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Introduction
Outsourcing manufacturing to China is a strategic decision for many small and medium-sized enterprises (SMEs) looking to scale efficiently and cost-effectively. However, while production costs may be lower, the legal and operational risks can be high if not properly managed. From scams and IP theft to vague contracts and supply disruptions, the pitfalls are real—but avoidable.
This guide consolidates insights from Trustiics' legal experts into one comprehensive resource to help international SMEs build a secure and reliable supply chain in China. Whether you're new to working with Original Equipment Manufacturers (OEMs) or looking to refine your current setup, this is your go-to legal playbook.
Part 1: Choosing the Right Partner in China
What is an OEM?
An Original Equipment Manufacturer (OEM) is a company that produces goods for another company to brand and sell. In China, many SMEs engage OEMs to create private-label products at scale.
Why Due Diligence Matters
Many suppliers look legitimate on the surface but lack the financial standing, operational capacity, or legal compliance to be reliable partners. For example, some may present well-designed websites and brochures, but further investigation reveals minimal assets or even fake registration details. Before engaging with any manufacturer:
- Verify legitimacy: Confirm the supplier is a legally registered business with proper licensing.
- Check business scope: Ensure they are authorized to engage in your type of production.
- Assess ownership: Be cautious if the controlling shareholder is a potential competitor.
- Investigate financial health: Confirm they are not in bankruptcy or on a court debtor list.
Due diligence is not a luxury—it's a necessity.
📎Trustiics offers a 72-hour China Company Verification service.
Part 2: Legal Documents You Need
Forget the handshake deal
Emails, MOUs, or vague framework agreements are often unenforceable and risky. These documents may lack key enforceable terms under Chinese law, such as jurisdiction clauses, contract chops, and clearly defined obligations.
Key contracts every SME needs
- OEM Contract: Clearly define roles, pricing, delivery schedules, penalties, and IP ownership.
- Non-Disclosure Agreement (NDA) / NNN Agreement: NNNs (Non-Disclosure, Non-Use, Non-Circumvention) are designed for Chinese legal enforcement and offer better protection than standard NDAs.
- Multi-Party Supply Agreement: If working with multiple suppliers, establish a unified agreement outlining delivery responsibilities, quality standards, and payment terms.
Enforceability in China (Why Local Review Matters)
Always have your contracts reviewed or drafted by a local China-based lawyer to ensure they are enforceable under Chinese law.
Key Issues When Negotiating an OEM Contract in China
OEM contracts are the foundation of any outsourcing relationship in China. A poorly drafted agreement—or one based on foreign legal assumptions—can expose SMEs to major risks. When negotiating OEM contracts with Chinese manufacturers, it’s important to address the following areas:
- Scope of Work and Technical Specifications: Define the product, required standards, production process, and tolerances in as much detail as possible. Vague descriptions lead to disputes and subpar quality.
- Pricing and Payment Terms: Include unit pricing, payment milestones, currencies, and bank account verification. Consider linking payments to quality inspections or delivery stages.
- Lead Time and Delivery Obligations: Set clear expectations on delivery timelines, delays, and penalties for non-performance. Specify the Incoterms used (e.g., FOB, CIF).
- Quality Control and Inspection Rights: Include your right to inspect goods during and after production. Consider involving third-party inspection services and outline remedies for non-conforming products.
- Intellectual Property and Confidentiality: Clearly state that all designs, tooling, molds, and confidential information belong to the buyer. Prohibit the OEM from using them for other customers.
- Exclusivity and Non-Compete Clauses: If needed, prevent the OEM from producing similar goods for competitors or selling your product design elsewhere.
- Termination and Dispute Resolution: Define breach events, termination rights, and legal jurisdiction. Disputes should ideally be resolved under Chinese law, with arbitration or litigation in China.
Having a comprehensive OEM contract that reflects local legal realities is essential to protecting your rights and preventing misunderstandings.
Part 3: Protecting Your Intellectual Property (IP)
First-to-File Trap
China uses a first-to-file system for trademarks. Register your trademark in China before entering the market or disclosing your designs.
Why NNN > NDA
An NNN agreement:
- Prevents the supplier from sharing your IP (Non-Disclosure)
- Prevents unauthorized use of your IP (Non-Use)
- Prevents them from circumventing you and selling directly to your customers (Non-Circumvention)
Patent, Design, and Copyright
If your products involve proprietary technology or creative content, consider registering relevant IP rights in China even if you've already done so in other countries. Patents (both invention and utility models) protect new technical solutions, while design patents protect product appearance. Copyrights can apply to manuals, packaging, software, and digital content. All these should be filed with Chinese authorities such as CNIPA or the NCAC to ensure enforceability.
Tech Safeguards
Use watermarking, file access controls, and tracking software to prevent unauthorized sharing of sensitive assets. For example, apply invisible digital watermarks to product designs, use password-protected folders for sharing files, and enable activity logs or alerts for suspicious access. These measures can act as a first line of defense and provide evidence in case of misuse.
Part 4: Managing Production & Payment
Start Small
Always begin with a small production run to test the supplier's reliability and product quality. This trial order helps you assess how well the supplier adheres to agreed specs, delivery timelines, and communication standards.
Secure Payment Practices
- Use escrow or letters of credit.
- Avoid large deposits upfront.
- Never send payments to unverifiable bank accounts.
- Do not use cryptocurrency (banned in China).
Monitor Production
Consider third-party inspection services or quality audits before shipment. These services can catch quality issues early, verify that contractual standards are being met, and give you leverage before final payment.
Part 5: Building a Reliable Supply Chain
Move Beyond Exporters
Directly engaging manufacturers (via OEM contracts) gives you more control than relying on exporters or trading companies. This control includes better oversight of raw materials, pricing structure, and production scheduling—critical elements for long-term supply chain reliability.
Align Interests
Working directly with manufacturers allows greater visibility into raw material sourcing, cost fluctuations, and production schedules. This transparency makes it easier to adjust to global supply chain shifts, negotiate better pricing based on real costs, and respond faster to delays or quality issues. You can also collaborate more effectively on demand forecasting and production planning.
Multi-Party Collaboration
Use master agreements to coordinate among your various suppliers, ensuring consistency across delivery timelines, specs, and accountability. These contracts can define interdependencies, outline penalties for delays, and establish common quality standards—helping to reduce friction between tiers of your supply chain. A clear legal framework improves overall efficiency and reduces the risk of finger-pointing when issues arise.
Contract Enforcement
Ensure contracts include dispute resolution clauses enforceable under Chinese jurisdiction. Chinese courts typically require that contracts clearly specify the governing law (e.g., PRC law) and jurisdiction (e.g., a specific court in China) or arbitration body (e.g., CIETAC or SHIAC). Without this, your ability to enforce rights locally becomes much harder. It's also important to ensure contracts are properly chopped and signed by authorized company representatives to stand up in court.
Final Thoughts
Outsourcing to China continues to offer significant advantages—but in today’s fast-changing global environment, those benefits must be weighed against evolving risks and shifting supply chain dynamics. With rising geopolitical tensions, stricter trade regulations, and efforts by some governments (including the U.S.) to incentivize reshoring or nearshoring, SMEs must take a strategic and future-proof approach to supply chain management.
Many international companies are diversifying production across Southeast Asia or moving some operations closer to home, yet China remains an essential hub for manufacturing due to its infrastructure, skilled workforce, and supplier networks. For businesses still relying on China for OEM manufacturing, proactive legal and operational safeguards are more important than ever.
From verifying your OEM to securing enforceable contracts and protecting your IP under Chinese law, these steps ensure you retain control and minimize risk—regardless of where the next global shift occurs.