Outsourcing and Intellectual Property

A common concern when sourcing overseas is protecting intellectual property. This article examines sourcing and piracy as well as steps that can be taken to reduce the risk product will be copied.

Due to the many different types of products available in the world, the uniqueness of a product does not in itself make it attractive to those who seek to profit by copying the ideas of others. Products such as the following are most attractive for those engaging in piracy:

1. High tech goods or other products that require expensive research and development to create. They are appealing targets for copying because the one copying the product does not have to invest in research and development costs.

2. Products such as computer software, DVDs and music are attractive piracy targets since they can be copied inexpensively and those copying them are not paying the true production costs.

3. Famous brand names are piracy targets since those copying them are not paying the advertising and other costs that established the brand and its premium pricing.

Less established products that do not fall into the above categories are also victims of piracy. This happens because someone recognizes a unique product or idea that they think will sell exceptionally well. Since the top three types of piracy listed above are primarily a concern for major corporations, this article will focus on the copying of less established products.

Many people mistakenly assume this type of piracy is driven by manufacturers in the country where the goods are being sourced, such as China. In actuality, most manufacturers will not begin production unless they have assurance of receiving payment. Furthermore, they are not in the business of marketing products or predicting future product trends. Therefore, the piracy of less established products is usually driven almost entirely by competitors and others in the countries where the goods are marketed. It is thus unlikely the type of goods this article focuses on will be copied unless a competitor is determined to do so.Outsourcing and Intellectual Property

Steps to reduce piracy
While piracy of less established products in China is less frequent than most realize, preventative steps should nonetheless be taken when sourcing overseas. These preventive steps include the following:

• For products with a high risk of piracy, follow the steps from the RFQ (request for a quote) phase. This can be done by first breaking down the product and only seeking quotes on its components. The product can then be shown to more manufacturers since none of them will see the big picture.

• Ask any potential manufacturer for a list of their customers to ensure they are not supplying product to a competitor.

• Even though China is not a legal-based society, a simple, direct NDA (non-disclosure) agreement, translated into Chinese, helps eliminate misunderstandings and ensures the manufacturer understands permissible procedures.

• Register brand names as soon as possible. China and some other countries are based on “first-to-register” rather than “first-to-market.” The process, which generally costs less than a few thousand U.S. dollars, can be made much easier with local English speaking attorneys who can usually be found at reasonable rates.

• If the product is very sensitive, the components can sometimes be produced by different suppliers who do not see the entire product. Then, the final assembly or packaging can be carried out at a secure facility either in China or in the country where the goods will be marketed. However, this approach will almost certainly increase costs and can only be used when profit margins are wide.

By understanding the types of goods usually copied and the reasons copying is performed, one can better implement the necessary precautions to prevent theft of intellectual property.

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