OEM Manufacturing Agreements in China

Of course, China is the world's leading manufacturing base. However, together with the recent product safety scares and the constant media attention, "Made in China" has changed into a high-profile problem for consumers and retailers. So how will a foreign company minimize the potential risks of tainted/substandard products produced in China? In this post, we discuss contract terms which foreign companies should look into when coming into OEM relationships with Chinese suppliers. (While we highlight a number of what we should feel would be the main issues to be covered by the agreement, we recognize that each case is exclusive and there's such thing as being a 'typical' OEM arrangement.)


Standard Form Agreements. An OEM could have a standard form agreement that they can is often more than ready to provide to foreign companies who wish to use their helps. While this may lower costs at the start and enable the foreign company to 'build favor' using Chinese counterpart, using this type of agreement is almost never advisable, and foreign companies would be smart to consult counsel, who will conserve the foreign company to negotiate and make preparations agreements.Remember that we sometimes advise that the written agreement is preceded by preparation and negotiation based on a company term sheet, which will outline the most important relation to cooperation. The agreed points inside the term sheet then function as the premise to the written agreement.

Major Relation to its Agreement. Below, we highlight several major (though non-exhaustive) terms which needs to be incorporated into an OEM Agreement:

1. Products and Specifications: The items to be manufactured ought to be well-defined from the agreement, as well as product specifications which should be described at length in relevant appendix(es).

2. Forecasts and Binding Purchase/Supply Commitments: As OEM Agreements often require that firm orders they fit through Purchase Orders, to guarantee that you've a binding supply/purchase commitment from the agreement itself, the parties will most likely designate some minimum commitment for sides, to produce and purchase a great amount of product in a given time period. Besides the minimum requirement, the purchaser will often give you a non-binding forecast to supplier, in a way that supplier can plan and allocate adequate resources (often 6-, 12-, 18-, 24- month terms).

3. Price: For anyone products designated as described previously, the parties should determine firm prices, that may be either effective through the entire term with the agreement, or at least a portion thereof, be subject to (we propose) maximum periodic price increases. Further, it really is best for include for discounts upon meeting certain pre-determined purchase volumes.

4. Quality Control: Buyer and supplier will acknowledge certain terms afforded to buyer/required of seller for conducting product quality control. Typical terms include i) access (often on short or no notice) to production sites, and ii) random testing of every batch of merchandise before dispatch to buyer. Further, the parties may, based on the value of anything, offer a representative from the buyer to become on-site on the full-time/regular basis, for the purpose of assisting in qc. (The buyer's representative might also monitor supplier's utilization of intellectual property and other improper dealings, though their effectiveness will invariably rely on his/her loyalty to the buyer.)

5. Term: The parties will determine the right term for his or her contract, and may even make the agreement renewable on request by buyer. This term must be sufficiently long in an attempt to ensure that buyer's wind turbine could be adequately recovered.
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