China manufacturing lawyers

Like most lawyers, I am hyper logical. That’s our training and that is who we are. We like order and we like clear explanations for when there is disorder. Clear enough so that we know how to prevent future disorder.

China is not terribly orderly, but well over 95% of the time, the problems foreign companies face in and with China are neither new nor unpreventable. Put another way, when I look at what has gone wrong for foreign companies in China I can usually find a number of things the foreign company  should have done differently to have prevented the problem or to have ameliorated it or at least to have positioned itself to have had real recourse once it occurred. Note that positioning yourself to have “real recourse” is often the single best way to prevent a problem in the first place. See e.g., You Need an Enforceable China Contract No Matter How Much You are Feeling the Love and You Need an Enforceable China Contract No Matter How Much You are Feeling the Love, Part 2. Or on the flip side, check out A Lifetime Sentence for Operating in China Without a Lawyer, Well Sorta, where we discuss the case of someone who is not allowed to leave China and highlight all the things this person did wrong to cause his present situation.

So when someone calls one of my firm’s China lawyers with a China problem for which they are entirely blameless my world gets rocked, at least just a bit. I mean, if that were to happen all the time, there would be no need for people to pay for lawyers, right? The one area where our China attorneys most often see this is when a foreign company has had a great relationship with its China factory for ten or twenty years and then all of a sudden the factory just disappears. What was the foreign company supposed to do? Fly out and visit its factory every two weeks to make sure everything was still okay? Get real.

So I was delighted the when a fellow lawyer sent me the link to a blog post titled, 10 Red Flags Your China Supplier is Going Bankrupt, as this post succinctly lays out the following warning signs for spotting a China manufacturer in trouble:

  1. Excess capacity.
  2. Poor lead times.
  3. Layoffs before the Chinese New Year.
  4. Workers aren’t being paid.
  5. Turnover has been rising for weeks.
  6. New payment terms.
  7. Quality is slipping.
  8. Phone calls and emails go unanswered
  9. Factory abruptly changes location.
  10. High customer complaints.

All of these make sense but I particularly like the following for the following reasons:

##3, 4 and 5. Layoffs, turnover and workers not being paid. If the people with whom you regularly work at your China supplier are disappearing or you hear of workers complaining, ghosting very well is about to happen. Our China manufacturing lawyers have seen this before.

#6. New payment terms. Almost always a sign of a factory in rapid decline or a bank switch scam. Either way, beware.

Any additions to the above?

Thailand manufacturing lawyers Vietnam

Way back in October, 2018, we wrote a post, Would the Last Company Manufacturing in China Please Turn Off the Lights, with the following as its lead paragraph:

The title is an exaggeration, of course. But with my law firm’s international lawyers fielding a steady stream of client requests for help with leaving China for Vietnam, Thailand, Malaysia, Cambodia, India, The Philippines, Indonesia, India and Turkey (mostly), it does sometimes feel as though within three years nobody will be making widgets in China anymore.

It then noted how the international manufacturing lawyers at my law firm have been getting a steady stream of reporters asking us to connect them with our clients that are leaving or looking to leave China. We tell them that for various reasons, none of our clients will be willing to discuss their leaving China and then they usually tell us that they “understand.” See How To Terminate Your China Supplier: Very Carefully and How to Leave China AND Survive.

It then notes how when we write about China economic problems we get hit with invective claiming we are making this stuff up either because we hate China or because we are trying to generate business for ourselves. But guess what people

Also in October, 2018, in response to questions our international lawyers were getting I wrote the following:

I see a lot of foreign companies leaving China now and I see that exodus as continuing. It would hardly be an exaggeration to say that on at least one level, nearly all of our clients would — at least in theory — like to cease having their products made in China. Part of this is due to the hassles and the hard times they have gone through in China and part of this is due to the grass always being greener on the other side. But to a large extent, these (hurt) feelings are mostly irrelevant. What’s relevant is whether these companies can do their manufacturing in a country other than China and whether their company would be better off doing so. I think that in large part the answer to the second question will more often be yes than no but the answer to the first and more important part will more often be no than yes. Put simply, most of the companies currently having their products made in China have no choice. No country right now comes close to matching China for its combination of manufacturing sophistication and low cost and until this changes, the overwhelming bulk of companies having their products made in China will continue to do so.

Further proof of this trend comes from China’s most recent export numbers, which — as this blog has predicted would be the case — continue to rapidly decline. See China’s exports fall more than 20% in February (CNBC) and China February exports tumble the most in three years, spur fears of ‘trade recession. 

I see three big things keeping somewhat of a lid on a manufacturing exodus from China. One, capacity. Countries like Thailand and Vietnam are literally getting overrun by American and European companies seeking to move their manufacturing there and it has gotten to the point where if you do not use a sourcing agent with really good factory contacts in these countries you will likely find it difficult to impossible to find a factory willing to take on your product manufacturing. Two, capability. Countries like Thailand and Vietnam have for years been great at manufacturing certain things and not others. They are both rapidly improving in their capabilities, but they are not at China levels, at least not yet. Three, knowledge and soft infrastructure. Many foreign companies already know China and know how to get a widget made there. Far fewer know Thailand or Vietnam or Indonesia, etc. And even if you don’t know China, it can be amazingly easy to navigate on your own and there are countless people out there who are super knowledgeable (and many who most emphatically are not) to help you. See China Manufacturing: To Sourcing Agent or not to Sourcing Agent, That is the Question. Our clients were having so many problems finding good people to help them with Vietnam and Thailand that we brought in house our two most trusted Thailand and Vietnam people.

If you are going to up and leave China for another country, you will need the very same protections in whatever country you go as you need for China, but specifically tailored for whichever country to which you are going. This may include the following:

  1. An NNN Agreements before you reveal your product specifications or design or customers or any other trade secret.
  2. A Mold/Tooling Ownership Agreement if you will be bringing your molds or tooling from China to the new country or if you will be paying (either directly or indirectly) for new molds or tooling in the new country.
  3. Product Development Agreements if you will be working with your new manufacturer to modify an existing product or create a new one.
  4. Manufacturing Agreements with whomever new who will be making your product. Go hereherehere, and here for what that entails
  5. You will need to register your trademark to protect your brand name and your company name and your logo in whatever new country you will be going. This will likely be the most important thing you do.
  6. design patent or a utility patent
  7. copyright. Usually not needed, but when it is, it’s very important.

And for a good overall read on what your company should be doing NOW in light of China’s plunging economy, check out China’s Economic Slowdown and YOUR Business: The Times they are a Changin’ — which we wrote back in September when many (most?) were denying there was any slowdown at all.

What are you seeing out there?

 

 

International manufacturing contracts lawyers

In Part 1 of this series, we talked about how the product development stage is the highest risk stage for foreign companies manufacturing overseas and yet also the most neglected stage. In Part 2, we talked about how foreign companies often will use NNN agreements in the factory search stage and Manufacturing Agreements (ODM, CM and OEM) for the production stage, but rarely use Product Development Agreements during the product development phase because they often fail to recognize they are in that stage or because they believe their NNN Agreement will protect them. We then explained why this can be a big mistake, the results we often see from this “big mistake” and, most importantly, how to avoid it.

In this Part 3, I am going to make a slight diversion based on an email exchange I have been having with a European company that started with it wanting our international manufacturing lawyers to review an NNN Agreement and a Mold Ownership Agreement it had paid a Chinese law firm to draft. This company was having a “bad feeling” about the documents and wanted our manufacturing lawyers to make sure they “would work for China” before submitting them to its longstanding Chinese manufacturer, with which it had maintained a “superb” relationship for the last seven years. I very quickly looked at the contracts — they were probably passable — but immediately wrote back to the company to ask whether it had a Manufacturing Agreement with this Chinese manufacturer. The response from the Spanish company was essentially, “no, but why.”

The why is that a Manufacturing Agreement is exactly what this company needed and it could have saved time and money and even credibility with its Chinese manufacturer by getting it. I explained that due to the stage it was in with its Chinese manufacturer, it would have been faster, cheaper and way way better for it to have had its Chinese law firm draft a Manufacturing Agreement with its Chinese manufacturer that included a paragraph with NNN provisions and another paragraph simply making clear that the Spanish company owned the listed molds.

That very recently concluded email exchange got me to thinking of how incredibly common it is for companies to come to us after having spent good money for legal things they either did not need at all or barely needed, especially in comparison to what they truly did need. We see this sort of overbuying/overselling all the time. Just last week, I consulted with a company that came to us after having paid for four trademarks in China when due to its situation it clearly only needed one and another company that had paid for a China employment contract even though it had no Chinese entity, which is one of the most dangerous things any foreign company can do. See American Companies in China without a WFOE and the Impact of Donald Trump and US Tariffs and Why Hong Kong is not the Answer.

Pretty much every day, a client or a potential client will come to one of the attorneys at my firm — and this holds true for every area of law in which we practice, not just international law — saying that it wants to retain us for X when the client actually needs Y. Needless to say, our attorney never would say, “sure, I will charge you for Y and do Y” while all the while thinking “this client really needs X.” No. She would say, “wait a second,” what you need here is not Y, but X, and let me explain why this is the case. Unfortunately, Chinese lawyers — certainly NOT ALL Chinese lawyers have been trained differently and I talked about this in an interview I gave back in 2016 (See On Being a China Lawyer and on Doing Business In China: An Interview):

Dan: I’ll backtrack a little and tell you the problems American companies often have with Chinese lawyers.

An American company will hire a Chinese lawyer and tell the Chinese lawyer, “I want to do ‘A,’” and the Chinese lawyer will do “A.”

Three months later the American company will learn that no one’s doing “A” anymore. They’re all doing “B.” So it will go back to the Chinese lawyer and say, “Look, we did ‘A.’ Now everyone’s telling me that wasn’t a good idea.” The Chinese lawyer will then say, “Right, it was not a good idea.”

“Then why did we do ‘A’?”

“Because you told me to do ‘A.’”

It drives American companies nuts. If you had called up an American lawyer, he or she would have said, “Why do you want to do ‘A’? We do ‘B’ 99% of the time. Let’s talk about it.” When somebody tells me they want to do something, I don’t just say, “Yes.” I ask them 10 questions because I want to make sure that’s the right way to go.

The typical dynamic between Chinese companies and Chinese lawyers is, “I’m the boss. You’re my scrivener.”

One time we were brought in to help a Chinese company. Twenty years ago it had formed an American company, and then that American company had formed a Chinese company. It’s called a “roundtripper.” China once gave all sorts of preferences to foreign companies; Chinese nationals would form American companies, then go back to China to get the preferences. Not legal, but it was very common.

This Chinese company had gotten huge. They had a company in the United States that was formed by somebody’s cousin, had never paid taxes, and maybe had aspirations of going public. They needed to clean up their act. It was hugely complicated, and we brought in an international accounting firm to help on the tax side.

My colleague Steve Dickinson is based in China, and one of the lawyers we work with there invites him out to lunch. Steve is thinking, “That’s weird. This lawyer never invites me to lunch.” Steve goes to the lunch and the client is there, and the client has this idea on how to solve the problem in about 1/10 the time and at about 1/100 the cost of what we have said needs to be done.

Steve tells the client (nicely, I presume), “Are you kidding me? You know nothing about U.S. laws, you know nothing about U.S. taxes, you’re not a lawyer or an accountant in China, and you think you’ve just solved the problem? Give me a break.” Why was Steve brought to this lunch? Because the Chinese lawyer knew it was absurd, but he just was not comfortable telling this to his client because that is not his role.

When Chinese companies come over here to the United States, they often want to tell us exactly what to do. Once we took on a case where as soon as we were paid, the Chinese company told us how we were going to handle it. We told them that what they were asking us to do would be the dumbest thing we could possibly do. (I talked with about 10 other lawyers and they were like, “Seriously?”)

“No, we need you to do that,” the Chinese company said.

We responded, “Nope. Here’s your money back.”

As American lawyers, we can’t have that. Our reputations are on the line. We’re not going to do something that makes us look silly and just wastes the client’s time and money. We’ll do things for clients even if we disagree, but not when it’s absurd or unethical.

What does all of the above have to do with saving your shirt when manufacturing overseas? A ton. Because one of the ways you save your shirt is by getting all of the manufacturing contracts and protections you need and no more.

The below is a typical email I send in response to a company that writes saying that they need legal help with their overseas manufacturing and asking how we would propose to provide them with that help.

Working with our international manufacturing lawyers will in the end always depend on what makes sense for your company and your product, but to give you at least some idea of what we do, I can tell you that we usually do some combination of the following for our clients that are looking to have their products manufactured overseas:

NNN/NDA Agreements. We almost always do these in the language of the country of your manufacturer (the official version) and in English (for you) and they typically take us 4-5 business days to complete. You can learn more about our NNN Agreements here. We draft our NNN Agreements to protect confidentiality and to prevent your overseas manufacturer from competing with you or circumventing you. They make sense before you reveal any confidences. If you choose to have us draft an NNN Agreement, we first send you (via DocuSign) a one page Flat Fee Agreement setting out the fee structure. We next send you a questionnaire and when we have your answers to that we draft the NNN in English for your approval. Once you approve of the English language version, one of our lawyers will translate that into the official language and we then send that to you. You then send the full NNN Agreement to your overseas counter-party and if it proposes any changes we will revise it.

Manufacturing Agreements. Once you have chosen your overseas manufacturer, you need a Manufacturing Agreement (a/k/a OEM Agreement or Product Supply Agreement) in the language of the country of your overseas manufacturer (official) and in English (for you). These typically take us 10-14 days to complete. You can find out more about our Manufacturing Agreements here. Our drafting process for these agreements is similar to our drafting process for our NNN Agreements. If you are already certain who you will be using as your overseas manufacturer you can probably skip the NNN Agreement and go straight to the Manufacturing Agreement as our Manufacturing Agreements contain all the substantive provisions of our NNN Agreements.

Trademarks. If you plan to put your company name or your brand name or your product name or your logo on your product or on its packaging, you need to register those as trademarks in the country in which you will be having your product made (there are some exceptions to this which we can discuss when you are clearer on where you will be doing your manufacturing). This is usually true even if you will not be selling your product in the country where your products will be made. Our trademark fees vary by the country. It also generally makes sense for you to have a trademark in those countries in which you have or expect to have substantial sales and we can help you with that also. It also sometimes makes sense to secure patents or trademarks as well.

In addition to the above (each of which depends on your situation and/or your product) and depending on how your production progresses, there may be other agreements necessary. If you want help finding the right factory, we can help with that also, either with our own people (for Vietnam or Thailand) or by referring you to outside sourcing experts.

Our goal is to provide our clients with customized solutions to fit their manufacturing needs. Towards that end, if you have any additional questions, please do not hesitate. In the meantime, if you can tell us more about your product, your situation, and your goals, we can help narrow down your actual needs. At some point I would be happy to get on the phone with you because in 10-15 minutes of my peppering you with questions I am confident I can figure out exactly what you need and if I can’t, I can refer you to one of our more specialized lawyers who can.

Bottom Line: When manufacturing overseas, what makes sense for you is what makes sense for YOU and that is not usually going to be what you read on the internet nor what some other company tells you it did nor what you tell some law firm you need nor what some law firm wants to sell you.

Your thoughts?

International lawyers for manufacturing contracts

In Part 1 of this series, we talked about how the product development stage is the highest risk stage for foreign companies manufacturing overseas and yet also the most neglected stage. Foreign companies will use NNN agreements in the factory search stage and Manufacturing Agreements (ODM, CM and OEM) for the production stage, but they rarely use Product Development Agreements during the product development phase, oftentimes because they do not recognize they are in that stage or because they believe their NNN Agreement will protect them. This is a big mistake that often leads to one of two disasters for the foreign company.

The failure to use a product development agreement often leads to one of two disasters for the foreign company.

The first disaster usually occurs when the overseas manufacturer does the product development work at no charge. In these situations, the overseas manufacturer often will claim the intellectual property rights in the developed product are its own and will “generously” offer to manufacture the product for the foreign company at the price, payment, quantity, quality and delivery terms chosen by the overseas manufacturer. No matter how outrageous the pricing or other demands from your overseas manufacturer, there is little you can do because you waited until development was finished before even considering who would end up with “your” IP and now your overseas manufacturer owns it all. Our international manufacturing lawyers see this all the time, especially with start-up companies involved in making products for the Internet of Things ecosystem. See The Internet of Things: Do You Really Own “Your” IoT Product?

The second disaster stems from foreign companies not considering the procedural/operational issues inherent in successfully developing a product. Foreign companies far often mistakenly assume their overseas manufacturers can develop any product within the tight timeframes and close tolerances required by modern business. This often leads to the following problems:

  • The product is never completed or never works properly.
  • The product is not completed until after the market opportunity has passed.
  • The product ends up costing far more than anticipated.

And again, Internet of Things companies seem particularly prone to this.

The best way to address the above product development risks is with a product specific product development agreement tailored to the country in which your manufacturer is located. A good product development agreement covers the period between the NNN agreement stage when you are figuring out which manufacturer to use and the Manufacturing Agreement stage when you have already selected your manufacturer and know exactly what you will have manufactured.

A good product development agreement generally includes provisions addressing the following:

1. The product to be developed.

2. The specific technology the foreign company and the overseas manufacturer will contribute.

3. Who will provide product specifications and in what form.

4. Who will own the IP rights to the resulting product. Our international manufacturing attorneys often review overseas product development projects where the overseas manufacturer has asserted it owns all of IP rights in the developed product. These overseas manufacturers typically had agreed to make “their” product available to our clients  while at the same time manufacturing the product for their own sales under their own trademark and for sales to competitors of our client. Our clients are usually stunned when we tell them that because they had no written agreement making clear they would own the resulting product and the resulting IP in that product, their overseas manufacturers are legally justified in claiming IP ownership because they contributed their technology to developing the product and because they incurred the product development costs.

5. Who will pay for product development costs?

6. Who will pay for the molds and tooling? This becomes a major issue when the foreign company seeks to use a different manufacturer after product development is complete. In this situation, the overseas manufacturer that helped you to develop the product will likely do one of the following:

a. Refuse to release the molds, tooling, CAD drawings and other items required to manufacture the product.

b. Require you pay a substantial fee to give you the molds, tooling, CAD drawings and other items related to the product.

c. Claim ownership in the IP related to the product and threaten to sue you in its own country if anyone else manufactures the product.

You will be particularly badly positioned if your overseas manufacturer did the development work and produced the molds and tooling at its own cost, though it is also very common for overseas manufacturers to engage in the above tactics even when you paid for the molds and tooling. You are not going to be protected from this unless you have a written agreement (enforceable in your manufacturer’s country) making clear you own the molds and tooling and penalizing the overseas manufacturer for not immediately returning those to you. See Product Molds And Tooling Three Things You Must Do to Hang on to Yours.

7. Setting milestones. Overseas manufacturers will often agree to do your development work but then fail to do so in a timely manner. Your product development agreement should provide incentives for your overseas manufacturer to meet the listed milestones and a penalty if it does not. The following is a typical arrangement:

a. The overseas manufacturer does product development at its own cost and you pay all hard costs for molds and similar items.

b. Milestones and clear specifications for product development are set.

d. You and your overseas manufacturer agree on a target price and quantity for when the product is developed.

e. If your overseas manufacturer meets the milestones and specs and agrees to sell at the target price and quantity, you will then enter into a Manufacturing Agreement with it.

Overseas manufacturers (especially in China and especially in Chinese-owned factories in Vietnam and Thailand) usually prefer to cover all product development costs because they want to own the resulting product and foreign companies far too often go along with this, without realizing this likely means your overseas manufacturer will end up with “your” product and its related IP.

In part 3 of this series we will discuss how to protect your molds and tooling when manufacturing overseas.

Asia product development contracts

When a company comes to us looking to have its product outsourced for manufacturing in a foreign country, they often do not have a fully final product. By this I mean that their “product” can be anything ranging from a mere idea to a prototype needing further development before large scale manufacturing to a product needing minor refinements to a fully-fledged ready-to-go product. Our international manufacturing lawyers deal with less than fully-fledged products more than half the time.

Often, a client will believe its product is “ready to go” when it actually can (and should be) further modified to reduce production costs or simply to make it just a little bit better. It is quite common for good overseas manufacturers to suggest at least a few helpful changes to so-called final products.

Whenever an overseas manufacturer modifies (even slightly) one of our client’s products (and even when they don’t), we as lawyers immediately have the following three questions:

  1. Will our client own the IP rights to the modifications?
  2. Will our client own the IP rights to the final product?
  3. How can we as the lawyers best protect our client’s IP rights in the modifications and the products?

These are not merely academic questions either as our international IP lawyers get a fairly steady stream of American (United States, Canada, Brazil and Mexico, mostly), Australian,  and European companies seeking help to “recover” their IP rights taken by their (mostly) Asian manufacturers. Much of the time there is little our IP lawyers can do in these situations either because it is not clear who owns the IP rights or it is clear that our client unintentionally relinquished the IP rights to its manufacturer. Even worse, there are plenty of times where we have to tell our client that it is not clear who would prevail were we to bring a lawsuit but it is very clear that such a lawsuit will be incredibly time-consuming and expensive and require all sorts of highly paid experts.

Who owns the IP rights in your product? Do you really know? It is not uncommon for manufacturers to wait years before asserting their rights to “your” product. This assertion usually comes when your manufacturer decides the time has become right for it to begin selling its own products or when you decide you want to use another manufacturer. See Your China Factory as your Toughest Competitor and How to Stop Your China Manufacturer from Selling Your Product to Others: Don’t Let This Happen to You for how common the first of these scenarios has become and see Why Changing Suppliers Can Be So Risky for how incredibly common the second of these scenarios has always been.

The product development stage is the highest risk stage for foreign companies manufacturing overseas and yet also the most neglected stage. Foreign companies will use NNN agreements in the factory search stage and Manufacturing Agreements (ODM, CM and OEM) for the production stage, but they rarely use Product Development Agreements during the product development phase, oftentimes because they do not recognize they are in that stage or because they believe their NNN Agreement will protect them. This is a big mistake that often leads to one of two disasters for the foreign company.

In part 2 of this series we will set out why not having a timely and country-specific Product Development Agreement can a mistake, the two disasters our international lawyers often see that arise from this mistake and, most importantly, what you can do to prevent all this.

Stay tuned….

Dumping China Thailand Taiwan India Carbon Steel

Vulcan Steel Products Inc. (Petitioner) on February 19, 2019, filed antidumping (AD) and countervailing duty (CVD) petitions against Carbon and Alloy Steel Threaded Rod (“Steel Threaded Rod”) from China, India, Taiwan and Thailand.

Under U.S. trade laws, a domestic industry can petition the U.S. Department of Commerce (“DOC”) and U.S. International Trade Commission (“ITC”) to investigate whether the named subject imports are being sold to the United States at less than fair value (“dumping”) or benefit from unfair government subsidies.  For AD/CVD duties to be imposed, the U.S. government must determine not only that dumping or subsidization is occurring, but also that the subject imports are causing “material injury” or “threat of material injury” to the domestic industry.

— Scope

The proposed scope definition in the petition identifies the merchandise to be covered by these AD investigations as:

The merchandise covered by the scope of these investigations is carbon and alloy steel threaded rod. Steel threaded rod is certain threaded rod, bar, or studs, of carbon or alloy steel, having a solid, circular cross section of any diameter, in any straight length. Steel threaded rod is normally drawn, cold-rolled, threaded, and straightened, or it may be hot-rolled. In addition, the steel threaded rod, bar, or studs subject to these investigations are non-headed and threaded along greater than 25 percent of their total actual length. A variety of finishes or coatings, such as plain oil finish as a temporary rust protectant, zinc coating (i.e., galvanized, whether by electroplating or hot-dipping), paint, and other similar finishes and coatings, may be applied to the merchandise.

Steel threaded rod is normally produced to American Society for Testing and Materials (“ASTM”) specifications ASTM A36, ASTM A193 B7/B7m, ASTM A193 B16, ASTM A307, ASTM A320 L7/L7M, ASTM A320 L43, ASTM A354 BC and BD, ASTM A449, ASTM F1554-36, ASTM F1554-55, ASTM F1554 Grade 105, American Society of Mechanical Engineers (“ASME”) specification ASME B18.31.3, and American Petroleum Institute (“API”) specification API 20E. All steel threaded rod meeting the physical description set forth above is covered by the scope of these investigations, whether or not produced according to a particular standard.

Subject merchandise includes material matching the above description that has been finished, assembled, or packaged in a third country, including by cutting, chamfering, coating, or painting the threaded rod, by attaching the threaded rod to, or packaging it with, another product, or any other finishing, assembly, or packaging operation that would not otherwise remove the merchandise from the scope of the investigation if performed in the country of manufacture of the threaded rod.

Carbon and alloy steel threaded rod are also included in the scope of this investigation whether or not imported attached to, or in conjunction with, other parts and accessories such as nuts and washers. If carbon and alloy steel threaded rod are imported attached to, or in conjunction with, such non-subject merchandise, only the threaded rod is included in the scope.

Excluded from the scope of these investigations are: (1) threaded rod, bar, or studs which are threaded only on one or both ends and the threading covers 25 percent or less of the total actual length; and (2) stainless steel threaded rod, defined as steel threaded rod containing, by weight,1.2 percent or less of carbon and 10.5 percent or more of chromium, with or without other elements.

Excluded from the scope of the antidumping investigation on steel threaded rod from the People’s Republic of China is any merchandise covered by the existing antidumping order on Certain Steel Threaded Rod from the People’s Republic of China. See Certain Steel Threaded Rod from the People’s Republic of China: Notice of Antidumping Duty Order, 74 Fed. Reg. 17,154 (Dep’t Commerce Apr. 14, 2009).

Steel threaded rod is currently classifiable under subheadings 7318.15.5051, 7318.15.5056, and 7318.15.5090 of the Harmonized Tariff Schedule of the United States (“HTSUS”). Subject merchandise may also enter under subheading 7318.15.2095 and 7318.19.0000 of the HTSUS. The HTSUS subheadings are provided for convenience and U.S. Customs purposes only. The written description of the scope is dispositive.

— Alleged AD Margins.

Petitioner calculated estimated dumping margins of:

China:  53.57% to 55.60%
India:  25.43% to 28.34%
Taiwan:  32.10%
Thailand:  20.3%

— Named Exporters/ Producers

Petitioner included a list of companies that it believes are producers and exporters of the subject merchandise.  See attached list here.

— Named U.S. Importers

Petitioner included a list of companies that it believes are U.S. importers of the subject merchandise.  See attached list here.

— Estimated Schedule of Investigations.

February 21, 2019 – Petitions filed

March 13, 2019 – DOC initiates investigation

March 14, 2019 – ITC Staff Conference

April 7, 2019 – ITC preliminary determination

July 21, 2019 – DOC CVD preliminary determination (assuming extended deadline)

September 19, 2019 – DOC AD preliminary determination (assuming extended deadline)

February 1, 2020 – DOC AD/CVD final determination (assuming extended deadlines)

March 17, 2020 – ITC final determination (extended)

March 24, 2020 – DOC AD/CVD orders issued (extended)

This product has previously been subject to other AD/CVD investigations.  In 2009, AD/CVD orders were imposed on carbon steel threaded rod from China.  In 2013, although Petitioner tried to get AD/CVD orders imposed on carbon steel threaded rod from India and Thailand, the ITC made a negative determination (i.e, no injury or threat of injury caused by the subject imports). This Petitioner appears to be a serial user of US trade laws repeatedly trying to get the US government to issue protective duties against subject imports. Given that the Petitioner’s most recent attempt to get AD/CVD duties imposed was unsuccessful, foreign exporters or US importers of this product may be able to use similar arguments to explain why these new AD/CVD actions should also be rejected.

Allow me to now pile on from a legal perspective and talk about how our international IP lawyers far too often have to deal with the remnants of companies that have had their IP “stolen by China” before they even made their first product. Protecting your IP before you go on Kickstarter is critical and far too few companies do this. This also costs money, but almost always less than $5,000, even for companies with steep IP requirements.

The Titoma article recognizes how consistently and ruthlessly and quickly Chinese companies are to make Kickstarter projects their own and beat

As a soon as a project is starting to get some good traction on the internet you can rest assured there are factories in China working on a lower cost version. This means the market window to establish yourself as the actual leader of the segment you’re creating shrinks rapidly with every month delay.

I can and will top this by describing what our lawyers see Chinese companies do with Kickstarter products. Now don’t get me wrong, our international manufacturing lawyers love Kickstarter. We’ve had clients start from nothing and raise hundreds of thousands of dollars from Kickstarter and then use that proof of concept to raise hundreds of thousands (even millions more). We’ve also had companies come to us after going up in flames due to Kickstarter. In Kickstarter And China Manufacturing. You Are So Wrong On Your China Risks, we talked about a typical kickstarter China conversation:

Company with product:  We just raised money on Kickstarter and we have lined up a China manufacturer for our product and we are thinking it is time to get a China lawyer involved, though we do not have much money for legal yet.

Me: Well, if you are going to spend money on anything, the most important thing is your intellectual property.

Company with product:  We figured we would deal with that later. Right now we just want someone to review our NDA and then review the manufacturing contract we will be drafting.

Me: Who drafted your NDA, an attorney with China experience?

Company with product:  No, we did it ourselves. It really just needs a quick review.

Me: I have never seen a self-drafted NDA that just needs a quick review for China. To work for China, you need a China NDA, which we actually call an NNN Agreement. NDAs are geared towards preventing disclosures of information but your biggest risk in China is typically not going to be your manufacturer disclosing your information; it’s going to be your manufacturer stealing your product and selling it worldwide and to your own customers.  Also, to be effective, the NNN Agreement should be in Chinese and it should contain liquidated damages provisions. There are all sorts of other things that need to go into it as well, but these are the basics. The same holds true for an OEM Agreement. But really, my biggest concern is your IP.

Company with product:  Well, to be honest with you, when we listed the risks on our Kickstarter, we said that the risks were manufacturing delays. We didn’t even mention our IP and so I don’t see how we can pay you anything right now to protect that.

Me: Well, if you cannot afford to protect your IP, it is probably not worth your money to pay for contracts. Why spend money for an NNN to protect yourself against a few companies — your potential manufacturers — when you are not able to spend money to protect yourself against the millions of other people out there who could steal your product? And as I hinted, we will need to start over on these contracts, using your draft contracts for nothing more than to determine certain facts regarding what you are doing. I really think that you should at least register your key trademarks.

Company with product:  Yeah, well, I’ll talk all of this over with my partners.

If you are going to do just one thing to protect your company and your product before you go on Kickstarter, register your brand name as a China trademark. In China: Do Just ONE Thing: Register Your Trademarks AND Your Design Patents, I talk about why this is so important:

When it comes to the need to secure the appropriate trademarks in China, I am blunt. Anyone who doesn’t do it is making a big mistake:

I tell them how if they do nothing else, they should immediately register their trademarks in China. This one usually surprises them and they often think I have misunderstood what they are planning for China. They at first do not understand why I am emphasizing the need for their filing a trademark in China when they have no plans to sell their product in China. I then explain how China is a first to file country, which means that, with very few exceptions, whoever files for a particular trademark in a particular category gets it. So if the name of your company is XYZ and you make shoes and you have been manufacturing your shoes in China for the last three years and someone registers the “XYZ” trademark for shoes, that company gets the trademark. And then, armed with the XYZ  trademark, that company has every right to stop your XYZ shoes from leaving China because they violate that other company’s trademark.

I had a similar discussion the other day with a company that told me that they will soon be listing on Kickstarter. I very strongly suggested they register their brand name as a trademark before they go on Kickstarter and sent them some blog link as to why. They responded as follows:

Thanks Dan – a good read… so, ok here are my questions/responses.

1)  It seems like you keep seeing the same pattern over and over (i.e. ignoring your good and  prudent advice) – so what is the common root cause of the theme? Said in another way, why do so many smart/rational folks decide to act  less smart/irrational by not doing IP/Trademark in China? I am sure a balanced analysis may show they are, at minimum, acting rationally, but tough choices are being made. My guess is that the cost seems prohibitive or there is no “on ramp” to an effective  China IP  highway. The feeling is overwhelming and akin to going from 0-65 mph in 3.5 seconds and asking everyone to drive a Ferrari because it has the 0-65 speed you need.

2)   I see trademark as something worth reviewing, possibly an “on ramp” strategy – what is the cost?

I am probably not too dissimilar to those other startups. All things considered, if I have a choice between using limited/scarce funds to allocate between textbook perfect China IP vs getting to a revenue state, most will chose allocating towards revenue.

I responded as follows:

They think the world is the United States. The problem is it isn’t. They’ve been trained to go to market and then build the foundation. That works for the United States, but not for China. In the United States, the first to use a brand name gets the trademark and to get a trademark you must use it. This leads American companies not to worry much about trademarks. In China, it’s the first to register who gets it and use is irrelevant (except if you go three years without using your registered trademark, you can lose it). There is no trademark via use.

American companies also ignore that just manufacturing in China requires a trademark because if someone registers your brand name as a trademark they get it and then they can stop your product from leaving China.

And here’s the big thing. As soon as any product goes up on Kickstarter, a ton of people in China will review it and if they like it they will register the product’s brand name as their own China trademark and then start making it. Oftentimes the company that makes it will be the same one you are talking to about having your product made and they will keep talking to you just to stall you. In the meantime they will beat you to market with your product and then be able to block your product from leaving China because it violates their trademark. And all this just keeps getting worse. See China Trademark Theft. It’s Baaaaaack in a Big Way. And it is mostly American companies that pay for this because the EU trademark system is more like China and so they get it. In fact, many Western European countries so get this that their governments will pay for their start-up companies to secure their IP in China early. Because of this we have represented a ton of Swedish and other European start-up product companies.

Also, Americans love patents and underestimate the value of trademarks. See China and Worldwide: Trademarks Good, Patents Bad for more on this. Patents are expensive and difficult to enforce and they rarely help you get something taken down off an online marketplace. Trademarks are cheap and easy and surprisingly powerful.

So for the thousandth time, register your brand name as a China trademark. EARLY — before anyone in China knows what it is and can beat you to it.

 

China lawyers

Because of this blog, our international lawyers get a fairly steady stream of legal questions from readers, mostly via emails but occasionally via blog comments or phone calls as well. If we were to conduct research on all the questions we get asked and then comprehensively answer them, we would become overwhelmed. So what we usually do is provide a quick general answer and, when it is easy to do so, a link or two to a blog post that provides some additional guidance. We figure we might as well post some of these on here as well. On Fridays, like today.

We are always preaching how if you are going to have your products manufactured overseas you should have the following:

1. An NNN Agreement.

2. A Manufacturing Agreement.

3. A registered trademark in the country in which you are manufacturing and in the countries in which you will be selling your product.

4. Oftentimes, a Product Development Agreement as well.

But we are often asked by companies whether they need all of the above (or at least the first three) if they will only be buying X amount of product at a time or even over time. There are no hard and fast rules on this. We usually like a 10-15 minute phone calls to ask questions and then give answers. Will you be putting your brand name or your company name or your logo on your product? What about on its packaging? How much will you be paying for your initial order? Will you definitely be making future orders? For how much? What, if anything is unique about your product? In what countries will you be selling your product? Do you have any patents, trademarks or copyrights anywhere in the world?  Where? What kind of patents? How terrible would it be for you if your product is sold by someone else before you can sell it? How terrible would it be if your product is sold by someone else but without your brand name or your logo? How easy would it be for someone who is not your manufacturer to duplicate your product? The answers to these questions allow us to give our advice.

Any general guidelines? Maybe the following:

If you are only going to be doing a one-time $10,000 or less purchase you probably do not need any of the four.

If you will be making a $10,000 purchase with plans to buy more if you do well selling your initial order, you can usually get away with just a trademark and maybe an NNN Agreement at the beginning, but maybe not.

We have seen too many start-up companies get shut down early for not protecting themselves early for us to tell anyone that not doing something will not put their future at risk.

 

 

 

On February 4, 2019, The American Institute of Steel Construction, LLC (Petitioner) filed antidumping (AD) and countervailing duty (CVD) petitions against Fabricated Structural Steel (“FSS”) from Canada, China and Mexico. You can see that petition here.

Under U.S. trade laws, a domestic industry can petition the U.S. Department of Commerce (“DOC”) and U.S. International Trade Commission (“ITC”) to investigate whether the named subject imports are being sold to the United States at less than fair value (“dumping”) or benefit from unfair government subsidies.  For AD/CVD duties to be imposed, the U.S. government must determine not only that dumping or subsidization is occurring, but also that the subject imports are causing “material injury” or “threat of material injury” to the domestic industry.

Scope

The proposed scope definition in the petition identifies the merchandise to be covered by this AD/CVD investigation as the following:

The merchandise covered by this investigation includes carbon and alloy (including stainless) steel products such as angles, columns, beams, girders, plates, flange shapes (including manufactured structural shapes utilizing welded plates as a substitute for rolled wide flange sections), channels, hollow structural section (HSS) shapes, base plates, plate-work components, and other steel products that have been fabricated for assembly or installation into a structure (fabricated structural steel). Fabrication includes, but is not limited to, cutting, drilling, welding, joining, bolting, bending, punching, pressure fitting, molding, adhesion, and other processes.

Fabricated structural steel products included in the scope of this investigation are products in which: (1) iron predominates, by weight, over each of the other contained elements; and (2) the carbon content is two percent or less by weight.

Fabricated structural steel is covered by the scope of the investigation regardless of whether it is painted, varnished, or coated with plastics or other metallic or non-metallic substances. Fabricated structural steel may be either assembled; disassembled, but containing characteristics or items, such as holes, fasteners, nuts, bolts, rivets, screws, tongue and grooves, hinges, or joints, so that the product(s) may be joined, attached, or assembled to one or more additional product(s); or partially assembled, such as into modules, modularized construction units, or sub-assemblies of fabricated structural steel.

Products under investigation include carbon and alloy steel products that have been fabricated for erection or assembly into structures, including but not limited to, buildings (commercial, office, institutional, and multi-family residential); industrial and utility projects; parking decks; arenas and convention centers; medical facilities; and ports, transportation and infrastructure facilities.

Subject merchandise includes fabricated structural steel that has been assembled or further processed in the subject country or a third country, including but not limited to painting, varnishing, trimming, cutting, drilling, welding, joining, bolting, punching, bending, beveling, riveting, galvanizing, coating, and/or slitting or any other processing that would not otherwise remove the merchandise from the scope of the investigation if performed in the country of manufacture of the fabricated structural steel.

Fabricated structural steel may be attached, joined, or assembled with non-steel components at the time of importation. The inclusion, attachment, joining, or assembly of non-steel components with fabricated structural steel does not remove the fabricated structural steel from the scope.

All products that meet the written physical description are within the scope of this investigation unless specifically excluded. Specifically excluded from the scope of this investigation is certain fabricated steel concrete reinforcing bar (“rebar”). Fabricated rebar is excluded from the scope only if (i) it is a unitary piece of fabricated rebar, not joined, welded, or otherwise connected with any other steel product or part; or (ii) it is joined, welded, or otherwise connected only to other rebar.

Also excluded from this scope is fabricated structural steel used for bridges and bridge sections. For the purpose of this scope, fabricated structural steel used for bridges and bridge sections is defined as fabricated structural steel that is used in bridges and bridge sections and that conforms to American Association of State and Highway and Transportation Officials (“AASHTO”) bridge construction requirements or any state or local derivatives of the AASHTO bridge construction requirements.

Also excluded from this scope are pre-engineered metal building systems. For the purposes of this scope, pre-engineered metal building systems are defined as complete metal buildings that integrate steel framing, roofing and walls to form one, pre-engineered building system and are designed and manufactured to Metal Building Manufacturers Association guide specifications. Pre-engineered metal building systems are typically limited in height to no more than 60 feet or two stories.

Also excluded from this scope are steel roof and floor decking systems designed and manufactured to Steel Deck Institute standards.

Also excluded from the scope are open web steel bar joists and joist girders that are designed and manufactured to Steel Joist Institute specifications.

The products subject to the investigation are currently classified in the Harmonized Tariff Schedule of the United States (HTSUS) under subheadings: 7308.90.9590, 7308.90.3000, and 7308.90.6000.

The products subject to the investigation may also enter under the following HTSUS subheadings:  7216.91.0010, 7216.91.0090, 7216.99.0010, 7216.99.0090, 7228.70.6000, 7301.10.0000, 7301.20.1000,            7301.20.5000, 7308.40.0000, 7308.90.9530, and 9406.90.0030.

The HTSUS subheadings above are provided for convenience and customs purposes only. The written description of the scope of the investigation is dispositive.

 

Alleged AD Margins

Petitioner estimated dumping margins of up to 31.46% for Canada, 218.85% for China, and 41.39% for Mexico.

Although Petitioner alleged numerous government subsidy programs that benefitted the Canadian, Chinese, and Mexican FSS industries, Petitioner did not allege specific subsidy rates.

 

Named Exporters/ Producers

Petitioner included a list of companies it believes are producers/exporters of the subject merchandise. You can see that list here.

 

Named U.S. Importers

Petitioner included a list of U.S. importers it believes to have imported the subject merchandise.

 

Estimated Schedule of Investigations

February 4, 2019 – Petitions filed

February 25, 2019 – DOC initiates investigation

February 26, 2019 – ITC Staff Conference

March 21, 2019 – ITC preliminary determination

July 5, 2019 – DOC CVD preliminary determination (assuming extended deadline)

September 3, 2019 – DOC AD preliminary determination (assuming extended deadline)

January 16, 2020 – DOC final determination (extended and AD/CVD aligned)

March 1, 2020 – ITC final determination (extended)

March 8, 2020 – DOC AD/CVD orders issued (extended)

 

If you are on one of these lists or you fear you should start preparing to respond.

Foreign Manufacturing Contracts

— Value of Manufacturing Agreements

Creating a clear manufacturing agreement can alleviate the various legal issues inherent in manufacturing overseas. Before we discuss the key terms for your manufacturing contract, we will briefly address why it is so important to have such a contract at all, even in countries with weak legal systems. There are three reasons why it makes sense to have a contract with your manufacturer and only one of those reasons is enforceability in court:

  1. Clarity. Having a well-written contract in the language of the manufacturing country will ensure that your manufacturer understands exactly what you want. For example, including a clause in your contract that fines the supplier for each day late will let your supplier know that you are serious about your manufacturing deadlines. At least half of the disputes we see between foreign manufacturers and their buyers from different countries stem more from cultural-linguistic misunderstandings as opposed to animus.
  2. Prevention. A well-crafted manufacturing contract with well-crafted damages provisions will convince your manufacturer that it will be better off complying with your contract than violating it. If your contract has clear and strict written deadlines, your manufacturer will give your products priority over its buyers without clear and strict written deadlines when it is facing a production crunch.
  3. Enforceability. Our law firm has written hundreds of manufacturing contracts and yet we have never had to litigate any of them. But when our firm’s international litigators have sued or threatened to sue or arbitrated or threatened to arbitrate on well-written manufacturing contracts drafted by other law firms, we have seen the benefits of having a quality contract, even in countries notoriously bad at contract enforcement.

If your foreign manufacturer believes your manufacturing contract will be enforced it likely will act accordingly. Similarly, if your foreign manufacturer believes no court will enforce your manufacturing contract, it likely will act accordingly.

— OEM, CM, ODM

Most manufacturing contracts we draft involve one of three different types of manufacturing arrangements: Original Equipment Manufacturing (OEM), Contract Manufacturing (CM), and Original Design Manufacturing (ODM). These three different arrangements influence various legal issues inherent to overseas manufacturing.

Type 1: Original Equipment Manufacturing (OEM). In this arrangement, the foreign buyer purchases a product from a foreign country factory that is already being manufactured by that factory. The product buyer then “packages” this product with its own trademark and logo. The buyer and the factory may agree to certain cosmetic changes (color, shape, minor added features) that further customize the product for the buyer.

In this sort of OEM arrangement, intellectual property (IP) is usually clear: the buyer owns its branding (trademarks, logos and packaging) and the factory owns the product. Difficulty arises once the product is customized. Who owns the IP once the buyer has made changes to the product? An OEM agreement can provide clarity here. Usually, the buyer seeks to restrict the factory from using the customization in selling the base product to third parties.

Type 2: Contract Manufacturing (CM). In this arrangement, the foreign buyer has a fully developed product design. Traditionally, this design was of a product that had been manufactured by the buyer in its home country. More recently, the product is a new design being manufactured for the first time overseas. In a CM arrangement, ownership may seem simple: the foreign buyer owns all the IP, both in design and branding, and the factory owns nothing. In practice, however, the division is not always so clear. For example, your factory may change your product’s design and use those design changes to modify its own products it sells in direct competition with your products. Difficulties exist in every contract manufacturing project and they can be resolved with a clear, written agreement.

Type 3: Original Design Manufacturing (ODM). As outsourced factories are becoming more technically competent, foreign buyers have started entering into arrangements in which their overseas factory does some or all the design work for the product. There are many variations on this ODM approach. In its most fundamental form, the foreign buyer provides drawings and a specification sheet and the overseas factory does the rest of the work in consultation with the buyer.

Under this sort of arrangement, the obvious question is who owns the design of the product? Both the foreign buyer and its overseas factory will claim ownership of the design using conflicting arguments. The overseas factory will agree to make the product on an exclusive basis for the foreign buyer, but the foreign buyer does not have the right to have the product made by a third party factory. This position can come as a bad surprise to the foreign buyer, particularly when its overseas factory suddenly announces it will be doubling the price for manufacturing the product. These issues can get even more complex when the product incorporates or is based on technology clearly owned by the overseas factory. In this setting, the factory will often state that the buyer can go anywhere it wants to manufacture the buyer’s own portion of the product design, but no third party factory can make use of the factory’s proprietary technology in the manufacturing process. Consider this case for a foreign buyer who has spent considerable time and effort to develop a product design only to learn after a year that its overseas factory has decided to terminate the manufacturing agreement.

Once again, the only way to resolve these issues is to confront them in advance with a detailed written ODM agreement that sets out a resolution to these issues that is fair to both sides. There is no simple, legal default answer to any of these difficult issues. Or, rather, the legal default in most countries will favor the position of the overseas factory. Absent a clear agreement on how to proceed, the foreign buyer will lose pretty much every time.

Asia has become the main location for start-up companies with an innovative product concept but no manufacturing facility. The most common form of ODM for foreign start-ups in Asia is some form of co-development. Under the old model of co-development, IP ownership was clear: the foreign entity paid the fee and had 100% ownership of the product. The issue our manufacturing lawyers keep encountering is that the legal consciousness of the parties to these transactions is stuck in the old model of straight development for a fee. But the issues that arise under the new, co-development model are quite different from the former “straight” development model.

 

— Product Development.

The basic issues to consider in an overseas co-development project are as follows:

  1. Will your overseas factory do the development work at its own expense or will you pay for the development work?
  2. What is the time schedule for the product development work?
  3. What is the final price goal for the product?
  4. What exactly are the “deliverables” and what is the process for determining whether the deliverables meet your goals?
  5. Who will design and manufacture the molds and tooling? For more on molds check out Overseas Manufacturing: How To Hang On To YOUR Molds

Though these five issues are normally difficult to resolve, they are actually the easy part of the process. The more difficult issue is who owns what with respect to the intellectual property in the product. Determining that your overseas factory owns 50% and you own 50% may be relevant for allocating income from commercialization of the IP, but it does not tell you anything useful on the practical level of manufacturing the product.

A foreign buyer that wishes to move its production to a different factory can legally do so only if it owns 100% of the IP; if the overseas factory owns part of the IP, the foreign buyer cannot legally switch its production to a new factory without a license or permission from its overseas factory.

 

— IP Protection

Overseas factories will usually take the following positions regarding IP:

  • The foreign buyer owns the exterior design (design patent) for the product. The customer owns its trademarks and logos.
  • The overseas factory owns the core intellectual property for the product.
  • The overseas factory agrees to manufacture the product for the foreign buyer on an exclusive basis. However, the overseas factory is free to continue using the core intellectual property in manufacturing for itself and in manufacturing products for other customers. This includes the overseas factory manufacturing products that will directly compete with the foreign buyer’s product. The only limitation on the overseas factory is that it cannot employ its IP to manufacture a product that uses the exterior design, trademark or logo of the foreign customer.
  • The foreign buyer cannot take have its product made by any other factory.

If your overseas factory takes the “you cannot go anywhere else” approach you will need to consider critical issues that arise at the production stage. Specifically, you will need to consider what will happen in the following common situations:

  • The overseas factory raises its price to an unacceptable level.
  • The overseas factory cannot meet your quantity or time of delivery requirements.
  • The quality of the product is not acceptable. There are consistently too many defects.
  • The overseas factory decides to stop manufacturing for you because it decides to manufacture a similar product for itself or for a larger company that generates larger or more consistent orders.

When these things happen, the remedy is to move to a different factory. Your ability to switch to a new overseas factory is what keeps your existing overseas factory “under control.” Now consider the situation where you cannot move your production to a different overseas factory. This puts you at the mercy of the factory and this is a situation you must avoid. For more on why it is so important to avoid this sort of situation, check out China and The Internet of Things and How to Destroy Your Own Company, where we talk about companies that have come to our law firm too late.

The international standard for dealing with the above intellectual property manufacturing issues is as follows:

  • The overseas factory must make your product for you for so long as you are interested in the product. If the factory chooses to stop making your product for you, it must provide you with a royalty free license to the technology necessary for you to be able to manufacture your product in a different factory. If the factory wants to avoid this result it must continue to manufacture your product for you.
  • The overseas factory is locked into a specific price for a specific period. Assuming a long term production arrangement there probably will be valid reasons for the factory raising or lowering the price. For example, exchange rate fluctuation can be a good reason to go in either direction on price. To provide for reasonable price changes, your contract should provide a mechanism for annual price adjustments. This mechanism can range from a simple index to a complex formula that accounts for multiple factors.
  • There are two primary mechanisms for dealing with the quantity/time issue. The first is to develop a production schedule that binds both parties. The second is to provide that if your factory is unable to meet your requirements it is contractually required to license production at an alternative location in the quantity necessary to meet the excess requirements.
  • Your manufacturing contract should provide for the situation where your overseas factory consistently violates your quality standards by giving you the right to terminate the manufacturing contract for breach. Your contract should state that if you terminate your manufacturing contract because of a breach by your overseas factory, your factory automatically licenses you to manufacture your product in a different factory. Some overseas factories will claim this rule allows you to claim breach simply to switch to a new factory. If this is a genuine concern, your agreement can provide for dispute resolution focused solely on this issue.

Though the above provisions are both fair and standard in international custom design and manufacturing, many overseas manufacturers refuse to discuss these matters or to accept a reasonable solution. The overseas factory knows its foreign buyer will be stuck and stuck is exactly where it wants its foreign buyer to be. Being stuck with a factory that behaves unreasonably is an unpleasant and usually very expensive experience. You should consider carefully whether you want to proceed in that kind of situation.

You do not want to be ambushed by these critical issues after you have spent considerable time and money in developing a product with a factory that will then hold you hostage at the production stage. See China and The Internet of Things and How to Destroy Your Own Company for a taste of what this can look like.

You need to get clear on these design and manufacturing and pricing and production and intellectual property issues from the start. This means you need an ODM agreement that sets forth how they will be resolved.