Engaging an OEM in China? Put these two things on your to-do list

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Written on: February 7, 2023

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When engaging a Chinese company to be your original equipment manufacturer (OEM), it is crucial to take precautions and follow well-established advice to avoid common pitfalls.

Due Diligence on an OEM

The main way of avoiding scams and fraud is to conduct a thorough due diligence exercise.

1. Legitimacy of an OEM

Determining the legitimacy of your potential partner is important. A major and initial issue in selecting a Chinese manufacturer is determining whether the manufacturer is “real.”

Many companies, including many in China, are very good at marketing themselves to look bigger and better. This occurrence can often cross the line into outright deceit and can occur virtually, on-site, and in person.

2. Credibility of an OEM

Another important fact you would like to confirm is whether your potential partner has sufficient capital (paid-in capital vs. registered capital explained) to undertake the proposed business.

The due diligence exercise will also help to confirm it is not in bankruptcy or defaults under court orders.

One more thing that due diligence check is the ownership of the OEM, which is also a component that can provide some insights into the OEM company. Check out the fixed-price due diligence service.

Documentation

1. Fair and transparent commercial terms of the OEM arrangement

Negotiating terms and conditions with a suitable OEM is important because it lays the foundation for a productive and mutually beneficial relationship between you and the OEM company. The next and related step after the negotiation is to document the understanding in an enforceable contract.

Clear agreements on pricing, lead times, payment terms, and IP/confidentiality create a shared understanding for effective collaboration. It reduces misunderstandings and disagreements and ensures full commitment to obligations.

2. Solid foundation to protect IP in the OEM relationship

Establishing these agreements not only safeguards the interests of both parties but also guarantees that they are working together toward their shared goals. For example, a non-disclosure agreement (NDA) or a non-use, non-disclosure agreement (NNN) can be important in the process of selecting an OEM.

NDAs and NNNs are legal contracts that protect confidential information and trade secrets against unauthorized disclosure or misuse. When negotiating with an OEM, including NDA/NNN to safeguard sensitive information, like designs and business plans.

By having an NDA or NNN in place, business partners can share confidential information much more comfortably.

By putting these on your to-do list, you would greatly increase the likelihood of selecting a trustworthy OEM.

What is an OEM?

In case you are wondering – OEM stands for Original Equipment Manufacturer, a company that produces non-aftermarket equipment or parts that another company typically markets. Numerous reputable private label companies utilize original equipment manufacturers to create their products, with examples such as Apple’s iPhones being produced by the established manufacturer, Foxconn.

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