How IP is changing in China

The issue of IP came up with one of my customers lately. But this was not what you would expect, a situation where a US Company is complaining about a Chinese company taking their design or product. In this case, it was the other way around; I was asking a customer of mine not to copy the designs of a factory I had met and introduced him to. The FTY could not meet my customer’s requirements so my customer, without my knowledge, simply gave the factory’s designs to another China vendor. When I found out about this and approached my customer telling him that I did not think this was the right thing to do, my customer justified his actions as follows: 

“IP is not a one-way street, especially in China, which has a history of such violations…if fact they based 25 years of growth on a copying everything in sight…and still do so.” 

The fact,  however, is that China is changing very fast and IP in China  means a lot more now than it used to.  IP  infringement claims rose 100% from 2010 to 2011 and most of these were domestic on domestic claims. Overseas companies accounted for just under 0.02% of claims filed in 2011.  This tells you that more and more China vendors are taking IP seriously.

A project  last year gave me some first-hand experience on how IP is changing in China. I had been asked by a US company to source a standard office product. It was a non design-driven product that was already being made in China but my customer wanted to find it for a lower cost. A couple of vendors I asked said that the product was very simple but they could not do make it without providing a reason.  Another vendor I asked told me that the product used a patented design of another Chinese company (something unbeknownst to me at the time) and this was the reason why he and the vendors I had approached were unwilling to accept an order.  I was very impressed by this and in fact applauded the response from the China vendors – even though I had to tell my customer they would have to order direct from the manufacturer at a cost they probably did not want to pay. As someone who has been doing business in China for years and has had to listen to countless stories about IP violations,  it was nice to see that China was catching up to the rest of the world in terms of IP protection. IP DOES matter now in China. 

In this climate product development by US companies in China should be pursued with all the respect and legality that it is in the US. As I said to my customer: if you want to do business in China you have to play by China rules.  Those rules now include IP.

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Giving your vendors enough time on orders

It is very important when you give an order to a China vendor to know exactly what you need and when you will need it.  A case in point is a company I am working with now.

This company has been developing some new products for a big US trade show at the end of February. Up to this point we have been working primarily on designs and approving prototype samples.  I sent my customer an email at the beginning of the New Year telling him that we had to take an overview of all the projects because of Chinese New Year,  when we could expect a significant slowdown in activity.  In reply, my customer told me that he will need a very large number of samples for the show.  I was a bit surprised by the large QTY of samples as was the vendor to whom I had passed on my customer’s request. Fortunately I had inquired of my customer well ahead of time.  Had I not asked him about his show-sample requirements I don’t think he would have told me until it was too late.  There are sometimes so many parties involved in a China production order that you really need to be aware of this and give the vendors plenty of notice so that they can plan accordingly. For this particular order the CMT FTY has to get the fabric from the print mill which as it turns out is on a different holiday schedule than the CMT factory.  Things will be tight but we should get the samples in time. 

Another problem with this current project is the packaging.  I raised the issue of packaging a month ago with my customer but with six weeks until the show the packaging specs are still not complete. The result is that it may be very hard for my customer to have his packaging printed in China in time for his show.  He may very well have to print in the US at far greater cost.  Many customers tend to neglect packaging as they focus on product but the fact is that packaging can take a lot of time and sometimes needs just as much attention as the actual product(s).  

So where we are now is that we are slightly rushing vendors to get everything ready for the show.  Rushing vendors is not a good idea because as my customer, from his own experience,  has acknowledged quality tends to suffer.  I would add that price also can go up – especially when you are dealing with first-time vendors.  In short, give yourself plenty of time. In my customer’s own words: “the earlier we convey our needs for the show, the better off we will be !!!”

Providing vendors with target costs

One of the most important things you can do when you are negotiating with a first time vendor is to give them a target cost. The target cost tells the vendor what you expect or hope to pay, and at the very onset it gives you some leverage in your relationship with them. You are essentially sending the supplier a message that if they want your business they will have to give you the product at a cost which is acceptable to you.  I have, however, met people who do not like to give new China vendors target costs, their hope being that what the vendor quotes will be much lower than what they, the buyer,  are expecting to pay.  I have even read China sourcing blogs where “experts” advise against giving target costs to vendors for precisely this reason.  I am always a bit shocked when I see this advice because personally I think that not giving a target cost  is a very risky strategy.  If you don’t give the vendor a target cost then they may very likely come back with a price that is over, not under, the cost that you have in mind. If this happens you have two choices:

a.) Meet the vendor’s cost which will impact your own margins and will send a message to the vendor that you are a pushover.  This will color your relationship with them going forward and allow them to manipulate not only cost but quality and lead-time.

b.) Walk away from the vendor.  This is fine unless the vendor has a product that you want. You also risk eliminating who might turn out to be perfectly solid vendors for your product.

A good case in point is a project I am currently working on.  I am sourcing a product and I am providing a target costs to all vendors I approach.  Most vendors so far have come back and met my target cost. A couple of them have told me that they can make the product at exactly the cost I gave them which tells me that, yes, I probably could have approached them with a lower target cost.  Still I am comfortable with the price they have given me.  Concurrently, I am having someone in China source the same product for me.  This person told me that they are not giving vendors a target cost because it is their belief that the product is in fact worth less than my target ( which seems to be the case based on the quotes I have received ). However, the quotes my Shanghai contact has received so far are about double the quotes I have received,  once again because he did not clarify for vendors his expectations about the value of the product.

It is good to remember that “low-cost” means different things to a Chinese FTY and to an overseas buyer.  When an overseas buyer thinks he/she is getting a product for low cost, the Chinese FTY may have the impression that the buyer is in fact over-paying for the product. In fact, I would venture to say that most China vendors have always worked under the assumption that foreign buyers will over-pay for product in China.  Their initial quotes to you often reflect this mindset – unless you give them a target cost.