If you are thinking that licensing your IP or partnering with a Chinese supplier is a feasible option for your product to reach its potential, then read on, for I am going to give you some major points for licensing your prototype/product in China:

1. Finding a Suitable Partner – Not surprisingly, ensuring you deal with a suitable manufacturing licencee requires the same first step as the importing process – Research & Tender. Making sure that your partner is trustworthy, well established, certified, offering fair market price for your IP, and has good service levels can ensure an easier ride through negotiations.

2. Setting up the Relationship – As I am sure I have mentioned before, Chinese business is all about relationships. When partnering with a Chinese manufacturer or dealing with such an important issue as IP licensing, it it important to remember that these things can’t be rushed. If you are looking at doing it on your own, be prepared for a few trips to China all atleast many months of phone calls and emails. In Chinese culture, often the most important moments of negotiating aren’t on a conference call, but in the 5th or 6th course of a 13 course banquette put on by your Chinese host! Before you even begin doing up a contract, it is important to get to know and build a relationship with your Chinese partner, because that is exactly what they will be looking to do with you.

3. Rules of Engagement: The License Agreement – When implementing your agreement, remember the key word for your Chinese supplier is PRACTICALITY. Knowing what is practical and workable for your Chinese supplier, and implementing that into your agreement is the best way for getting favourable results. Using an Australian or foreign created agreement will often be problematic for a Chinese supplier, and can greatly affect the likelihood that they will sign it. This is where building a relationship with your supplier first, shows its true importance. Having a relationship established, where you have a good understanding of your partners motives and needs, will best serve you when it comes to negotiating your Licensing Agreement.

4. Effective Collection of Payment – Collecting royalies for your IP can take many forms and in some cases can open new doors or opportunities. The most standard form is a percentage of the products sold or a fixed price per item. Arrangements such as monthly or yearly retainers can be difficult for manufacturers to agree too, for they have no different gauge of the potential income. An alternative, and one often sometimes taken by inventors with low capital who wish to sell to there own market, is to have the licensing compensation include receiving the product itself. For many, this can deliver their dream of selling to their own market (e.g. Australia) where significant profits can be made.

The process of licensing or off-shore partnering under you own steam can be long and intensive, even with an IP Protection specialist on board. Saying that, it is possible, however, the process can be shortened and the risk reduce simply by utilizing the support of experienced professionals.

If you would like to know more about the process on Licensing & Royalties in China, please feel free to contact us.

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Having sourced everything from clothes to heavy machinary, we have seen almost everything that can go wrong or right during the sampling stage.

To help you get the perfect sample as smoothly as possible, here are some key milestones, industry norms, and pitfalls that you will need to be aware of when getting your sample made in China:

1. Preparing for the Sampling Stage:

The Chinese are masters of copying, so if you want an exact replica of your current product then send it to them. Often information such as drawings, diagrams and measurements can be ‘lost in translation’; this is why we recommend that you send your prototype or sample directly to the manufacture.

If you are just getting started on your product, then having your prototype made domestically will enable you to have greater control on exactly what you want. Having your prototype made locally often also works out cheaper then doing it in China, given added on-costs such as freight.

2. Selecting Your Sample Makers:

The key to getting that ‘perfect’ Chinese manufacturer is to contact as many as possible. This may mean that after contacting and researching your industry you will have a number of suppliers that you may wish to get samples from. Normally ChinaDirect will narrow the manufacturing candidates down to 6 or so ‘promising’ suppliers. From that group we would normally send request for samples to around 3 suppliers. Receiving samples from at least 3 suppliers will enable you to have a significant understanding of the manufacturing quality China is capable of; and also allow you to compare between a number of company’s before you make a decision on who is best for you.

The reason we don’t send out samples ‘willy nilly’ to all that we have contacted is that the sampling stage can involve a lot of back and forth and can somtimes be quite expensive, especically if you a dealing with multiple suppliers.

3. The Process and the Cost:

As I mentioned before, the sample process can be a costly exercise depending on the product you wish to have manufactured. In most cases, suppliers will charge a sample making fee and this fee is often related to the uniqueness, value, and readiness of the materials needed to produce the sample. Products such as machinery are more complicated then samples for clothing and thus costs may be higher.

When you are trying to work out how many potential suppliers to send samples to, and the costs associated with them, make sure to ask yourself the following questions:

- Will custom moulds have to be made?
- Will the supplier have the exact material I request or will they have to source it externally?
- What about the colour? Do they have the right Pantone Colour Code available?
- Does the supplier currently have the right skill sets and equipment to produce the sample or will it have to be outsourced?
- How long will it take to get a sample made?

Sometimes a manufacturer will be able to supply you with a free or cheap sample if they already have everything needed to produce the item. However, when thinking about getting samples, make sure you think about all areas of the sample’s production and what costs may be forwarded onto you.

To better safeguard and create a level of understanding between you and your potential manufacturers, you may wish to think about using a Sample Making Agreement which contains a detailed description of the product, quantity to be supplied and cost. This agreement also sets out specifically your and your supplier’s responsibilities in regards to the manufacturing of the sample product. For more information about a Sample Making Agreement click here.

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The 1st stage for importing goods is the Research and Tender process. This includes finding and certifying applicable suppliers for your products. This step marks the most important area of the system for importing goods. In order to be effective at importing goods, you have to first build from a solid foundation. It can be simple to find manufacturers online, sites like globalsources.com and madeinchina.com can supply you a wealth of manufacturers for the product you want to import. However! The key issue to realise when importing goods directly from associates of such sites is that generally a few emails is not enough to work out the good from the bad. When importing goods some critical questions and procedures need to be taken. In order to ensure your potential manufacture is right for your business, it will require you to do some background checks.

Some areas worthy of investigating include:

- REPUTATION – Ask for testimonials of previous customers.
- EXPERIENCE IN EXPORTING – Where have they exported to previously? Are they capable of importing goods into western countries? e.g. Australia, Europe etc.
- QUALITY AND WORKERS SKILL – Can they can demonstrate the most complex and high quality merchandise they have produced?
- SERVICE ATITUDE – How fast do they reply to your enquiries? What is the quality of their responses like?
- FACTORY CAPACITY – Are they to small or huge (e.g Minimum Order Quantities)? Are they be able handle bigger orders as your business expands?
- ABILITY TO FOLLOW INSTRUCTIONS – Ensure your potential suppler can clearly understand and follow your instructions and requests.
- WILLINGNESS TO COMPLY TO QUALITY STANDARDS- Ensure that the supplier is committed to developing a long term relationship that includes making sure your quality guidelines are delivered whenever you are importing goods from them.

The first stage for importing goods is normally where the most effort is involved. Before you start investing in the sampling or manufacturing process, it is critical that you first manage the risks involved in importing goods by ensuring you have found a supplier that is trustworthy and right for your importing needs.

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Tariff
A duty (or tax) levied on goods transported from one customs area to another. Tariffs raise the prices of imported goods, thus making them less competitive within the market of the importing country.

International Commerce (INCO) terms

Shipping terms set the parameters for international shipments, specify points of origin and destination, outline conditions under which title is transferred from seller to buyer, and determine which party is responsible for shipping costs. They also indicate which party assumes the cost if merchandise is lost or damaged during transit. To provide a common terminology for international shipping, the following INCO terms have been developed under the auspices of the International Chamber of Commerce.

Cost, Insurance and Freight (CIF)

The exporter pays the cost of goods, cargo and insurance plus all transportation charges to the named port of destination.

Cost and Freight (C&F)

The exporter pays the costs and freight necessary to get the goods to the named destination. The risk of loss or damage is assumed by the buyer once the goods are loaded at the port of embarkation.

Ex Works (EXW)

The price quoted applies only at the point of origin and the seller agrees to place the goods at the disposal of the buyer at the specified place on the date or within the period fixed. All other charges are for the account of the buyer.

Free on Board (FOB)

The goods are placed on board the vessel by the seller at the port of shipment specified in the sales contract. The risk of loss or damage is transferred to the buyer when the goods pass the ship’s rail.

Free on Board Airport (FOB Airport)

Based on the same principles as the ordinary FOB expression, the seller’s obligation is fulfilled by delivering the goods to the air carrier at the specified airport of departure, at which point the risk of loss or damage is transferred to the buyer.

Transportation and Delivery Terms

The following are common terms used in packing, labeling, transporting and delivering goods to international markets. They are in addition to the above INCO terms.

Bill of Lading (Ocean or Airway)

A contract prepared by the carrier or the freight forwarder with the owner of the goods. The foreign buyer needs this document to take possession of the goods.

Certificate of Origin
A document that certifies the country where the product was made (i.e. its origin). A common export document, a certificate of origin is needed when exporting to many foreign markets.

Commercial Invoice

A document prepared by the exporter or freight forwarder, and required by the foreign buyer, to prove ownership and arrange for payment to the exporter. It should provide basic information about the transaction, including description of goods, address of shipper and seller as well as delivery and payment terms. In some cases, the commercial invoice is used to assess customs duties.

Customs Declaration

A document that traditionally accompanies exported goods bearing such information as the nature of the goods, their value, the consignee and their ultimate destination. Required for statistical purposes, it accompanies all controlled goods being exported under the appropriate permit.

Customs Invoice

A document used to clear goods through customs in the importing country by providing documentary evidence of the value of goods. In some cases, the commercial invoice (see glossary entry) may be used for this purpose.

Ex Factory

Used in price quotations, an expression referring to the price of goods at the exporter’s loading dock.

Export Permit

A legal document that is necessary for the export of goods controlled by the Government of export country, specifically goods included on the Export Control List.

Freight Forwarder

A service company that handles all aspects of export shipping for a fee.

Insurance Certificate
A document prepared by the exporter or freight forwarder to provide evidence that insurance against loss or damage has been obtained for the goods.

Landed Cost

The cost of the exported product at the port or point of entry into the foreign market, but before the addition of foreign tariffs, taxes, local packaging/assembly costs and local distributors’ margins. Product modifications prior to shipment are included in the landed cost.

Packing List

A document prepared by the exporter showing the quantity and type of merchandise being shipped to the foreign customer.

Pro Forma Invoice

An invoice prepared by the exporter prior to shipping the goods, informing the buyer of the goods to be sent, their value and other key specifications.

Quotation

An offer by the exporter to sell the goods at a stated price and under certain conditions.

Financial and Insurance Terms

The following are the most commonly used terms in international trade financing.

Consignment

Delivery of merchandise to the buyer or distributor, whereby the latter agrees to sell it and only then pay the exporter. The seller retains ownership of the goods until they are sold, but also carries all of the financial burden and risk.

Document of Title

A document that provides evidence of entitlement to ownership of goods, e.g. carrier’s bill of lading.

Letter of Credit

An instrument issued by a bank on behalf of an importer that guarantees an exporter payment for goods or services, provided the terms of the credit are met.

Letter of Credit (Confirmed)

A local bank confirms the validity of a letter of credit issued by a foreign bank on behalf of the foreign importer, guaranteeing payment to the local exporter provided that all terms in the document have been met. An unconfirmed letter of credit does not guarantee payment so, if the foreign bank defaults, the local exporter will not be paid. Local exporters should accept only confirmed letters of credit as a form of payment.

Letter of Credit (Irrevocable)

A financial institution agrees to pay an exporter once all terms and conditions of the transaction are met. No terms or conditions can be modified without consent of all parties.

Open Account

An arrangement in which goods are shipped to the foreign buyer before the local exporter receives payment.

Partnership, Alliance and Market Entry Terms

The following expressions define the various types of partnership or alliance arrangements as well as methods of market entry common in international trade.
Agent

A foreign representative who tries to sell your product in the target market. The agent does not take possession of and assumes no responsibility for the goods. Agents are paid on a commission basis.

Distributor (Importer)

A foreign company that agrees to purchase a local exporter’s product(s), and then takes responsibility for storing, marketing and selling them.

Franchise

This is a more specific form of licensing. The franchise is given the right to use a set of manufacturing or service delivery processes, along with established business systems or trademarks, and to control their use by contractual agreement.

Joint Venture

An independent business formed cooperatively by two or more parent firms. This type of partnership is often used to avoid restrictions on foreign ownership and for longer-term arrangements that require joint product development, manufacturing and marketing.
In a specifically American legal context, however, a joint venture is a collaboration between two companies to carry out a particular, individual project. The venture lasts only as long as the project does and is governed by the partnership laws of the state where it was formed.

Licensing

Although not usually considered to be a form of partnership, licensing can lead to partnerships. In licensing arrangements, a firm sells the rights to use its products or services but retains some control.

Trading House (or Company)

A company specializing in the exporting and importing of goods produced or provided by other companies.

Legal Terms

The following are some of the more common legal terms encountered in international transactions.

Arbitration

The process of resolving a dispute or a grievance outside of the court system by presenting it to an impartial third party or panel for a decision that may or may not be binding.

Contract

A written or oral agreement which the law will enforce.

Copyright

Protection granted to the authors and creators of literary, artistic, dramatic and musical works, and sound recordings.

Intellectual Property

A collective term used to refer to new ideas, inventions, designs, writings, films, and so on, protected by copyright, patents and trademarks.

Patent

A right that entitles the patent holder, within the country which granted or recognizes the patent, to prevent all others for a set period of time, from using, making or selling the subject matter of the patent.

Trademark

A word, logo, shape or design, or type of lettering which reflects the goodwill or customer recognition that companies have in a particular product.

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We all know that products are simply cheaper in China, and that in most cases the countries capability to produce quality items depends only on your own ability to manage your supplier. But what about intellectual property? Can you keep it in China?

The reason why China was the focus of the world for copying, didn’t stem from the suppliers themselves, rather from the rest of the world.

In most cases, copies of a product aren’t a result of suppliers actively searching for products to copy, rather they are presented with a product from an ‘outsider’ who is looking to make money from their cheaper manufacturing costs.

This doesn’t mean IP piracy does not exist, but you should treat the protection of your intellectual property as if you were in your own ‘western’ country.

To help protect your IP, here are our TOP 10 Infringement Risk Reduction Strategies:

- Agreement in Chinese law – Non Disclosure Agreement: Invest in a proven and practical Non Disclosure Agreement. To eliminate confusion ensure that it is in both English & Chinese. Click here to find out more.

- Patent Protection in your Target Market: Think about the markets you will be selling too, and apply for patent’s in those countries.

- Conduct Regular Audits: Regularly review your manufacturers operations to ensure they are not selling extra runs of your product, or dealing with your competitors.

- Flooding the Market: Offer your product to the market at a high volume and low cost. This can help to discourage copying.

- Key Components: Keep the manufacturing of key product components internal or separate from your main manufacturer.

- Own the Tooling: Purchase the tooling used for the manufacturing of your product. This means you can take it with you if the relationship with your supplier goes pear shaped.

- Include IP Clauses in Contracts: Always ensure that whenever a transaction is occurring, your IP is included in the agreements.

- Continuously Innovate: Always make sure you have something different and new in the pipeline (don’t just use the same model forever).

- Attend High Profile Sourcing Events: Trade fairs are a great opportunity for you to scout for copies e.g. Canton Fair.

- Seek Professional Advice: Experience within mainland China is key. Places like Hong Kong have slightly different laws.

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I will be sure to post some pictures of the nights events, and maybe even an image of the award. Fingers Crossed!!

Lindy Chen.

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Here are some of our own secret techniques and other well-known options:

Supplier Self Assessment:

The Supplier Self Assessment outlines all your standards for product quality, against which the supplier will judge him/herself.  During the negotiation phase, use this form to make your supplier clear on your expectations.  Then have your supplier complete the form and fax it to you, prior to shipping the goods, so you can approve it, or not approve it.  This method is unique to our processes, and something you may wish to invest in.

More details can be found here.

Pre-Shipment Photo:

Basic and straight forward, having your supplier send a photo of your product before shipping will allow you to see what to expect in your container.  This type of inspection can be very detailed depending on the type of photos you request.  The packaging, the key components of the product (e.g. stitching in clothing), colour etc. can all be documented in a photo.  A good measure of what to expect, a photo does however limit the amount and depth of product inspection a importer can do, and in some cases it can be limited by what the supplier wants you to see.

Pre-Shipment Sample:

You may choose to have a sample of your order air freighted to you before the main shipment arrives.  This form of inspection will enable you to gauge the quality of the shipment you will soon receive.  Having the product in your hand enables the appropriate testing to be performed and for your own peace of mind.  However, if something has gone wrong with the main shipment you won’t know for sure until it is at your door.  This method can also sometimes be impossible due to the nature of the product.

Factory Audit:

This involves having a qualified inspector verify the factory’s existence, check core production competencies and capacity claims.  Also check the bona-fides of the person you are dealing with and see first hand the quality procedures employed.

During Production Inspection (DPI):

Occurs when the merchandise is completed, packed and ready for shipment, or at least 80% of products packed.

Performed to an agreed Acceptable Quality Level (AQL), established between you and the supplier.   Samples are taken based on the internationally recognized statistical random sampling technique, commonly known as ANSI/ASQC Z1.4, BS 6001-1, and ISO 2859-1.  Inspectors will verify quantity, style, colour, workmanship, size, packaging, and shipping mark to ensure the merchandise meets the contract specifications, or conforms to the approved sample.

If you are interested in finding out more about the inspection options and services available to you, please feel free to contact us.

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Well don’t keep them to yourself,  share them with your importing mates!

I am keen to here about any specific challenges you have faced  when dealing with China.  Please feel free to leave a comment below about issues you have faced or solutions you have found.  I will attempt to reply to your comments and hopefully pass on some of my 15 years of experience on the subject.

I’m looking forwards to some great discussions!

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Once your goods have been manufactured in China, should you outlay more money to have your product inspected prior to loading on the container?

If you’re not using an independent sourcing company then yes, you probably should have a third party inspect the goods.

If you’re using a trusted sourcing company, the answer depends on a few variables, such as:

•    Order value
•    How safety critical your item is
•    Your confidence/history/relationship with the supplier
•    Your risk tolerance

For example, it mightn’t be cost effective to inspect a $10,000 order of erasers from a company who has been making and exporting erasers to the West for 10 years. (Low value, low safety criticalness, high confidence in supplier)

However, a $50,000 order of erasers may be worthwhile inspecting.

At ChinaDirect, whether we’re doing an on-site inspection or not, we always put the responsibility of checking the goods onto the supplier.

We’ve devised a highly effective form that shows the supplier we’re not only serious about quality, but we’re going to hold him accountable for it.

It’s called a Supplier Self Assessment form, and we introduce it to the supplier when we’re negotiating the Purchase Order, so the supplier clearly knows clearly our expectations, and how he will be assessed.

The supplier simply fills out the Supplier Self Assessment form and sends it to you prior to your inspection of the goods, or if no inspection is being undertaken, before shipping your goods.

If everything looks ok on the form, you can approve delivery.  If there are any areas of concern, you have a conversation with the supplier to resolve it, BEFORE SHIPMENT.

Of course, the only instance where you would not have a third party inspect the goods is when the order value is low, your product is not safety critical, you have high confidence/history/relationship with the supplier, and/or you have high risk tolerance.

See here for further details on the Supplier Self Assessment.

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Like any unknown area that you move into in your life, when you are first dealing with China, it can appear quite daunting.  Just as you use an accountant to do your tax, a bookkeeper to do your books, and a lawyer to do law-related business, you’ll also need to choose a ‘partner’ to assist you with your importing matters.

So, who do you use?  Well, someone who will represent YOUR interests, not the interests of the factory.  Be aware that agents, brokers and trading companies make most of their money from the factory or supplier, even if you’re paying them too!

So who’s interests do you think they’re looking out for?

One of the questions I’ve been asked by clients is about agents or brokers they’ve found on the Internet that will source products from China for a 5% commission, or less.

Be aware these agents also receive a commission from the manufacturer or supplier who supplies your products, and to cover this cost the manufacturer or trading company will build in their commission into the offer price for the goods.

The result is that the commission paid by you to the agent can be anywhere from at least 12% to 100% and not 5% – you can never be 100% sure.

As most agents are profit driven, they may refer your business to the supplier with the cheapest price, resulting in substandard product, or to the supplier which offers them the highest commission (which isn’t necessarily the one with the most suitable product for you!).

My recommendation is to get professional support from an independent sourcing company to assist you through the importing process, allowing you to avoid the pitfalls, and work on your business, not in it.

At the end of the day, your importing business is about providing you and your family a better lifestyle.

Those who try to save a penny and not get professional help, their experience of importing from China can end up being a very expensive, frustrating exercise.

And, if you choose a reputable Australian sourcing company, your company may be eligible for a $20,000 government grant.

Enterprise Connect is a $251 million Australian Government initiative that provides practical support to thousands of small and medium enterprises (SMEs).

The first level of service offered through Enterprise Connect is a comprehensive Business Review, which is delivered at no cost to a client firm.  Skilled and experienced Business Advisers carry out Business Reviews on-site at your firm’s premises.

Your company may also be eligible for Tailored Advisory Services which reimburse your firm half the cost, up to a maximum of $20,000, of engaging consultants like ChinaDirect to help implement changes that improve your business performance.

We stumbled across this relatively new Federal Labour grant after one of our clients used it for our services.  We’re now on track to save that company $800,000 p.a. in purchasing costs!

Before you select an import adviser, or sign anything, make sure you read our special report on how to choose an import agent, which has questions to ask when you interview them. Go to the ‘Articles’ tab on this website to check out the free report.

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