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Made In China…Without Leaks, Knockoffs or Back-Door Shipments

Five Simple Ways to Keep Your Products Safe
By Bill Quarless

The December 2004 BusinessWeek cover served as a wakeup call for all U.S. companies. Headline: “The China Price.” Storyline: U.S. manufacturers are being forced to cut their prices 30-50 percent in order to compete with the Chinese. In some cases, Chinese manufacturers are so cost-effective American manufacturers can only compete if they cut prices below their cost of materials. Message for U.S. companies: Move your manufacturing overseas or face a serious competitive disadvantage.

I remember the day that story hit newsstands, and the buzz it created. As an American owner of a Hong Kong-based manufacturing firm, I was suddenly fielding a ton of questions from U.S. contacts. One type of question stood out above all the others because I heard it again and again: How do I make my product in China without my proprietary information being leaked? Without my idea being knocked off? Without my product being shipped out the back door?

It took me a while to distill all of my experience into an answer, but here it is: Five simple ways to protect yourself when manufacturing your product in China.

1. Do your homework

The vast majority of factory owners are honest people, but there is that untrustworthy minority that gives everyone a bad name. Weed them out using basic research techniques. Start with the several free sources of information in China, which include government organizations like The China Council for the Promotion of International Trade and The China Chamber of International Commerce. Then move on to the paid services, which can tell you the company’s trade practices, payment history and uncover any dirty secrets (e.g. if they’ve ever infringed on another company’s intellectual property).

Next, do your legwork. Make your contact take you on a tour of the factory you’re considering. Sometimes, a factory that looks great on paper or online (it’s called stock photography) turns out to be a lot less than expected. The only way to know is to pay them a visit. This also gives you a chance to observe your contact’s relationship with the factory. In China, there are so many in-betweens, go-betweens and company names (in English and Chinese) that it can be hard to know who you’re really dealing with. If your contact has a different business card than the factory staff, if he is not shown the respect of a boss, or if everyone acts like they are meeting him for the first time, you know all is not as it seems. Moreover, don’t be shy about asking questions. Some starters: Who else do you manufacture for? Do you retain customers for a long time?  If not, why not?

2. Sell yourself

While you are studying the factory, the factory’s people will be studying you. So a certain degree of salesmanship is required. Your potential Chinese supplier is hoping for volume and ongoing business. Convincing them that you’re a serious player who’s in it for the long haul is another way to protect your project. Everyone knows what happened to the farmer who killed the goose that laid the golden egg. (There is a Chinese version of this same fable.) My experience has shown that the Chinese think long-term and will not sacrifice a potentially profitable relationship for a quick buck.

3. Build trust and be fair

Generally speaking, legal documents such as a non-disclosure agreement (NDA) are unenforceable in China and create an air of distrust. I prefer to use documents that represent a show of trust instead. My favorites are “Terms of Engagement” and an “Authorization to Manufacture.” These mutual agreements state that your project is proprietary, but also authorize the factory to manufacture exclusively on your behalf. Ultimately, though, a clear understanding and a firm handshake are more valuable than any piece of paper in China.

It’s also important to keep in mind that while the Chinese come from a culture where everything is negotiable and haggling is expected, it’s important for everyone to come out a winner. If you brow-beat your supplier into a losing situation, they may just find a way to make it up later. I always negotiate hard, but I also have preplanned concessions at the ready so my counterparts won’t lose face.

4. Conduct surprise inspections

The initial tour shouldn’t be the last time you set foot in the factory. It’s equally important to have a presence while production is running. I conduct weekly, sometimes daily, tours to keep a close eye on things. Typically, these are surprise inspections – a simple yet effective technique for keeping everyone honest. Such visits make it unlikely that a factory will even think about breaching confidentiality, let alone shipping your product out the back door.

5. Mark your molds

If your biggest worry is that your factory will sell your product to someone else without your knowledge, then I have a simple way to minimize or eliminate that risk: Mark your molds. By putting an intentional distinguishing mark on the underside of all your products, you accomplish two things. First, you let the factory know you’re serious about confidentiality and will be checking up on them. Second, you have a way to tell instantly if your factory is in breach of your trust. Whenever someone brings me a copy of a product and claims my factory is to blame, I simply turn it over and look for my mark. If it isn’t there, my factory isn’t responsible.

In addition to the above, the single greatest way to protect your products in China is to have great relationships. It may surprise you to learn that in an average factory meeting, I spend as little as one third of my time talking about a project. The rest is devoted to reinforcing my bonds of friendship. Naturally, such relationships take time and can present a challenge for American companies because of the need for face-to-face contact. A good shortcut is to work with a reputable sourcing and production management firm that has already built these relationships.

Bill Quarless is president and CEO of Impact Products Ltd., a firm specializing in China manufacturing and production management. He lives in Hong Kong and can be reached at (852) 2139-3961, via e-mail at bill@impactproducts.com or online at www.ImpactProducts.com.

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