At some point in the journey to creating and selling a new hardware product, your product crosses that magical, albeit challenging, step into ready-for-manufacturing.
These days, many of the potential factories to choose from are in China. There are compelling reasons to consider selecting one of these, but there are also many important things to know and do to ensure a smooth process and a successful result. And you certainly don’t want to end up losing money, or even losing control over your product's IP (intellectual property).
Here's some advice, based on a talk, "Approaching Chinese Manufacturers," given by Greg Fisher on May 14, 2018, at the Hardware Massive Oslo event, "Product Production - From Kickstarter to China” (plus a brief email follow-up with him).
Fisher's experience reflects over 15 years working with over 200 Chinese factories and helping over 1,000 companies with development and manufacturing. He is the founder of the Berkeley Sourcing Group, Hardware Con, and also Hardware Massive, a global platform for hardware startups to meet locally and connect globally with the hardware startup ecosystem.
Finding a Factory: Be Thorough
If you want to look for and find a factory directly, the two main websites to explore are Alibaba.com and GlobalSources.com, says Fisher. "Search for the kind of product or process you need, and you may or may not find a factory."
However, Fisher cautions, what you find "may be a guy in a room presenting himself as a factory. There's about a 60% chance of it really being a factory currently. You won't really know until you go there. It's gotten a little better; back in the day it was really deceptive, you would have no idea unless you spoke Chinese."
(See American Express’s How to Find a Manufacturer in China for more tips.)
Under the Manufacturer's Priorities
Since you're looking for a manufacturing partner, it's important to understand what a factory's interests and priorities are. "The factory wants to keep the machines running. That's how they make their money; when they aren't running, they're losing money."
As a startup you won't have a large initial order, but factories are also looking for scaling businesses. "It's like talking to an investor," says Fisher. "You want to convince them you'll be a success, something they want to invest their time and resources in."
"In the first order they will lose money," Fisher points out. "It's their marketing expense, they don't usually do other marketing, they're willing to take on some small orders, but you have to appreciate all the hard work they are doing at their expense."
Protect Your Intellectual Property Rights
Protecting your IP, or intellectual property, is an essential part of contracting with manufacturers and other business partners.
"Make sure you pay for design services, and make sure that it's clear you own the designs, and that you get the design files and confirm they’ve done it right before you make the final 50% payment," says Fisher. "A lot of factories can do the design very quickly and efficiently...but if you don't have this agreement, and if you don't have the files, they have all of your details and all of the control in the relationship."
And when the work is done, do pay.
"If you don't pay them, they legally own everything they've done," Fisher said.
While protecting your IP is important, focus on protecting yourself in the countries you will sell to. "If you're on Kickstarter, once you get publicity, and you have a good product, it's likely somebody in China – your factory or another one – will copy you."
(For example, see the somewhat depressing Your brilliant Kickstarter idea could be on sale in China before you’ve even finished funding it.)
Pragmatically, advises Fisher, "Unless you're going after the marketplace in China, don't worry about protecting your IP there – there's a bigger picture." And, Fisher re-assures, the Chinese factory you are using is the least likely to become a competitor. "We've never had a Chinese factory significantly rip off our customers’ ideas and compete with our customers in their market, but we have had Taiwanese and US companies copy our customers’ products."
Protect Your Trademark
"Trademarks in China are very well enforced. Put your logo in the tool that's making your product. For example, seal the tool with your signature on pieces of tape and register a trademark in China. If you do that, a factory that wants to make unauthorized copies of your product will have to make a new tool in order to reproduce your tool without your logo on it. And tools cost a lot of money, from $10K to $200K."
Don't Select Based on Lowest Price
"Don't go with the factory with the lowest price," warns Fisher. "Usually the lowest-price competitors are doing that to get you in the door and hooked; later on it's very hard to switch production midstream, and they know that. They are likely to give that low price and then raise it halfway through. There are a million reasons why they can do that, and they all make sense. This tool needs to be harder, this tolerance is too tight, the workers can’t do it the way you want, so we have to double your price.”
Don't Forget About Packaging
"Packaging is often one of the most forgotten about parts of the process," says Fisher. Given that it can take a long time, "you want to start early."
Packaging can make up 10% of the total product cost, Fisher notes, "so if you haven't factored that into your sales price, you can end up with a price point that doesn’t have enough margin."
Also, Fisher points out, packaging is very important in consumer retail as part of the product experience. He cites what Apple has done as an example.
Many of these points and concerns will apply whether you chose a factory in the United States, China, or elsewhere, of course. But distance, language, and different laws – all of which apply to American startups looking to Chinese manufacturers – make it even more important that you do your homework, along with ongoing due diligence.