In a short space of time China has gone from barely producing anything to being a leader in goods such as consumer and electronic products. Manufacturing in the East is known to be low cost, quick to market and the flexibility of producing goods in China means if you want to make changes, this can be done with little red tape.

Owing to the reduction of UK manufacturing bases for electronic consumer products, it would seem that China is the best option - particularly for the speed in which goods can be turned around. Whilst this can create a questionable stance towards consumerism, the proficiency in this area is winning hands down, feeding into the ‘can-do attitude’ of the Chinese. Their open attitude in helping foreign companies, along with cost, flexibility and expertise is the reason why most of the world’s manufacturing is now done in China.

One of the most worrying aspects of going down this manufacturing route is breach of intellectual property. For example, joint-ventures are very common between UK and Chinese companies: the Chinese partner manufactures on behalf of the UK partner and they share the profits. However, you need to be aware that by manufacturing in China you are effectively creating a competitor. There is always a danger that some Chinese manufacturers will use a joint-venture as a means of getting hold of your technology so that they can set up their own factory to replicate your product - and keep all the profits. UK businesses need to have tightly drafted Joint Venture Agreements with Chinese partners to protect themselves.

Other drawbacks include achieving the level of quality in fit and finish you want when your manufacturer is on the other side of the world. Therefore doing business in China involves a lot of travel. The best way of overcoming problems (production, language, and culture) is by being there face to face. Perhaps it might help if Mandarin were taught as part of the school curriculum?

To minimise the risk to your business when developing products in China, there are a few prudent factors to observe:

· Do your due-diligence: this is extremely important in the run up to setting up manufacturing in China, particularly now as there are so many manufacturers eager to do business. There will be lots of people saying they can help you, so you need to make sure the one you choose has the right capability (and capacity).

· Build relationships with the manufacturer: A key element about working with manufacturing companies in China, is building a relationship with those involved. The Chinese conduct business at a very personal level, so if you don’t go out and visit you will become just another number on the balance sheet. They won’t bend over backwards for somebody they don’t know. It’s also imperative that you go out and visit during the project.

· Randomly visit: Don’t just make scheduled visits when the red carpet will be rolled out for you, which the Chinese are very good at doing - but don’t turn up unannounced either. Give short notice on the day you plan to go and phone them to let them know you wanted to come and say hello. These kinds of visits tell you much more about the standard of the factory and the quality of work. You won’t learn that by just speaking to someone on the phone.

· Negotiate disputes: Should an issue arise, the first step a Chinese party will suggest is the need for negotiation. This is great because it’s much cheaper than going straight to court. It gives everyone a chance to resolve things before it goes any further. Face to face communication is best. Though the Chinese generally speak very good English today, it will be a lot harder to try to resolve it over the phone or by email. The Chinese are very contextual the way they communicate body language, eye to contact, expressions and tone of voice are extremely important in any negotiation.

· Include an arbitration clause in your contract: If any disputes were to arise, rather than have them dealt with in an English or Chinese court where one party might have 'home court advantage’, DLA Piper advises clients to consider putting an arbitration clause in their contracts. By doing so, both parties agree to have any dispute heard not in court, but by an independent arbitration panel, chosen by the parties themselves, which could be in China, elsewhere in Asia or in Europe. Importantly arbitration awards are far more easily enforceable globally which is critical for example if your Chinese debtor only has assets in China. An arbitration award will be enforceable automatically in China, whereas an English court judgment will not be recognised.

Contact: Jeremy Offer, Managing Director, Dekode

+44 (0)1625 532469, [email protected], www.dekode.co.uk

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