tend to be higher. You might not ever have been in a situation where
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you had issues with such a counterpart in another country.
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You don't really know how to handle that. You don't even know if a contract
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can do anything for you at all.
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So you don't even think actually of setting up a contract and I've seen that
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many times and I can understand that well if you're buying $3,000 of socks and,
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Do you really need a contract? I mean, there's a lot of things you can do.
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For example, in Alibaba, they have the trade assurance thing that is definitely
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not protective if you have relatively large amounts of money at stake.
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But again, if it's $3,000 of socks, you know, or $5,000 or even $10,000, why not do it?
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It's relatively inexpensive. It does reduce the risks.
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And, you know, there's many ways to mitigate your risks in these cases.
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I mean, keep the amount small so there's, you know, a lower incentive for the
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other party to cheat you.
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And also there's a lower exposure on your side, a lower exposure to risk.
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Well, I guess that's pretty simple to grasp.
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If we talk more about a manufacturing contract as kind of like a legal tool
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to gain this result over your supplier,
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I mean, what do you see as the benefits of this kind of contract?
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If we're not talking about, you know, using a letter of credit or something
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like that and using payment as the tool, how about a contract itself?
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Well, the number one benefit, by far, is to put on paper what happens if this, this, this happens.
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What happens if you are late by one week, two weeks, one month, two months?
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What happens if you want to raise your price?
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Can you do it right away? Can you do it without any form of justification?
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What happens if you violate our confidentiality agreement? And we have a proof of that.
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What happens if this, this, this, and that?
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And it sort of forces the supplier to read through it and confirm in writing,
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yes, that's fine. We commit to doing that, right?
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And as a bonus, if you have a clear quality standard that you attach to that,
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agreement, also the supplier will pay more attention to it.
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They're much more likely to read it carefully because they want to know what
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they're committing to, right?
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So that's by far the number one benefit.
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I guess the second benefit is when things.
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If things really go south, the relationship really turns sour and they stop
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responding and whatever.
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As the buyer, you still have one weapon to really scare them to scare the supplier
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it gives you some extra leverage in these cases and,
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For those people who've been in this situation, I guess, yeah,
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they wish they had an enforceable contract, right?
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Enforceable in the country where the supplier has assets, obviously.
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Or, you know, or in a country that if they find the supplier guilty,
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then, you know, will make it likely to,
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I don't know the exact legal word, but to transfer that into a Chinese court,
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and get a court order onto the supplier, right?
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So it's much, much more simple if it's all litigated in China and then enforce it right away in China.
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Actually, Chinese courts, from what I read and from the World Bank Standard
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and so on, the World Bank listing, sorry, it seems like agreements are enforceable in China.
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If you write your contract in a very specific way, if you write your contract
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in a way that Chinese court would not find is unfair, there's certain things
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like this, of course, you've got to be careful with.
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But if you pay attention to all this, if you work with a good lawyer,
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you can really have something that's enforceable, a pretty good weapon you know,
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a loaded gun in case the supplier does something wrong and they're not used
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chinese suppliers and most of them anyway are not used to being sued so it's
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sort of a shock for them so that's these are the big two benefits right.
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Of course, there's some other things, but these are the big two, I think.
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Okay. I think that will surprise perhaps some of the listeners who are in the
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West who perhaps think that enforcing things in China seem like they're almost
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impossible if you read a lot of the Western news these days.
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But in fact, it's actually good news.
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Yeah, yeah, yeah, sure. And one thing also, I just thought about that.
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I forget, as you mentioned manufacturing contracts, but actually there's two
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other contracts that are really, really important.
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If you, as the buyer,
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work on a new product, right? So there's two things.
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The confidentiality agreement, which, okay, and everything I'm saying here,
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you get to double-check it with a lawyer if you want to use it, right? I'm not a lawyer.
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So when it comes to confidentiality, you don't want your designs,
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your files, your samples to go around in an uncontrolled manner.
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So you want to to prevent the supplier from disclosing the information from
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using it against you or you know to to compete with you or to sell it to someone who competes with you,
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when you want to prevent the supplier from,
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maybe reaching out directly to your customers right,
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these are some of them the important things now if you have them sign on that
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they would be they will tend to be more careful okay some of them of course we all know them,
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they don't even read the contract they say well whatever this is just the paper,
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if we sign that we'll get the order okay let's sign the paper and then the purchaser
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will will feel he's doing his
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job and it's going to be fine right so that that's a bit dangerous because,
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they they don't intend to uh to do anything about it.
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But if they come back to you with some some suggestions for changes and so on it is a good sign.
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And by the way, a lot of our clients at the beginning sent us these kinds of,
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confidentiality agreement and we have to get back to them and ask them to make some changes, maybe,
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i don't know 20 or 30 percent of the time some of them are really,
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very worried i mean to the point where they're nearly paranoid and they want
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to to have these really heavy you know damages and things like that it's really punitive damages that,
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that are not very nice to to read in a contract i mean it's it would nearly
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give them the incentive to make it look like we breached a contract just to
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sue us and to finance their project. So anytime we see that, we say, no, forget it.
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But I kind of understand where they come from. So there's confidentiality agreements
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and then there's the development agreements.
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So if you develop your own product and either you're going to count on the supplier
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to bring some of the technology, maybe something they developed before,
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or maybe one of the modules is going to come from them or something like that.
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Or the supplier is going to do some of the engineering work.
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And who's going to make the tooling? If there's, for example,
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a plastic enclosure, who's going to make the mold?
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Are you going to manage that from your country and everything?
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No, probably the supplier is going to handle that, probably work with a tooling
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fabricator or maybe the plastic injection molding shop also makes tooling sometimes.
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So most of the time, the supplier is going to end up managing that or a consulting
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firm or engineering firm. I mean, we do that for a number of clients.
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But in any case, you want these people to sign a contract about development
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and it should make it very, very clear who owns the intellectual property.
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Right if you if you're going to pay for all this work and it's all based on
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your ideas and you're basing your maybe your business on that or you're really
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investing seriously into it,
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you definitely have to to to own the intellectual property right so that at
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one point you want to switch from this supplier to that supplier and so on,
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and and and you are in position of power because again you financed all of that
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right and this comes back to the previous podcast i forgot which episode,
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on contract manufacturers and and the way they tend to be different from oem
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and odm manufacturers right this this would typically be easier with a contract manufacturer,
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there's of course there's special cases and again i'm not a lawyer there are
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come you know relatively complicated cases,
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where it's what they would call maybe blended intellectual property and then
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what happens in this case maybe instead of saying,
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such and such party owns the intellectual property you might say well.
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The manufacturing, you know, only this, the customer can decide to manufacture
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this product in this factory.
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And, you know, they end up having this type of agreement where the supplier
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cannot make it for other companies.
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And maybe the buyer commits to not having other factories do it,
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provided the factory hits certain performance standards or, you know, provided,
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they keep complying with the quality standard and don't raise the price without reason.
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There can be a long list of criteria here to ensure that they can keep manufacturing the product.
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It can get pretty complicated.
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And yes, Steve Dickinson on the China Low blog wrote several good articles about that.
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That's, you know, easy to read, but really they don't make it more simple than
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it should be. It does cover a lot of nuance.
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And so that's what I would suggest you read if you want to know more about that.
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I'll try and link to one or two of them in the show notes and also the podcast
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episode you were referring to about the different supplier types.
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I'll definitely add a link to that for any listeners.
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So, so far you've discussed the agreement to stop your supplier from
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using the IP incorrectly. So we're talking about something like an NDA or an NNN agreement, right?
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Yeah, a triple N agreement, yeah, is what a lot of lawyers call that.
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For anyone listening, what do those Ns stand for, please?
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Oh, non-disclosure, non-use, non-circumvention.
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So that's what I mentioned before. So they should not disclose it,
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they should not use it for any purpose other than the purpose of the agreement,
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and they should not try to circumvent,
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the importer, basically.
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Okay. And then you moved on to product development. So a kind of product development
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agreement, and that's who's actually developing the product,
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who's actually going to be owning the IP when all's said and done.
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And again, this is an issue depending on the type of supplier that you might work with.
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And how about when it comes to the manufacturing? So is there such a thing as
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a manufacturing agreement as well?
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Sure. I mean, it's a bit like a purchase agreement. I mean, when you think about it.
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So when you purchase something, what do you want to have the supplier commit to?
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What's the product? What's the spec? basically also what's the quality standard,
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you know usually is maybe in an appendix to the contract so that whenever it's
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updated you don't have to reopen the contract and have everybody sign it again,
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another thing you want to know is what's the price right so when you manufacture
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with a company and you you really have them sort of trained to make your product,
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you you can really switch to another manufacturer very easily,
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so you want them to offer you you know let's say price stability they should
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not be able to raise the price especially without reason and like for next week,
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so you you want some something to control that now you're not going to be able
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to to have them sign that all throughout.
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2020 and 2021 One, the price will remain $12.5 US dollar per product,
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or even in RMB, which would be low risk for them.
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Except maybe if you buy millions of these widgets, yeah, you will find a supplier
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willing to commit to that.
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But generally speaking, you can do that. But at least you can put some limits
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on unexpected price increases.
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And you want the price to be set right there. and, you know,
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don't change it anytime soon, right?
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Another thing, obviously, is when am I going to receive it, right?
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So typically, when you issue a purchase order, purchase order will say shipment
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date to be on whatever, you know, 15 November.
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What happens if the purchase order.
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Comes 15 november if they say well you know it's uh we haven't really you know
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finished assembly yet you know we're going to be late sorry and then actually
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they haven't even started assembly,
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and they and they ship to you on 15 december well you're not going to be very
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happy so you want something you know some kind of penalty or,
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something like that that that really really entices them to try hard to be on time, right?
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And obviously, as the buyer, you want to do your part here. You need to give
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them enough, maybe some forecasts if possible, maybe non-binding forecast,
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but with a certain degree of accuracy.
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That obviously always helps.
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Also, don't try to squeeze the lead times too much. You need to be reasonable.
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Otherwise, you're sort of forcing them to be late.
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And especially if the product has something new that needs to be approved,
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well, you know, you got to be realistic.
00:20:47.274 --> 00:20:51.120
You can't tell them, yeah, you have to ship 15 November no matter what.
00:20:51.718 --> 00:20:56.254
And then maybe you need to get some samples to your own customer that you don't control.
00:20:56.797 --> 00:21:00.488
And your customer gives you the approval on 8 November.
00:21:00.970 --> 00:21:04.772
Well, what's going to happen? but the factory is going to have to decide,
00:21:05.272 --> 00:21:09.894
hey, do we go ahead and produce anyway, which in some cases,
00:21:09.894 --> 00:21:14.066
unfortunately, might be the best thing to do. It's actually quite common.
00:21:15.214 --> 00:21:18.780
Or we wait just to be safe, but then we're going to be hit by the penalties.
00:21:19.814 --> 00:21:23.594
What do you think is going to take precedence, right? So you need to frame your
00:21:23.594 --> 00:21:26.024
contract in a way that...
00:21:26.873 --> 00:21:30.908
Give them the right incentives, but also at the same time, you've got to be
00:21:30.908 --> 00:21:32.794
reasonable on your side, right?
00:21:33.282 --> 00:21:37.958
You need to be reasonable. You might want to negotiate other things,
00:21:37.958 --> 00:21:42.692
you know, maybe having them keep a certain level of safety stock,
00:21:43.115 --> 00:21:47.368
maybe of some of the components, not assembled, or maybe of finished products.
00:21:47.368 --> 00:21:51.254
You know, then that goes into VMI, vendor managed inventory,
00:21:51.742 --> 00:21:56.304
which they would finance, maybe sometimes in a warehouse just next to the old warehouse.
00:21:57.150 --> 00:21:58.298
But it's still in their book.
00:21:59.225 --> 00:22:04.338
So you're financing it directly, obviously, because that takes warehousing space,
00:22:04.338 --> 00:22:07.294
that takes working capital, that takes all kinds of things.
00:22:08.547 --> 00:22:14.139
And then the the manufacturing agreement would typically cover a range of other
00:22:14.139 --> 00:22:19.829
things but i don't really want to go deep into that because again we're not
00:22:19.829 --> 00:22:22.849
really lawyers and i don't want to go into,
00:22:23.789 --> 00:22:29.709
explanations of of arcane closes and you know there's a lot of things here that i've seen i've read,
00:22:30.549 --> 00:22:37.159
maybe 20 times but i've never really seen anybody sued for them and and defend
00:22:37.159 --> 00:22:40.929
themselves for them and all these kind of things so as an employer i have a
00:22:40.929 --> 00:22:42.680
pretty limited understanding of course.
00:22:43.202 --> 00:22:46.453
Sure that's okay it's really this is more about giving
00:22:46.830 --> 00:22:51.449
a structure of you know what what you would say a typical manufacturing contract
00:22:51.449 --> 00:22:57.115
is going to be including so you've got the chinese mda or triple n agreement
00:22:57.458 --> 00:23:00.459
you've got the product development agreement and also the manufacturing agreement
00:23:00.459 --> 00:23:05.139
so i mean all of these together would constitute your typical manufacturing
00:23:05.139 --> 00:23:07.409
contract as a best practice.
00:23:07.409 --> 00:23:09.239
And that's what I'm looking for.
00:23:09.239 --> 00:23:14.609
Nothing specific. Yeah, if you're developing a new product, I mean,
00:23:14.609 --> 00:23:19.949
if you're going to the Canton Fair, let's say last year, right?
00:23:19.949 --> 00:23:26.084
Pre-pandemic, you went to the Canton Fair and you saw some nice,
00:23:26.386 --> 00:23:29.533
whatever, coffee machines, and you said, oh,
00:23:30.207 --> 00:23:34.070
i like this one can you make it in blue okay great well you're not going to
00:23:34.070 --> 00:23:39.440
have the supplier sign a triple n or an nda right i mean or except maybe don't
00:23:39.440 --> 00:23:41.540
say that you work with me or something like that but,
00:23:42.246 --> 00:23:46.880
i mean it's their own product you can't really you can't really force them to
00:23:46.880 --> 00:23:51.920
keep it just for you except if you say well i want exclusive distribution over
00:23:51.920 --> 00:23:54.621
that territory and i commit
00:23:55.050 --> 00:23:58.360
to selling 50,000 pieces of them next year.
00:23:59.358 --> 00:24:02.714
That might be something the supplier agrees with.
00:24:03.283 --> 00:24:07.100
But still, it's not going to be your product. I've never seen that.
00:24:07.100 --> 00:24:11.780
A Chinese supplier is saying, okay, we sell you the IP rights and things like
00:24:11.780 --> 00:24:14.904
that, and we'll never make it for anybody except you.
00:24:15.241 --> 00:24:18.573
It's a bit weird. And same thing for the development.
00:24:19.700 --> 00:24:27.089
All they do is put your logo on it. well you don't need to have a development agreement i guess right,
00:24:28.000 --> 00:24:31.190
you go straight into the manufacturing agreement oh yeah okay and you already
00:24:31.190 --> 00:24:32.360
have the tooling you already have,
00:24:33.240 --> 00:24:37.480
everything you can go into production anytime just change the the corner okay
00:24:37.480 --> 00:24:41.470
great you know what are the payment terms right so that's another thing that
00:24:41.470 --> 00:24:45.073
goes into the manufacturing agreement obviously the payment terms,
00:24:45.897 --> 00:24:50.290
you know where is it going to be made right because you don't really you want
00:24:50.290 --> 00:24:56.039
them to subcontract, you want to be able to visit the place or have somebody
00:24:56.197 --> 00:24:58.407
audit the place and confirm that.
00:24:59.801 --> 00:25:04.489
Well, it's relatively reliable, and they know what they're doing.
00:25:04.489 --> 00:25:08.746
They have a quality system, things like that. So, okay, this is the approved place.
00:25:09.794 --> 00:25:17.364
Don't put manufacturing anywhere else, because usually that's a very bad sign, right?
00:25:17.959 --> 00:25:22.500
That's where a lot of disasters come from. So no subcontracting.
00:25:23.179 --> 00:25:29.539
Obviously, the buyers get the right to go there when there's production, pretty much any time.
00:25:30.759 --> 00:25:37.764
If the buyer finds some issues with inspection, testing, no shipment,
00:25:38.164 --> 00:25:44.307
keep it there, fix it, present it for re-inspection until it's fine.
00:25:45.048 --> 00:25:46.790
That's very, very standard.
00:25:47.864 --> 00:25:56.496
And then what happens if it's received? Then there's a lot of quality issues that are noticed.
00:25:57.027 --> 00:26:02.327
That's where a lot of contracts that I've read really fall short because lawyers,
00:26:03.134 --> 00:26:05.981
and it's normal i mean it's not something that they're trained to,
00:26:06.601 --> 00:26:11.121
to to know but they can't really make the difference between a manufacturing
00:26:11.121 --> 00:26:17.771
defect and a design defect you know defects can come from different places and
00:26:17.771 --> 00:26:21.600
if it's a defect that is due to the design maybe the product,
00:26:22.267 --> 00:26:28.351
is using the wrong material but hey yeah you say tpe this is tpe you know,
00:26:29.371 --> 00:26:35.144
you know we did exactly what you said it's not a manufacturing issue but if,
00:26:36.051 --> 00:26:38.946
if after whatever after one year,
00:26:39.962 --> 00:26:46.781
in normal use the TPE gets really damaged or there's some abrasion or whatever,
00:26:48.066 --> 00:26:53.192
you can't go back to the supplier and say hey the product you made is bad because
00:26:53.459 --> 00:26:57.964
maybe the supplier did exactly as you wanted right.
00:27:00.241 --> 00:27:04.381
According to your design so this is really ridiculous you can't go back to the
00:27:04.381 --> 00:27:11.381
manufacturer for design related defects and and people really don't understand very often you know,
00:27:12.295 --> 00:27:17.363
the you know they would say well you know it happens sometimes and sometimes doesn't happen,
00:27:18.099 --> 00:27:23.724
well yeah that's that really sounds like a design related defect you know what
00:27:24.131 --> 00:27:28.014
but people don't really understand that and it's um it's a bit difficult to to explain,
00:27:28.653 --> 00:27:32.181
and and so so typically it's really important to,
00:27:32.781 --> 00:27:38.631
make sure that as the manufacturer you know they can't come back to us for defects
00:27:38.631 --> 00:27:43.371
that appear like 12 or 18 months after the products are in the field because
00:27:43.371 --> 00:27:45.457
typically these are dishonorated defects,
00:27:46.089 --> 00:27:48.098
typically manufacturing defects,
00:27:48.881 --> 00:27:54.571
are noticed very early in the life of the product, right?
00:27:54.571 --> 00:27:59.221
It's something that's poorly assembled, it's poorly glued or whatever,
00:28:00.239 --> 00:28:06.456
or there's poor contact in the board or whatever, you know.
00:28:07.249 --> 00:28:12.148
Or the product falls down and it breaks the connection and it no longer works,
00:28:12.624 --> 00:28:16.856
a lot of these things will will come up in the first one two three months,
00:28:17.596 --> 00:28:22.226
after the products are in the in the hands of users or in the field right but
00:28:22.226 --> 00:28:26.896
anyway this is so what happens if a lot of defects are found in the field right
00:28:26.896 --> 00:28:29.050
so at first what does it mean a lot.
00:28:30.106 --> 00:28:36.976
Is it 50 well that's that sounds like really a lot right on the other hand is it yeah is it,
00:28:37.496 --> 00:28:43.356
one percent well you know debatable really depends on the kind of product and
00:28:43.356 --> 00:28:45.506
and usage and price point and everything,
00:28:46.255 --> 00:28:51.174
right what happens if there's a lot of issues can the manufacturer be sued,
00:28:51.912 --> 00:28:56.606
you know on on what terms why you know how how can the manufacturing contract
00:28:56.606 --> 00:29:03.556
be ended terminated right these are some of the the common things that are,
00:29:04.536 --> 00:29:06.041
in a manufacturing contract.
00:29:07.736 --> 00:29:15.816
And pretty much any lawyer that is used to business transactions with Asian
00:29:15.816 --> 00:29:19.148
suppliers will have this type of template.
00:29:19.601 --> 00:29:25.256
I mentioned Steve Dickinson and the good folks from the China Law blog,
00:29:25.256 --> 00:29:30.773
but we've seen a number of contracts from a number of different law firms and,
00:29:31.998 --> 00:29:37.420
tend to always cover the same things but really where the defer is in depth
00:29:37.809 --> 00:29:44.274
so you some of the contracts are you know three pages long that that's a bit
00:29:44.274 --> 00:29:46.336
short but if you purchase,
00:29:47.149 --> 00:29:54.882
relatively low quantity maybe low amount let's say you pay small orders at least
00:29:55.039 --> 00:29:58.764
you maximize the chances that the supplier reads it, right?
00:29:58.764 --> 00:30:03.654
And sometimes less is more, as they say, and at least if there's the five key
00:30:03.654 --> 00:30:07.534
things you want them to know and comply with, maybe that's a good fit.
00:30:08.674 --> 00:30:12.169
And I don't know if lawyers would agree with that, but that from a business
00:30:12.366 --> 00:30:14.143
point of view, that makes sense.
00:30:15.617 --> 00:30:22.658
Now, there's also contracts that are, you know, 60 pages long and a bit hard
00:30:22.658 --> 00:30:26.941
to read and really go into all the details.
00:30:28.168 --> 00:30:32.618
And these tend to be very protective of the buyer. But the typical supplier
00:30:32.618 --> 00:30:36.462
is not capable of reading it and understanding it, right?
00:30:36.932 --> 00:30:45.707
This works well with relatively mature and how to say yeah experienced suppliers
00:30:46.043 --> 00:30:49.461
right and typically it's for purchasing,
00:30:50.709 --> 00:30:54.848
you know to the tune of hundreds of thousands of dollars at least at the very
00:30:54.848 --> 00:31:03.128
least don't do that if you find company and alibaba to make i don't know yoga mats or or,
00:31:04.708 --> 00:31:08.972
bamboo kitchen gadgets for $5,000, right?
00:31:10.388 --> 00:31:15.439
It's not a good fit. They're not going to read it. They're not going to pay attention to it.
00:31:15.957 --> 00:31:19.418
They're probably not even going to want to sign it. And for good reason,
00:31:19.418 --> 00:31:22.162
they will say, hey, but why you send us such a crazy contract,
00:31:22.690 --> 00:31:25.790
right, for this kind of small business?
00:31:26.121 --> 00:31:28.924
And frankly, they have a point. They have a point.
00:31:30.140 --> 00:31:33.948
What I like about the manufacturing agreement is that it takes away a lot of
00:31:33.948 --> 00:31:38.508
the ambiguity that you might find. I mean, we spoke recently about how a lack
00:31:38.508 --> 00:31:43.613
of transparency is fairly evident in China when dealing with Chinese suppliers a lot of the time.
00:31:43.985 --> 00:31:46.017
And this really sort of keeps them in line, doesn't it?
00:31:47.552 --> 00:31:52.376
Right. That's why the number one benefit I mentioned at the beginning of this episode,
00:31:53.667 --> 00:32:01.461
is really to put black and white on paper what is expected and to have the supplier
00:32:01.461 --> 00:32:07.123
read it and hopefully comment on it and get to an agreement in a written manner.
00:32:09.109 --> 00:32:14.770
Because what I see a lot of the time is people who talk and talk and talk,
00:32:15.297 --> 00:32:19.481
mention something in Skype, mention something on WeChat, right?
00:32:20.771 --> 00:32:24.291
But they don't keep all this in a master document. and they don't put it all
00:32:24.291 --> 00:32:25.740
black and white, clearly.
00:32:27.093 --> 00:32:30.338
Well, that might be efficient in the short term, but,
00:32:34.091 --> 00:32:36.663
I think an opportunity is lost, basically.
00:32:37.611 --> 00:32:41.801
Oh, yeah. There's been a problem in the past trying to go back through multiple
00:32:41.801 --> 00:32:46.311
different chats in different areas and emails and on WeChat and whatever.
00:32:46.311 --> 00:32:47.367
I mean, it's a nightmare, isn't it?
00:32:48.343 --> 00:32:52.069
Yeah, obviously. And then, well, you know what?
00:32:53.608 --> 00:32:58.281
The supplier, if you sue them, will also go through your Skype and WeChat,
00:32:58.281 --> 00:33:03.645
things like that, and they will maybe find contradictory things.
00:33:05.086 --> 00:33:09.602
Maybe not directly contradictory, but certain things that,
00:33:11.955 --> 00:33:15.188
are, how to say, inconsistent enough.
00:33:17.626 --> 00:33:21.400
To make you look bad and inconsistent in a court of justice.
00:33:21.992 --> 00:33:23.182
And this is really not good.
00:33:23.822 --> 00:33:28.536
So that was our CMD gold revisit of manufacturing contracts in China.
00:33:29.012 --> 00:33:33.160
And I think one of the most important points from this episode is that the value
00:33:33.160 --> 00:33:37.320
of a good agreement isn't simply having something you can point to if a relationship
00:33:37.320 --> 00:33:40.963
eventually breaks down. In fact, its real value starts a lot earlier.
00:33:41.265 --> 00:33:46.484
It forces both sides to agree on the important questions before production begins.
00:33:46.856 --> 00:33:51.680
So who owns the IP and tooling? What exactly is the supplier expected to manufacture?
00:33:51.680 --> 00:33:55.116
What quality standard applies? Can production be subcontracted?
00:33:55.557 --> 00:33:59.650
When can inspections take place? Who approves shipment? What happens when something
00:33:59.650 --> 00:34:01.786
doesn't meet the agreed requirements?
00:34:02.308 --> 00:34:05.570
It's also worth thinking about the question that came up towards the end of
00:34:05.570 --> 00:34:06.749
the original conversation.
00:34:07.150 --> 00:34:11.170
What's the worst thing that could realistically happen. Could the supplier refuse
00:34:11.170 --> 00:34:14.050
to release your moulds? Could your design be used elsewhere?
00:34:14.050 --> 00:34:17.835
Could production be subcontracted without your knowledge and then who knows what might happen?
00:34:18.375 --> 00:34:21.510
Could you receive a batch that doesn't meet your requirements and discover that
00:34:21.510 --> 00:34:23.994
nobody ever clearly agreed on who was responsible?
00:34:24.529 --> 00:34:29.060
Those are much easier problems to address while the relationship is good rather
00:34:29.060 --> 00:34:30.955
than after something has already gone wrong.
00:34:31.361 --> 00:34:36.092
And one final update for today in 2026 when we're revisiting this.
00:34:36.539 --> 00:34:40.608
Don't assume that an old contract template, a generic western agreement,
00:34:40.945 --> 00:34:46.808
or something generated by AI perhaps is automatically suitable for manufacturing in China.
00:34:47.116 --> 00:34:51.580
The correct contracting entity, ownership provisions, quality requirements,
00:34:51.580 --> 00:34:57.495
remedies and dispute resolution arrangements all need to fit the specific situation and current law.
00:34:58.023 --> 00:35:01.770
So use the principles we've discussed today to understand what needs to be controlled
00:35:01.770 --> 00:35:07.496
and then work with the appropriate legal counsel when you're putting the actual agreement in place.
00:35:07.949 --> 00:35:13.029
Thanks for listening and we'll be back soon with another episode of China Manufacturing Decoded.
00:35:14.613 --> 00:35:18.288
Thanks again for listening to this podcast brought to you by the Sophist Group.
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