Quick Question Friday: China Law Answers, Part 83

Because of this blog, our China lawyers get a fairly steady stream of China law questions from readers, mostly via emails but occasionally via blog comments or phone calls as well. If we were to conduct research on all the questions we get asked and then comprehensively answer them, we would become overwhelmed. So we usually provide a quick general answer and, when it is easy to do so, a link or two to a blog post that provides some additional guidance. We figure we might as well post some of these on here as well, which we generally do on Fridays, like today.

Every day our international manufacturing lawyers see increasing evidence of how China’s role as factory to the world is changing. Most directly, we see it in the emails we get from companies looking to manufacture their products overseas. Three years ago, around 90 percent of those emails mentioned only China. These days, a good 25 percent or so do not mention China at all and of those that do mention China, around a third of those mention China as an option, along with one or more other countries. More subtly, we see it in the increasing number of emails we are getting related to molds and tooling.

How do emails regarding molds and tooling reflect China’s declining manufacturing role? A company that plans to stay with its China factory for the next decade is going to be a lot less concerned with what happens to its molds and tooling than a company that recognizes it might be leaving its China factory for a Thai or Vietnames or Indonesian or Mexican factory within the year. A company that thinks it may be moving its manufacturing to another country relatively soon is going to be concerned about its ability to take its already paid for molds and tooling with them. So yes, we are getting a greatly increased number of questions these days regarding how to protect your molds. The following email exchange are summarizes typical emails our international manufacturing lawyers are getting these days.

Client. Our Chinese and Thai manufacturers have all agreed to sign the NNN Agreements you drafted for us without issue. Thanks for those. One of the Chinese manufacturers has agreed to create samples of the _________ product and we will be paying $2200 to have them make the molds for that. Remember that as soon as the Thai factory is able to increase its capacity (which we expect to happen with the next year) there is a good chance we will be moving all production to there. Do you recommend we have your firm draft an agreement making clear we will own that mold before we pay the Chinese manufacturer any money for it?

Lawyer. It depends. The NNN Agreement you have with  your Chinese manafacturer prevents it from using your molds to compete with you so you do not need a mold agreement for that. So the question then becomes only whether it makes sense for you to have a mold agreement making clear that the mold you will be buying belongs to you. The quick answer is no because our fee for that agreement will end up being way too close to $2200 for it to make economic sense. There is no point in paying X dollars to protect something worth X dollars. But the answer is yes if it would be a complete disaster for you if when you want to move to a new factory the Chinese manufacturer holds onto your molds. Based on what we know about what you are doing and how quickly things are moving for you, I doubt that would be the case, but I feel like I need to at least throw that out there. So almost certainly the answer is no, but if you tell me that you made a typo and the molds are really worth $200,000, then let me know and I’ll scream at you to have us draft something before you pay that kind of money.

For more on how to protect your molds and tooling when manufacturing in China, check out China Mold Ownership/Mold Protection Agreements.

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.