Your China Factory as your Toughest Competitor

Really good, really interesting article, entitled by Melissa Twigg on how Chinese factories are starting to produce their own-label products “that bear a strong resemblance to the products they make for global luxury companies.” The article is China’s Factory Brands: Clones or Clever Business? and though it focuses on luxury goods (with an especial focus on handbags), it has relevance for pretty much any company using Chinese contract manufacturers.

These Chinese factories are not necessarily creating duplicates of the foreign products they are making for their foreign buyers. They are instead applying what they have learned from manufacturing for their foreign buyers and using that information to compete directly with them. As our China lawyers have become fond of pointing out to our clients, “since you will essentially be educating your Chinese manufacturer in how to compete with you, you need contracts that will at least limit what it can do when it does so.”

This article nicely explains why Chinese factories are risking the loss of existing customers to go into business competing with them:

In recent years, China’s manufacturing sector has taken a hit due to a slowdown in global demand and the migration to cheaper sourcing centres across South East Asia. With a highly skilled workforce and not enough work, some factory owners that supply major luxury companies have decided that the solution now lies in creating brands of their own.

Most of these factory brands are not in the business of yuandan, the high-quality ‘factory extra’ replicas recently cited by Alibaba’s chairman Jack Ma as fakes that are so good, they are better than genuine luxury goods in a controversial interview. However, there are some instances where Chinese factories produce branded goods that bear a strong resemblance to products they already make for their Western clients. And sometimes tracing the origin of these brands can lead to a rather murky trail.

“They’re making this kind of move to protect themselves,” says Gerhard Flatz, the managing director of KTC, a manufacturer of premium sportswear in China. “Manufacturing is moving elsewhere, so in order to survive the factories feel they have to do something different. Sure, it’s a tricky business practice but factories are in a difficult position. There’s a war out there and they have nothing to lose.”

Agreed.

We have gotten more calls in the last year from companies whose China factories are now directly competing with them than in probably the three years before that combined. Chinese factories are more confident now than they have ever been about going out into the world with their own products, and more willing to toss their foreign customers to the curb early. Amazon and Alibaba do not help matters as we are getting roughly a call a week from someone whose product is being sold on Amazon and/or Alibaba by their Chinese factory.

What we can do to help these companies varies tremendously, depending on what they have already done to protect themselves. For what you can do to protect yourself from this sort of competition, I suggest you read the following

• China NNN Agreements
• China Product Development Agreements
• China: Do Just ONE Thing: Register Your Trademarks AND Your Design Patents, Part 1
• China: Do Just ONE Thing: Register Your Trademarks AND Your Design Patents, Part 2

In a subsequent posts I will discuss the various options companies have to try to stop their Chinese factory from competing with them, largely depending on the protections they put in place before the competition began.

We will be discussing the practical aspects of Chinese law and how it impacts business there. We will be telling you what works and what does not and what you as a businessperson can do to use the law to your advantage. Our aim is to assist businesses already in China or planning to go into China, not to break new ground in legal theory or policy.