Can We Trust Our Suppliers?

I make a point of attending the Hong Kong and Canton Fair gift shows twice a year, in late April and late October.  When my friends in America ask me why, I tell them that I primarily attend to identify and defend against suppliers attempting to knock off and sell our products.  China has become a free-for-all with respect to intellectual property and many suppliers are merely embarrassed, rather than scared and quick to act, when they are caught red-handed.

Many buyers at the Chinese and Hong Kong fairs fail to consider that they may be buying products protected by law as intellectual property (“IP”) not owned by that supplier.  An importer, without realizing they have done something wrong, can also be sued for trade dress, which is defined as “the non-functional physical detail and design of a product or its packaging, which indicates or identifies the product’s source and distinguishes it from the products of others.”

It is commonplace nowadays for suppliers to market and sell products that another company asked them to produce.  It is also common practice for these suppliers to be sent the product to duplicate or for them to discover the product somewhere and reproduce it.  This behavior represents the outcome of a cost-benefit analysis, in which most suppliers do not recognize costs and determine that it is worth the risk.  In a country with the competitive mentality of dog-eat-dog and a still emergent regulatory regime, ethics sometimes take a back seat to financial opportunities.

But in China, buyers are not the only parties suffering mistrust; suppliers are equally vulnerable.  Sadly, these suppliers have learned much of this mistrust from entrepreneurs from the United States and other high-GDP countries who constantly scour the tradeshows and trade websites such as Global Sources and Alibaba for less expensive and better quality products.

From what I understand, many years ago Chinese suppliers used to bend over backwards to form and maintain long term relationships with their buyers.  Respecting the wishes of their vendors, whom they perceived as lifelong business partners, these suppliers kept prices stable even when their costs spiked and protected proprietary products with their lives.  There are still suppliers who do think and act this way, but I am finding them fewer and farther between.

My companies own many utility and design patents and have also filed many of these same patents internationally.  We always file in China because the country houses such a large percentage of the world’s consumer goods manufacturing and IP protection enables us to catch and enforce our rights against Chinese suppliers knocking off our products.  Throughout years of attending many fairs in China, I have found so many suppliers displaying knockoffs of products—ours, those of companies owned by friends of ours, and other well-known IP-protected products.

I’ve heard from many people that the Chinese government is cracking down on counterfeiters and have read several stories about the government coming down hard on firms selling misappropriated and illegally reproduced DVDs, CDs, purses/handbags, watches and other items.  The Chinese government experiences vigorous international pressure from countries and large corporations to enforce intellectual property offenses.  Today they are doing a better job of this than ever before.  Our challenge, though, is that we may only rely upon ourselves to proactively discover these instances and alert the government.

One of our new products recently became especially successful and we decided to use one supplier to manufacture the product.  We visited this factory on multiple occasions and felt that we had formed a strong, mutually beneficial relationship, as well as a clear understanding that this product is our legally protected intellectual property.  We instructed them to only manufacture this product for us and to prevent other trading companies from marketing or selling it.

In April, as our first container of the product was en route to the U.S., I attended the Canton Fair and discovered our product in the booth of another company from the same city as our supplier.  It was our exact product and, to our knowledge, nobody else in China had ever seen it besides our supplier.  A few years beforehand, I had encountered a situation just like this one.  Upset and feeling betrayed, I immediately took a hard stance with the infringing supplier, asserting that this was our product and that we were going “to come after” them.  I’ve learned quite a bit since then.

Nowadays, I walk calmly into the booth and try to collect as much information as I can about what they call their “new product:” its price point, its MOQ, the countries in which they are selling it, etc. I then ask for a copy of their catalog, take a picture of the product with the booth number in the picture, and finally inform them that this product is ours and that we own the rights to it in the U.S. and in China.  Thankfully, we work with Chinese attorneys who have written powerful letters that often elicit a few nervous faces.  Between a letter such as this and what I tell these firms, we make clear that they need to discontinue selling the reproduction immediately or there will be legal and financial consequences.  In addition, we emphasize that we will legally pursue importers bringing our products to countries where we own the intellectual property rights.  We have yet to pursue any of these infringing suppliers after alerting them because we monitor them vigilantly and follow up.  We do this in many ways, for example, sending emails from different email addresses to ask whether they are still selling it.   

In April, after the fair ended, I traveled to our supplier’s factory and mentioned that another supplier in their city was already showing our product.  The supplier told me that this other factory had visited our supplier’s factory recently and must have stolen a sample out of their showroom.  I explained to them very clearly again that this product was our property and was not to be exported anywhere without our authorization, not to be exhibited at any trade show, and not to be distributed around the trading company circuit, as many products are.  They assured me that this would never happen again.

We enjoyed a more positive relationship with them until October, when I went back to Hong Kong and Guangzhou for trade fairs.  At the Hong Kong fairs, I stumbled upon one company selling our product with our packaging and another company selling not only our existing product, but also other products we were still developing in collaboration with our supplier.  Prior to the fairs, I let our supplier know that I was attending the Canton Fair as well and found out they were also going to be exhibiting.  We proceeded to talk about the days I was going to be there and I told them I would stop by their booth.

When I arrived at our supplier’s booth, I immediately noticed our product on display.  Thankfully, they were busy at the time with other customers, so I took my pictures without their awareness.  I acted like I wasn’t paying much attention when they were finishing up with these prospective customers.  Out of the corner of my eye, I noticed that the owner of the factory recognized me and proceeded to take our product off of the shelf and hide it beneath a cabinet.

While I expected to speak to them about the two suppliers I encountered at the Hong Kong shows, I didn’t know that our own supplier was doing the same thing.  I sat down and began a conversation with the owner of this factory and their English speaking representative, who has been my point of contact throughout our business relationship.  I began the conversation addressing the other two suppliers selling our product.  Both were from the same city as our supplier.  I showed them their catalogs, which included our product and the products in development.  The owner immediately called up one of the suppliers, got off the phone and told me through the interpreter that it was taken care of.  They claimed, like in April, that this factory must have taken the product from their showroom and that they would take action.

Regarding the second supplier at the Hong Kong fair, I was told at the booth that the second supplier had actually approached our supplier to manufacture our product and our supplier was upset that we were trying to source this outside of their factory.  A few months earlier, we began speaking with a company that specialized in sourcing out of China as we wanted to add some design elements to a few of our products.  I had provided them a few samples of our products, including this popular product.  The prototype I had given the company was a revised version on which we worked with our supplier during my visit to their factory in April, and the other company had subsequently sent this product to this new manufacturer in China.

After our supplier explained this to me, I then asked them why they were showing our product at the Canton fair.  My contact at the factory told me that she specifically advised the owner not to do this, but that he insisted they show it.  She also explained that the owner had suffered a head injury and had not been thinking correctly.  I then asked them if our product was in their catalog.  They changed the subject twice, so I walked over to where their catalogs were, opened one up and located our product inside.  I kept this open, turned around the catalog and gave them a puzzled look.  They offered up another excuse that when the owner was hospitalized with his head injury, their marketing director assembled the new catalog without knowing whether to exclude our product.  By the time the owner and my contact were made aware, they claimed not to have had enough time to change it.  They apologized profusely and told me that none of this would happen again.  I reminded them that they told me the same thing in April and asked them what they had not understood then.

The owner, through my contact, insinuated that he felt betrayed because we tried to source through another factory and were being disloyal to them.

I had a choice to make: Would we continue to work with a company that continued to ignore our demands to protect our IP or should we cut our losses immediately, pursue legal action and seek a new supplier altogether?  Churning in my mind was the Chinese proverb: “Fool me once, shame on you; Fool me twice, shame on me.”  Recently, our companies have been quick to disengage with other entities that we feel are operating unethically.  But in this situation, a few thoughts occurred to me:

–          We unfortunately did not have another supplier on which we could rely for quality and the nuances of our product.  Furthermore, we needed more product immediately.  We have since developed a relationship with a backup supplier.

–          We have been to the factory multiple times and, aside from these encounters, have developed meaningful personal relationships with the factory leadership for over a year.

–          I did somewhat sympathize with their sentiments of betrayal.  I know very well we need multiple suppliers, but our primary supplier reasonably felt like we were preparing to work exclusively with a competitor.

I made the decision, at least for the short-term, to continue the relationship with the caveat that, if we discovered anything like this in the future, we would immediately discontinue working with them and proceed with legal action.  I know from previous dealings in Chinese commerce that enabling people to save face (even when they are clearly in the wrong) is important to cultivating relationships.  So I apologized to them that we tried to source this out at a factory other than theirs and invited them out to dinner that night.

At dinner, the conversation was focused on improving our relationship and both sides felt self-expressed.  I already have noticed a significant difference in the quality and openness of our communication since the dinner meeting.  That said, there is no doubt both I and our legal team in China have been keeping track of this situation.  I will also certainly return to the shows in April to monitor the situation with this product and our other product lines.

Besides monitoring intellectual property protection, attending these shows is extremely useful to observe what new products are being produced, identify upcoming trends within the different industries, and to gauge the pulse of what is happening in the suppliers’ world.  Additionally, it’s always good to speak with potential backup suppliers and ready them for backup production in order to mitigate risk and keep your primary supplier “honest.”

I advise so many of my fellow importers to attend trade shows and monitor sourcing websites to ensure that their products are not being misappropriated and illegally reproduced.  Word travels quickly in China when a product is successful.  It is our responsibility to protect our products and that requires concerted effort and special attention.  I would also recommend signing confidentiality contracts with your suppliers to explicitly document the agreement that they may only sell a product to your company and may not disclose this product to other companies in China.  But even taking these steps to mitigate your risk, risk nonetheless remains.  We must always remain vigilant and creative to protect our most valuable intellectual property.

By David Sternlight,

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