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  • McManus Riis posted an update 1 year ago

    Needless to say, China has become the world’s leading manufacturing base. However, together with the recent product safety scares as well as the constant media attention, "Made in China" has changed into a high-profile issue for consumers and retailers. So, just how does 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 think about when getting into OEM relationships with Chinese suppliers. (Basically we highlight several of might know about feel would be the main issues to be covered by the agreement, we notice that each case is exclusive and there isn’t any such thing like a ‘typical’ OEM arrangement.)

    Standard Form Agreements. An OEM could have a standard form agreement that they will be more than happy to provide to foreign companies which use their helps. Although this may lower costs at the start and enable the foreign company to ‘build favor’ with their Chinese counterpart, using such an agreement is almost never advisable, and foreign companies would be smart to consult counsel, who’ll profit the foreign company to properly negotiate and prepare agreements.Remember that we quite often suggest that the written agreement is preceded by preparation and negotiation based on a company term sheet, that can outline the key regards to cooperation. The agreed points from the term sheet then be the cornerstone for the written agreement.

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

    1. Products and Specifications: These products to become manufactured should be well-defined in the agreement, as well as product specifications which should be described in detail in relevant appendix(es).

    2. Forecasts and Binding Purchase/Supply Commitments: As OEM Agreements often require that firm orders are placed through Purchase Orders, to guarantee that you have a binding supply/purchase commitment within the agreement itself, the parties will frequently designate some minimum commitment on sides, to create and buy a lot of product in just a given time period. In addition to the minimum requirement, the customer will frequently supply a non-binding forecast to supplier, such that supplier can plan and allocate adequate resources (often 6-, 12-, 18-, 24- month terms).

    3. Price: For those products designated as described previously, the parties have to research firm prices, that can either be effective through the entire term from the agreement, or at least some thereof, susceptible to (we recommend) maximum periodic price increases. Further, it can be best for include for discounts upon meeting certain pre-determined purchase volumes.

    4. Qc: Buyer and supplier will agree with certain terms owned by buyer/required of seller for conducting product qc. Typical terms include i) access (often on short or no notice) to production sites, and ii) random testing of each one batch of goods before dispatch to buyer. Further, the parties may, with respect to the valuation on the agreement, look after an agent from the buyer to get on-site over a full-time/regular basis, for the purpose of assisting in qc. (The buyer’s representative can also monitor supplier’s using intellectual property and also other improper dealings, though their effectiveness will usually be determined by his/her loyalty towards the buyer.)

    5. Term: The parties determine a suitable term for his or her contract, and may increase the risk for agreement renewable on request by buyer. This term should be sufficiently long in order to make certain that buyer’s wind turbine might be adequately recovered.

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