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  • stevencollar3 posted an update 6 months ago

    Needless to say, China is among the most world’s leading manufacturing base. However, with all the recent product safety scares and the constant media attention, "Made in China" has become a high-profile gripe for consumers and retailers. So, just how will a foreign company minimize the hazards of tainted/substandard products stated in China? In this article, we discuss contract terms which foreign companies must look into when entering into OEM relationships with Chinese suppliers. (While we highlight a number of what we feel will be the main issues to become taught in agreement, we notice that each case is different and there is no such thing like a ‘typical’ OEM arrangement.)

    Standard Form Agreements. An OEM could have a standard form agreement that they can is often more than prepared to provide to foreign companies which use their services. Even though this may lower costs in the beginning and allow the foreign company to ‘build favor’ making use of their Chinese counterpart, using this agreement is actually never advisable, and foreign companies can be wise to consult counsel, that will assist the foreign company to correctly negotiate and prepare agreements.Be aware that we sometimes recommend that the written agreement is preceded by preparation and negotiation judging by a company term sheet, which will outline the major relation to its cooperation. The agreed points inside the term sheet then serve as the foundation 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 needs to be well-defined inside the agreement, along with product specifications which should be described in more detail in relevant appendix(es).

    2. Forecasts and Binding Purchase/Supply Commitments: As OEM Agreements often require that firm orders are positioned through Purchase Orders, to make sure that there is a binding supply/purchase commitment in the agreement itself, the parties will frequently designate a particular minimum commitment on sides, to make and get a certain amount of product in a unpredictable moment period. Apart from the minimum requirement, the purchaser will frequently give a non-binding forecast to supplier, so that supplier can plan and allocate adequate resources (often 6-, 12-, 18-, 24- month terms).

    3. Price: For all those products designated as described previously, the parties have to research firm prices, which will be either effective through the entire term with the agreement, or otherwise a percentage thereof, be subject to (we advise) maximum periodic price increases. Further, it’s best for include for discounts upon meeting certain pre-determined purchase volumes.

    4. Quality Control: Buyer and supplier will agree on certain terms owned by 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 each batch of products before dispatch to buyer. Further, the parties may, depending on the value of anything, provide for an associate from the buyer being on-site on the full-time/regular basis, to the reasons like assisting in quality control. (The buyer’s representative may also monitor supplier’s use of ip and also other improper dealings, though their effectiveness will rely on his/her loyalty for the buyer.)

    5. Term: The parties determine a suitable term for contract, and could result in the agreement renewable on request by buyer. This term should be sufficiently long to be able to ensure that buyer’s initial investment could be adequately recovered.

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