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.