China Automotive (Autoparts) Industry: “To Be or Not To Be” In China … And 5 Reasons To Be

I have had two chances to explore the autoparts industry in China. The first time was while I was working a foreign government agency promoting investment and trade into China. Then again a year ago, when I met and interviewed Mr. P. M. García Sola, Project Manager China at Kunshan Inautek Automotive Components Co. Ltd. His company is a WFOE that manufactures and sells auto components in China.

These two interactions gave me an opportunity to experience the “to be or not to be in China” dilemma.

When I was working with the foreign government agency, I was shocked to see how difficult it was to convince autoparts companies to participate in the Shanghai Auto Show. The main reason seemed to be the IP risks involved. Companies feared being copied. And not just companies, part of the problem was also that a lot of people in our organisation were so afraid of the IP risks involved in a China operation that they were not too motivated to promote attendance.

When I met Mr. Garcia Sola last year, I experienced a completely different story. He was in the process of setting up a China factory, and he obviously had strong views about the fact that you must set up in China if you are a strong player in this industry. These were his reason not to miss out on this opportunity:

The obvious reasons that make China a “must be there” market for strong players in the automotive / autoparts business:

1.China is currently the largest automobile manufacturer in the world.
If you have an international commitment, there are a few markets you will be considering (due to cost competitiveness): China, Brazil, Mexico (serving the US market) and India. Sometimes we talk about North Africa, we have been talking about North Africa for the last twenty years, but it is still very unstable. China is by far the largest automotive industry by volume.

2.China is a fast growing market for the automotive industry, and it will continue growing.
There is still room for growth in this market due to:

– an increasing number of families that can afford to buy a car (the expanding middle class)

– the potential for road and highway infrastructures to expand

3.All top foreign car makers operate in China.
As an already well-established supplier for car makers we already have a competitive advantage versus other suppliers

4.Cars manufactured in China are sold mostly in the domestic market.
So I would read that as potential for incremental sales for foreign autopart companies that settle here.

And his reason to overcome IP fears:

5.Copying your IP is easy, stealing your clients in the automotive industry is not.
In the automotive industry, they may copy you in the customer service area / market (replacement parts). But automotive companies are extremely careful about who their suppliers are. A lot of companies manufacture and sell our same product, but in China there would be a maximum of two companies that would meet similar standards to ours. You need strict quality control processes and standards that not everybody can match. It is too risky for automakers to switch to the local companies that may copy you. I remember being told a story about a foreign company producing windmills. They were copied but when the moment to start arrived, it just did not work. That was the best marketing campaign for them.

What are your views?

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36 Tips on How to Deal or Negotiate with your Chinese Suppliers

During the last year, I have interviewed several entrepreneurs who source products from Chinese factories. Their tips and insights are scattered across a number of posts (and a few of them I’ve not even published). Today I am going to compile most of the tips I’ve heard so far on how to deal / negotiate with Chinese suppliers ( I say most because I am probably forgetting a few). Here is the check-list:

LOOKING FOR SUPPLIERS…
Tip #1. Initial Search for Suppliers: directories, trade-show directories and internet
Tip #2. Not all good suppliers have English websites, get on board somebody who can help you search in Chinese
Tip #3. Existing (good) suppliers may be able to help expand your supplier network in non-competing products
Tip #4. If there is any IP involved, register it in China before you approach anybody
Tip #5. Consider registering your IP for categories similar to the one you manufacture

SHORTLISTING SUPPLIERS
Tip #6. Approach them first with an introductory email presenting yourself, your company and detailing as much as possible the product you are after
Tip #7. If they do not answer fast (1-3 days) move on, they will give you trouble in the future
Tip #8. If you have a good number of suppliers to choose from, create a “pre-selection system” that helps you shortlist: level of response to your introductory e-mail response, telephone check (do they exist?), factory address provided, factory license, any certification your business requires, quality certifications…
Tip #9. Ensure you are not dealing with the middle man (I): Visit the factory… ALWAYS!
Tip #10. If you can’t visit the factory, get an Inspection Company to do it for you. It is not that expensive

NEGOTIATING WITH YOUR SELECTED SUPPLIERS
Tip #11. If you are not a fluent Chinese speaker, bring a native Chinese speaker to the negotiation- he/she will be a valuable support
Tip #12. Understand perfectly the production process
Tip #13. Be very clear on who is going to be making decisions
Tip #14. The best way to do business in China is face-to-face” Technology is great, but I do not think it is the way Chinese people are wired to work
Tip #15. “I can’t” is not in their vocabulary, so be wary if you get silence for an answer…
Tip #16. Make them recap the agreements, do not assume they understood just because you feel you were clear enough”
Tip #17. Give realistic purchase estimates. If you promise 10 more times than you are planning to buy, they will cut corners to meet their profit so it will hit you back with poor quality (they work on small margins)
Tip #18. Expect long negotiations: even points that have already been agreed will be raised again in the future
Tip #19. Pricing: Do not get obsessed with the cheapest deal. Quality has a price and you should also consider that.
Tip #20. Track commodity prices used in your products
Tip #21. Learn about your suppliers cost structure (how much goes into labor, materials cost…),
Tip #22 . If your IP is involved, make sure they agree to sign a good non disclosure agreement, with non use / non circumvention  provisions (I read this one at the China Law Blog- worth reading the whole post about it)
Tip #23. Make sure you have good contracts in place. It will be a good use of your money to get a China knowledgeable lawyer to draft them (so that the terms are enforceable and it covers all the points you need to cover- IP, stocks, product quality, product specifications, penalties, etc)
Tip #24. Ensure they have the machinery & capability to produce your product. Ask them to produce a few samples in front of you, even if they don’t match your exact specifications.

PRODUCTION & SHIPMENT
Tip #25. Make sure you visit the factory during product development. It will speed the process, as nobody will tell you on the phone when they’ve got stuck with something (especially if the product is technically sophisticated)
Tip #26. Visit the factory during production & for quality control
Tip #27. If you can’t visit factory send an inspection company or somebody you trust (and is qualified for the job)
Tip #28. Don’t pay till you are sure all the product is in good condition (make sure the contract is draft that way)
Tip # 29. Never relax! Even with good suppliers. “Quality Control: Always, even with good established suppliers”
Tip #30. Always be ready with back up options- you would be surprised about how many last minutes surprises happen
Tip #31. Expect Delays in your Supply Schedule (power shortages are common, national holidays…)
Tip #32. “Problems don’t finish after production. Supervise Logistic Paperwork! There are often mistakes that will get your shipment stuck

…ON-GOING RELATIONSHIP
Tip #33. Payment Terms… Some buyers feel that, once you build the business relationship,  things get easier (ex. Not requiring advanced payments)
Tip #34. Get rid of unreliable suppliers A.S.A.P. If they trick you once, it will happen again
Tip #35. Take care of good suppliers, they are not easy to find. Look for win-win when problems come up.
Tip #36. “Renegotiating conditions” is quite common. Your Chinese supplier sees the contract as the “beginning” of the relationship. If you follow tips 20 & 21 (track commodity prices & know suppliers cost structure) you will be able to assess if there is a fair reason to give in (hopefully in future productions)

Would you like to add your tips?

15 Tips on Intellectual Property Protection in China… most of them no money required!

A few months back I wrote a post entitled “6 Tips for Start Ups and Innovators on Intellectual Property Management in China“. Since then I´ve read a couple of very useful posts at the China Law Blog that have extended this list to 15 tips… most of them free!(read the list bellow in my post).  The first post from the China Law Blog is titled “Top Seven Intellectual Property Mistakes By Foreign Companies Doing Business in or with China” and quotes a post by the High Touch Legal Services Blog, entitled, “Top Ten Intellectual Property Mistakes of Startup Entrepreneurs“.  The second post from the China Law Blog is titled “Six Ways to Protect your China IP. No Lawyer Required” and is based on inputs from an article entitled “Enforcing Intellectual Property Rights in Weak Appropriability Regimes: The Case of de Facto Protection Strategies in China” written by professors at the University of St. Gallen (Switzerland) Marcus M. Keupp, Angela Beckenbauer and Oliver Gassmann.

So here goes the updated list of tips on how to protect your IP in China… most of them with no money expenditure required!:

  1. BUILD IN YOUR BUSINESS PLAN THE NEED FOR IP MANAGEMENT FUNDING.
    IP Management is expensive and money is not going to magically materialize, so unless you have a business plan that already foresees the need to properly manage IP you will soon get into trouble.  
  2. GENERATE CASH FLOW BY COMMERCIALIZING IP.
    You may need to develop ways to commercialize your IP to generate a cash flow during the first years. This is not easy, as assessing the value of your IP may be difficult in the first years.
    Some Ideas on how to commercialize IP:  

    1. Selective Licensing, people you may license IP to that is not going to cause you any problems…
    2. Assignment of non-core IP (with buy-back clause, if possible).
      Warning! Companies may approach you to talk about your ideas and then go and use them themselves… They know you will not have the money to sue them! 
    3. Private Equity… but you may need to give up a lot. You must have confidence in your ideas and negotiate really tough.
    4. IPO (Limited Possibility)
  3. LEARN AS MUCH AS YOU CAN ABOUT IP.
    Going to a big firm may be too expensive for a start up so learn from IP books (there are a lot of books about this topic out there), learn from IP websites, learn about claims… learn as much as you can.
  4. DON’T PUBLISH ANYTHING ABOUT YOUR INVENTION
    Don’t publish about your invention or research. Once you publish it… it has gone public!
  5. KEEP IT CONFIDENTIAL
    Sign NDAs with ANYONE you talk to and always mark everything as “confidential”. That will help you if you need to prove that your secrets/ideas have been stolen.
  6. KEEP IT A TRADE SECRET- DON’T PATENT IT.
    Some companies believe that the most effective mechanism to protect their IP is actually not to patent it.  The belief is that if you can work on the development for a few years and get well ahead of your competitors then you have lead time advantage… and that could be the most effective way to protect your IP.
    The “secret” definitely needs to be something that can’t be reversed engineered (for example a production process) and you must be confident in your ability to maintain the secrecy.
  7. USE EMPLOYEE INVENTION AGREEMENTS
    Employees agree to report anything to the company that they invent that result from any work performed on behalf of the company and those inventions are assigned by the employee to the company.
  8. DO NOT ASSUME THE COMPANY OWNS CONTRACTORS’ WORK PRODUCT
    The Chinese Copyright Law provides that, short of prior arrangement, the copyright in commissioned works belongs to the commissioned party…. that is, the 3rd party! So make sure you have signed an agreement to assignment the copyright to your company.  
  9. REGISTER ALL YOUR IP, NOT JUST PATENTS
    China Law Blog notes here that companies seem to underestimate the importance and value of trademarks and trade secret agreements in China
  10. IDENTIFY AND PROTECT TRADE SECRETS via agreements with their employees or via NNN Agreements with outsiders.  
  11. SIGN CONFIDENTIALITY, NON COMPETE AND/OR NON CIRCUMVENTION AGREEMENTS WITH YOUR CHINESE SUPPLIERS
  12. FOCUS ON ACHIEVING TECHNOLOGICAL ADVANTAGE so that imitation is impossible or difficult
  13. NURTURTE YOUR INTERNAL GUANXI (good salaries, training…) , so that employees feel so committed that they are less tempted to sell your IP.
  14. BUILD STRONG EXTERNAL GUANXI
    Good relations with officials and institutions you can turn to in case of IP infringement.
  15. LIMIT THE ACCESS TO PRODUCT FUNCTIONALITY THROUGH A SAFE PASSWORD OR OTHER “ACCESS KEY”
    Here the China Law Blog shares an example of a client that sells an equipment that requires a protected password for full functionality.

Do you have any other tips to add to our list?

China National Indigenous Innovation Product Accreditation: Some Good News.

The Ministry of Science and Technology (MOST), National Development and Reform Commission, and Ministry of Finance have issued the Draft Notice Regarding the Launch of the National Indigenous Innovation Product Accreditation Work for 2010. The USCBC (US China Business Council) is providing an unofficial English translation of this draft in their website.

The USCBC also highlights, in a document that seeks its members’ comments, the main improvements that this new notice represent for foreign investment and the unsolved concerns.

Two clear wins in the requirements to qualify as indigenous innovation:

  1. Intellectual Property: moving from being based solely on IP developed and owned in China to allow products based on IP that has been licensed for use in China from overseas.
  2. Trademark registration: Trademarks and brands are no longer required to be first registered in China. Applicants must have exclusive rights to the product’s trademark, or have the right to use the trademark, in China.

Technology requirements are also more relaxed but the text is so vague that it feels less “scary” but not more clear.

And the main concern remains the possibility that foreign investment will still be discriminated, given that there is no amendment to the application form that inquires about the ability of the applicant’s product to substitute imports.

Trademark Rights in China: Good News, Bad News.

A lot has been written about the status and enforcement of trademark rights in China. This is no surprise, as for some industries trademarks are a key strategic business advantage.

When it comes to trademarks in China, I like to put it this way “I have good news and bad news… which one would you like to hear first?”

The good news is that, although China has to put up with quite a negative press when it comes to respecting and enforcing IP rights (one could say well deserved), on trademark rights protection it has quite a good record of enforcement!

So what could the “bad news” be? Well, China follows a first-to-file system so, if you have not done it already, anybody could well register your mark without evidence of prior use or ownership (ouch!). So register your trademarks now (it may take between two to three years – although there were proposed law changes that hopefully could end up shortening this period) so that you don’t have a nasty surprise one of these days.

Lovells, the international business legal practice, has published in its website a “Clients Note” entitled “Pre-emptive intellectual property rights management in China” in which they highlight what they call the “hijacking of IP rights”.  I’ll summarize it for you: “somebody registers your rights and then takes legal action against you for IP rights infringement … because you are obviously making use of your own rights!”

The document also shares a real life example in which things went really wrong for an unnamed US Company. A former distributor registered this company’s trademark and ended up:

  • Filing trademark infringement complaints in several Chinese cities
  • Getting all production plants sealed
  • Getting product seized by administrative authorities and
  • Achieving an administrative order ordering the US Company to stop using its own trademark…

You can breathe now. It has a happy ending. But my point is that those things happen. And as Douglas Clark, a partner in this same law firm, mentioned in a lecture on Intellectual Property at CEIBS Executive Forum on April 6th, his firm gets 5 to 6 cases like this every year.

You may be thinking now that you don’t sell your products in China, but that does not take you to safer ground. Check out the China Law Blog for some basic tips on outsourcing … and do not miss the part in which they mention that you could even be prohibited from exporting your own product from China!

I hope I did not leave you too worried… for peace of mind, you can just log onto the Trademark Office of the State Administration for Industry and Commerce (CTMO)

http://www.ctmo.gov.cn/english/index_e.asp

And browse in the link bellow to see if you find your trademark there….

http://202.108.90.72/trade-e/index.jsp

Hope not… unless you are registering it yourself!

Do you have any experience to share?

6 Tips for Start Ups and Innovators on Intellectual Property Management in China

On April 6th, I attended a lecture organized by CEIBS Executive Forum on the topic “Intellectual Property Management in China – Multinational Companies, Start Ups and Innovators”. The session was presented by Mr. Douglas Clark, a Partner at Lovells LLP who has been practicing IP law in China since 1993 and is a one of the leading names in IP law in the country.

In my blog post today I will focus on the insights related to Start Ups and Innovators.

As soon as the Start Up and Innovator’s module started… there was bad news for them:

  • IP Management is very expensive
  • Start Up and Innovators tend not to have too much money
  • Intellectual Property Return on Investment (ROI) comes after a long time (by the time you come up with the invention, do R&D, do testing, develop a product and finally sell it, it will definitely be years!).
  • … And that ROI is not even certain to arrive. It is difficult to assess in early days how much a patent is worth, it could be very valuable but it may turn out to be nothing.

But don’t stop reading yet! Things got a little better later on when he shared a series of advice on how Start Up and Innovators could approach IP Management and try to overcome the difficulties above mentioned:

  1. BUILD IN YOUR BUSINESS PLAN THE NEED FOR IP MANAGEMENT FUNDING.
    As mentioned before IP Management is expensive and money is not going to magically materialize, so unless you have a business plan that already foresees the need to properly manage IP you will soon get into trouble. You need to be clear, going in, how much money you are going to need and how you are going to get it.
  2. GENERATE CASH FLOW BY COMMERCIALIZING IP.
    You may need to develop ways to commercialize your IP to generate a cash flow during the first years. This is not easy, as assessing the value of your IP may be difficult in the first years.
    Some Ideas on how to commercialize IP:

    1. Selective Licensing, people you may license IP to that is not going to cause you any problems…
    2. Assignment of non-core IP (with buy-back clause, if possible).
      Warning! Companies may approach you to talk about your ideas and then go and use them themselves… They know you will not have the money to sue them!
    3. Private Equity… but you may need to give up a lot. You must have confidence in your ideas and negotiate really tough.
    4. IPO (Limited Possibility)
  3. LEARN AS MUCH AS YOU CAN ABOUT IP.
    Going to a big firm may be too expensive for a start up so learn from IP books (there are a lot of books about this topic out there), learn from IP websites, learn about claims… learn as much as you can.
  4. DON’T PUBLISH ANYTHING ABOUT YOUR INVENTION
    Don’t publish about your invention or research. Once you publish it… it has gone public!
  5. KEEP IT CONFIDENTIAL
    Sign NDAs with ANYONE you talk to and always mark everything as “confidential”. That will help you if you need to prove that your secrets/ideas have been stolen.
  6. KEEP IT A TRADE SECRET- DON’T PATENT IT.
    This piece of advice was prompted by Mr. Ge Dingkun, a CEIBS Professor of Strategy and Entrepreneurship. He mentioned a study conducted by university professors which came up with a revealing finding. Companies believe that the most effective mechanism to protect their IP is actually not to patent it.  The belief is that if you can work on the development for a few years and get well ahead of your competitors then you have lead time advantage… and that could be the most effective way to protect your IP.
    Mr. Clark agreed with this suggestion and even gave an example of a situation in which he had given the same piece of advice to a company that would have not been financially capable of fighting back an infringement on a patent.
    You can always file the patent later on (unless somebody comes up with the exactly same invention in the meantime!). But something important to consider if you decide to go the “trade secret” way is “Do you have the ability to keep it secret?”.  The “secret” definitely needs to be something that can’t be reversed engineered (for example a production process) and you must be confident in your ability to maintain the secrecy.

Do you have any other suggestions on how Start Ups and Innovators could defend their IP rights?