1. Who Owns the Product Design?
When foreign buyers purchase products from Chinese factories the big issue is usually who owns the design of the product. This issue is often discussed in a theoretical way, based on intellectual property law principles, without getting to the real point. You are having a product made at Chinese Factory A. You decide the price Factory A is charging you for the product has become too high. The fundamental issue is this: can you take that exact product and have it made at factory B?
Suppose you find a product made and designed by a Chinese factory. Normally, you will not purchase off-the-shelf products in their “as-is” condition. You will customize the product by maybe changing its colors, and/or its surface design and/or small surface features such the number of buttons so that particular iteration of the product will be seen as your product.
In this situation, the Chinese factory ordinarily will take the position that it owns the underlying product design and it can sell that product anywhere in the world. It will though agree to “customize” its product for you by making surface changes such as color, logo, or changes to one or more surface design features. If requested, the Chinese factory will usually agree not to manufacture and sell a product using those same features for sale anywhere else in the world, or maybe just to your particular sales market.
2. What Happens if You Change Your Manufacturer?
Given this basic position, what happens if you want to go to a different manufacturer for the same product?
The Chinese Factory usually will permit. you to go ahead and customize the product made by a different factory, but it will not usually permit you to have that new factory manufacture your product based on the Chinese Factory’s underlying product design.
Some Chinese factories will permit you to have its product made by a different factory, but require you pay it a royalty. Other Chinese factories will agree to give you a license to go to another factory solely to manufacture the product but not to make any adaptation or other “new work” relying on the underlying design.
Where does your Chinese program fit into this system? Most buyers face a situation where their Chinese factory cannot sell the buyer’s customized product but they are stuck with that Chinese factory and if they want to go to a different factory, they must start over from scratch or pay what is usually a very high royalty. This can be a disaster if there is no readily available alternative source for your product.
Another issue that arises from this situation is the question of exclusivity. If you have worked hard to create a market for a specific product in a certain territory, you will not want essentially the same product to be sold in that territory in direct competition with your product. It is common to provide that your factory is not permitted to sell the customized product to any other buyer. On the other hand, the factory is free to work with a different buyer who customizes the product in a different way. It is that alternative customized product that will then appear as a competitor in your territory.
Obtaining the agreement of your Chinese factory not to sell your customized product to anyone else is relatively easy because no one else really wants that product. It is much more difficult to get your Chinese factory to agree not to sell an alternative product. If you are looking for that kind of protection, you must be clear about the rules and you must expect the Chinese factory will only agree to those rules if it receives a substantial benefit for doing so. That benefit is normally your agreement to a specific volume of product purchase for each year of exclusivity. Big companies often get this sort of deal; SMEs, far less often.