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China manufacturing contracts: why you need them

The manufacturing process within China is a decision taken by many companies in the last few years. China has been transforming into”the “factory of the world”. Many foreign corporations have decided to relocate polycarbonate injection molding production into China and employ local firms which manufacture all sorts of goods at competitive prices. These are then available on the international market.

 

If a foreign firm engages a Chinese manufacturer, they must be sure that the injection molding for ABS products they produce will be in compliance with agreed quality requirements. Here are five keys to minimizing risks in relationships with Chinese manufactures.

In this article, we’ll discuss contract terms which foreign companies should think about when they manufacture in China and must negotiate Manufacturing Contracts with Chinese suppliers. we highlight 10 several major clauses that should be included in the manufacturing contract in China:

Specifications and Products

The items to be produced should be clearly stated in the contract as well with product specifications which should be detailed in an appendix.

Forecasts and binding Purchase/Supply commitments:

A PMMA injection molding Manufacturing Contract generally requires that the firm orders are placed through Purchase Orders for the purpose of guarantee an explicit purchase/supply commitment within the agreement itself, the parties will often designate a minimum commitment on both sides to produce and purchase a certain quantity of products within a given time period. In addition to the minimum requirement that the buyer is often required to give a non-binding forecast to the suppliers, so that they will be able to plan and allocate appropriate resources (often 6-, 12-, 18-, 24month terms).

Price:

For those products identified previously the parties must establish price that is firm and will be valid for the term of the contract or at least a part of it with respect to (we recommend) annual price increases that are not excessive. Further, it is beneficial to include for discounts upon meeting certain pre-determined purchase volumes.

Quality Control:

Buyer and supplier will come to an agreement on the terms afforded to buyer/required of seller for the conduct of quality control. Typical terms include : i) access (often without notice or with a short time notice) to production facilities, and two) randomly testing each batch of products before dispatch to buyer. Additionally, the parties could in accordance with the terms of the contract, stipulate an official representative for buyers to stay on-site at all times, for the purposes of assisting in the quality control. (The buyer’s representative can additionally monitor supplier’s use intellectual property or other illegal dealings, though their effectiveness is contingent on their loyalty towards the purchaser.)

Raw Materials/Components:

As part of the quality control process, buyer should require that supplier provide a list of its suppliers along with purchase orders over a pre-set period to ensure that the agreed upon raw materials/components are being used.

 Intellectual Property:

All intellectual property used in the manufacture of the product, including trademarks, patents, copyrights, and other business secrets should be licensed to the seller, for the limited purposes of meeting with its obligations under the contract. In addition, buyer should draft the related terms so as to restrict suppliers from exercising any rights of ownership over the IP licensed.

Termination:

Termination events, as in most agreements will be those which trigger immediate right to terminate (for instance, improper usage of intellectual property by the buyer and violation or non-compete terms) and those that require a notice period as well as the breaching party’s right to correct the breach (failure to supply products meeting specifications).

 Non-competition:

Because an OEM relationship requires a significant transfer of intellectual property and sensitive information, the buyer must not only be aware to ensure that the additional products aren’t manufactured from the suppliers, but its affiliated companies and its directors and management. (Note that the consequences in not providing the proper information the required terms could lead to not only selling the item in China but also in the same markets as the buyer, and at much lower costs.)

Arbitration:

As injection molding PLA manufacturing tends to be concentrated in lesser-developed regions in China in addition to cost/time/reliability benefits often associated with arbitration, we advise clients to select arbitration for dispute resolution. Arbitration may be conducted in China and internationally (in all New York Convention signatory state) however, domestic arbitration permits buyers access to Chinese courts for injunctive relief.

In conclusion, a well written Manufacturing Contract is essential for foreign businesses that make the decision to build their products in China. Chinese companies, like companies everywhere, are not happy being threatened with legal action. A great contract incorporates the essential quality requirements and also lays out the Chinese firm to be held accountable for failing to meet those requirements.

 

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