My law firm is always getting emails like the following (I got one this morning which spurred me to write this post):

I’m a __________ based business owner and widget designer. I’m developing my own line of widgets and I am now preparing to move forward by sending out my samples to factories in China. I am interested in knowing what my next steps should be from a legal perspective and how you can help me with those.

My response was and is usually along the following lines:

The first two things you will likely need are a Non Disclosure Agreement (NDA) and a registered trademark in China. We prefer to do what we call an NNN Agreement — non-disclosure, non-use and non-circumvention. This is an agreement that you use when you are trying to find manufacturers for a product. You have the manufacturer sign the agreement before you show them the product. It prevents manufacturers from stealing your design for themselves and from going around you to sell the product to your U.S. customers.

Here is some more information on NDAs/NNNs:

If you are not concerned about manufacturers in China copying your widget designs, you do not need an NDA/NNN Agreement.

The one thing you will almost certainly need to do (but maybe not right away) is to register your trademark in China. Before you use any of your trade names (think brands or product names) or trademarks in China (think logos), you absolutely must register them in China or someone else almost certainly will and then you will not be able to use your name in China, even if all you are doing is exporting your product from China. Here’s some info on that: China: Do Just One Thing. Trademarks.

Depending on your situation, you may also want/need a Product Development Agreement. If you are going to work extensively with a Chinese manufacturer to develop a new product, you need a specific product development agreement. These agreements cover the cost and procedure for development and ownership of the developed product. Many companies fail to enter into this kind of agreement and then discover the Chinese side owns “their” product and/or molds at the end of the process.

Once you have chosen the manufacturer for your widget, the next thing you will need is a Manufacturing Agreement (these are also called supplier agreements and OEM Agreements). Many U.S. companies do all their manufacturing in China based on purchase orders. This is very bad for the U.S. side. A good manufacturing agreement covers IP, quality control, NNN issues, warranty, ownership of molds, tooling, supplies, diversion, dispute resolution, and all the other various issues that arise in a manufacturing relationship.

Here is some more information on Manufacturing Agreements:

If you have any additional questions, please don’t hesitate to ask.

  • So you would advise to follow these 4 steps for a typical situation where the western buyer needs to develop and manufacture a new product in China?
    1. Before even showing any product information: “NNN” agreement
    2. Before the supplier starts developing prototypes: product development agreement
    3. Before communicating any brand name: trademark registration
    4. Before authorizing production/wiring a deposit: manufacturing agreement

  • In case the manufacturing agreement doesn’t include any information about the ownership of molds and/ or tooling but the buyer bears the costs – who would be the legal owner?
    What if the supplier refunds the tooling/ mold charges after a certain order amount. Would there be a change of ownership?

  • Interesting article. One of the most important things that is not mentioned in this article is Guan Xi – great personal relationship with your business partners. Many are the times in China that an agreement of any kind, even if signed by both parties, will be difficult to keep. Good personal relationships are the way to success.

  • Dan
  • Dan

    Assuming all four such agreements are required, you definitely have the order right.

  • Dan

    And what percent of American or European companies that order product from China have the guanxi required to get a Chinese company to keep its agreement? I would venture to say it is about .00000001%.

  • Thanks Dan. Interesting posts!

  • HI

    Anyone getting started on manufacturing in China today is like the suckers getting liar loans to buy multiple properties in 2005. Too late to the game, about to be left holding the bag.

  • Krehky

    Do I always need all of these agreements? What if I am only buying $10,000 worth of product?

    • frank

      don’t do it yourself – give this business to experts and let them take the risk

  • Dan (another Dan)

    I’ve heard on the news, about a few months back, that many companies in China mainly assemble products rather than manufacture them. I don’t know what are the proper terms or jargon is in this area, but I’m a little confused.

  • Moving manufacturing offshore is moving it outside of your direct influence and control. This is the cost of the dollar saving that China deliver to manufacturers. It’s all about the balance between how cost effective is your management of additional ‘troubles’ that introduced by outsourcing versus cost saving generated by outsourcing.
    Some companies manage it by transferring only small or simple parts manufacturing offshore, not the whole product.

  • tod

    Under “agreement” in China many Chinese will understand as verbal agreement. One must remember that you are dealing with western mind set where fear of ‘loosing face’ is well imbedded in the thinking of the self respecting business man.
    So if you are dealing in the first place with known and respected company / people then you can have a security of the NDA as well general business trust build without any paperwork. Not to mention that foren company have lite chance enforcing complex agreements in the local court that rule if favor of locals.
    So, travel China, meet people, spend time with them, build relationship, judge character and you will be OK.
    My 2 cents worth of experience.