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CONTRACT MANUFACTURERS IN CHINA

After months of study and scrutinizing, you’ve found a reliable contract injection molding manufacturer in China that has the best quality and value combination and has a proven history, and now it’s time to seal the partnership with an agreement for supply. Due to outsourcing and globalization many CMs are in China nowadays are huge and sophisticated, yet many of them prefer to make supply agreements appear like an unprofessional purchase order. Sometimes, they may use this method to speed up the process, but often they do it in order to ensure that buyers don’t receive the protections they need. It is best not to bring the CM quick to sign on with an unreliable supply agreement , and leave many important issues unresolved. Many companies have had to learn this lesson by the way.

A great supply agreement must contain a comprehensive list of the business needs of the buyer and the CM and also the legal recourse that the buyer can pursue against the CM in the event of a breach. Here are six suggestions on those “must-haves” in supply agreements with Chinese CMs.

  • Be sure to sign a contract with the correct party.

It is important to contract with an organization that has enough financial resources in case things go wrong. This simple rule is frequently ignored because a lot of low volume injection molding buyers sign contracts with third-party sourcing firms that are not affiliated with the CM who owns the manufacturing facility. If a defect in the product is discovered, the purchaser has only recourse legal against the contracting party, it will not be able to pursue the original CM. The contracting party may be the holding company of the CM located in Hong Kong, Taiwan or Singapore. It is important to conduct your due diligence and be sure that the company you’re paying isn’t a shell entity with little to no capital. If the contracting party is an International Sales subsidiary for the Chinese CM You should think about making the Chinese CM sign the supply agreement or to guarantee the fulfillment of the supply agreement. Be aware that many Chinese businesses do not possess an officially registered English name, and therefore must be identified with the legal title in Chinese along with the English name on the agreement for supply.

  • Provide a detailed list of materials and pricing requirements.

A bill of material (BOM) is an inventory of the components that will be used to create the product. Making a detailed BOM an element of the supply agreement is essential in the event that you intend to rely on the CM to source raw materials and other components for the product. This will prevent the CM from reusing less expensive materials at their discretion and reduce the risk of product defects and recalls.

When you have worked out the price of the unit to pay to CM and you think about adding specific pricing clauses to the agreement on supply. CMs won’t hesitate to inform you of the rising cost of labor and inflation within a few months of signing the contract and requesting an adjustment to the price. If you’d like to set an agreed-upon price for the coming two years, a volume discount or a cost reduction plan, or you wish to define the pricing model that is based on the BOM or other pricing adjustment mechanism, be sure to include relevant clauses in the supply agreement , or an exhibit of pricing. If you intend to sell certain products in China it is likely that you require separate pricing rules for exports and items that are intended for the China market due to the effect of VAT and the rules for title transfer.

  • Write down the requirements for quality and the warranty for the product.

It is important to include specific specifications for the polycarbonate injection molding product (and packaging) specifications as well as inspection and quality control procedures in the agreement for supply. It is commonplace to conduct an inspection prior to and after delivery of the product, and this is especially important when the final destination of delivery is far away from the Chinese manufacturing facility. Consider the scope of an inspection–every product as opposed to. sampling, the parameters of an outbreak of failure, etc.–and attempt to tie the payments to CM with the results of the inspection.

In the past, a lot of CMs in China insist on no warranty. Nowadays, more and more CMs are willing to provide warranties against defects in the product that the CMs have been responsible–i.e. design flaws that the buyer is accountable are not covered. You must definitely think about requesting one. The warranty is usually determined by the date of delivery since it is difficult for the CMs to determine the date of purchase.

  • Make sure you know the owner of the mold/tooling.

There are plenty of stories of horror concerning mold or tooling conflicts with Chinese China CMs. The CMs know that without tools or molds either you, or another CM can’t immediately create the products , and they may make use of the tools and molds to hold them hostage. Make sure you get the CM to sign a supply agreement that you are the owner of the mold or tooling at all times and provide a complete mold/tooling listing. If you’re transferring tools or molds that you have already purchased to the CMs request an initial deposit and include what amount is required in your agreement of supply. Consider including the provision for liquidated damages, that specifies a set amount of damages in the event that your tooling or mold isn’t returned to you upon request. A fair liquidated damage puts you in a position to obtain a swift decision from an Chinese court. This also provides the Chinese court the right to put a freeze on the assets of the CM prior to obtaining a judgment that will almost always lead to the return of your tools and molds.

  • Protect your intellectual property.

You may have registered your trademarks, patents or copyrights in your main markets, as well as in China. These registrations could prevent the export of counterfeit products from China and also prevent competitors from registering the identical intellectual property rights in China. In the event that you’re core IP is knowledge and trade secrets that cannot be secured by formal registration and registration, the CM must agree in the supply contract that you are the owner of such knowledge and trade secrets, as well as any intellectual property rights that are new that include any new knowledge and trade secrets that result from the process with the production of your products in accordance with the agreement for supply. Make clear if the CM is able to work for other customers in a different field (and the length of any non-compete time) and, if so what the procedure for production teams and production lines will be separated. Be sure to take care to take care of any possible product “leakage” problem, including the disposal of defective products. IP protection is another aspect where a liquidated damages provision could be beneficial.

  • Be aware of dispute resolution.

The best method to settle disputes in a supply contract with the Chinese PMMA injection molding CM is different based on the nature of the dispute. If the CM is unable to meet the product specifications or fails to meet delivery deadlines it is possible to discuss the issue with your CM first. If this is not possible then seeking damages in the form of monetary and arbitration in a country that is not China that is governed by local law could be the best choice. Since China has signed on of the Convention of New York on Foreign Arbitral Awards international arbitral awards from more than 160 countries are recognized and implemented in China. However, China may not have any obligation to recognize or apply court rulings from your country.

However when you find yourself in a position where financial compensation is not enough to solve the issue, you might decide to settle the issue through the court system through Chinese courts. For instance, if the CM creates and sells your products without your knowledge , either in direct contact with consumers, or to competitors in violation of the contract, or in the event that you find that the CM refuses to return the molds or tools and you want to seek an injunction to prevent the CM from violating the agreement to supply.

In these circumstances the inclusion of an arbitration agreement that is international could be detrimental to you. Therefore, you should try to identify your most probable and costly dispute that could arise under the supply agreement, and then determine the dispute resolution method that is most suitable for your situation.

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