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Selling Product In China Through Your China Manufacturer. It’s Complicated.

Posted in Legal News

As China’s consumer market continues to grow, we have of late been dealing with an increase in requests from clients who want to sell into China the products they are already having manufactured there via product out-sourcing. Doing so is more complicated than what one might initially think.

One thing the foreign company can do is to have its products made in China, shipped to them outside of China (let’s say the United States) and then sell the products into China. The obvious problem with his is the shipping costs and the customs issues.  The way to avoid these things is to have the product never leave China, but that creates its own problems.

The typical situation is as follows:

  • American company A has its products manufactured in China by Chinese manufacturer B.
  • Chinese company C contacts American company A about buying American Company A’s products in China.
  • American company replies, “we make the products you want in China. There is no reason for us to import the furniture into the U.S. and then export it back to China. So instead we will arrange it so that you can purchase directly from our manufacturer.

If sales are made, how much money goes to American company A and how much goes to Chinese manufacturer B? How will it be paid? When? Who takes the risk on quality? Who takes the risk of payment? It sounds simple, but it actually is not. What if Chinese buyers contact Chinese manufacturer B directly?

One of the things we always provide in our OEM agreements/supplier agreements/manufacturing agreements is that the Chinese factory can sell the U.S. company’s products only to the U.S. company. We do this so that the factory cannot sell direct to anyone for any reason. We do this for many reasons. What if the Chinese buyer is not really planning to sell the products in China? What if the Chinese buyer is planning to purchase the products in China and then sell them into the gray market in the United States or Europe or somewhere else? Or, what if the sale is done secretly, without the United States’ company’s knowledge? Or, what if the Chinese buyer is not qualified to market, service or repair the U.S. company’s product and the value of its brand gets damaged as a result of that. We have seen this many times.

No matter how the foreign company (in this case American company A) chooses to proceed, it must be sure to register its trademarks in China or it runs the very real risk of others selling its product in China under its name without it being able to stop them or, even worse, others being able to stop the U.S. company from manufacturing its products in China under its own names.

  • Joey Conor

    Interesting

  • twofish

    It’s not just US businesses selling to China that have headaches, but Chinese businesses selling to China have their own headaches. I’ve seen Chinese factories that are manufacturing stuff for the US try to reorient themselves to selling for the Chinese market, and it turns out to be much, much harder than it seems. The problem is getting the product from the factory to the consumer is a hard thing to do. Once you are set up to get product from Dongguan to Peoria, Illinois and you want to refocus to get those products to Hunan, you have to relearn everything. If it’s hard to do for someone who is Chinese in China, it’s going to be even harder to do for someone that isn’t.

    But first things first…..

    What’s your value proposition? If you are a US business person making money off Chinese products in the United States, you are making money for some reason. It’s because you know the market, or you have control/knowledge over distribution channels, or you have a good reputation.

    Now if you want to sell in China, you have to ask yourself, what value can you provide? If you have a global brand that everyone in the entire world knows about, that’s your value proposition. However, if you have a brand that people in the United States know, but no one in China has ever heard of, then trademarks and OEM agreements are going to only be useful it’s part of a larger branding effort, and in that situation the details of registering trademarks is going to be only one small part of your headaches.