(This post was first published on Forbes)
Did you know that your product might be copied in China even before you ship it? While copying happens elsewhere, including Facebook blatantly copying Snapchat features or Google Home being a strong echo of Amazon’s echo, Chinese copycats can be particularly aggressive.
Realistically, the gigantic Chinese supply chain, built over decades with some of the dollars from our past and future iPhones, cannot possibly move overnight (or over a U.S. presidential term). As a result, most high-tech manufacturing will remain in China—at least for a while. Today, its scale and know-how is unparalleled, and can bring enormous advantages to companies who know how to make use of it.
So how can you protect your business from such a ruthless environment? This is the number one question we get asked at our Shenzhen-based hardware startup accelerator, HAX. Here is our most up-to-date answer on how smart entrepreneurs protect themselves, whether or not they produce or sell in China.
Know your fakes
Not all fakes are created equal, and hence they should be dealt with differently. First, there are products made by competitors under their own brand. They could have learned about your product by reverse engineering it, seeing it advertised online or on Kickstarter (like the Fidget Cube), or from a leak at your partner factory.
Depending on the case, they might infringe on your patents, design or trademark. They might also have circumvented those, or operate in a legal vacuum if you haven’t protected yourself where their products are made or sold.
The second kind of fakes are products made by your own factory, that can become your toughest competitor. It could be selling the surplus they have, or derivatives made using what they learned from you. If your only protection was an NDA, they are breaking your trust, but not the law.
So what can you do to protect your startup from those troubles? There are old and new ways to do so, with pros and cons for each.
NDAs are not enough
They don’t protect you as much as you think. Your factory might sell your products to new customers, or even try to sell to your own customers, both in China and abroad. Dan Harris, an international lawyer at Harris Bricken specializing in Chinese business law and fellow Forbes contributor, advocates “NNN Agreements,” which include non-disclosure (the classic NDA), non-circumvention and non-competition. Those can be complemented by manufacturing agreements and product development agreements to avoid issues with your factory subcontracting the job, changing suppliers without notice, or even claiming rights for their contribution to the development of your product.
Patents and trademarks
Patents are often a necessary evil: of little direct use until you’re established, but highly valuable for protection, licensing or acquisition later on. Yet, patents are not always suitable. Often, you’re better off keeping some processes or software confidential. To avoid wasting your resources, research prior art, define your IP strategy, file early (a provisional patent is affordable and gives you time to plan), and optimize payments. In China, a trademark or a design patent can be very effective so do not forget to file locally.
Do your due diligence
Key suppliers are as important as cofounders. They are also as important as investors, since favorable payment terms will support your cash flow. Don’t simply hand over your plan to a factory you met on Alibaba: a shotgun wedding can end up in a costly divorce.
Get recommendations, do your research and be on the ground. Make sure your partners meet the quality and labor standards you want, have the right motivation and give you proper attention. As a fledgling startup, you bring them very little revenue to start with. Hence, you must find partners who value intangibles such as believing in your product, your vision, and who like dealing with you. Avoid factories who think short term and China-only.
Keep it complex
The complexity of your product is a natural defense. The entry barrier could come from science (e.g. material science, optics, medical research), software (e.g. computer vision algorithms and AI), manufacturing (like for Native Union‘s marble smartphone cases) or a community.
And while it won’t stop all the knockoffs, there’s sure to be clear difference in quality. “We saw competitors try and copy our hardware, but without strong software development capabilities the user experience is always poor,” noted Jasen Wang, CEO of Chinese startup Makeblock which makes STEM robotics kits.
Ambitious projects also attract investment and talent more easily, another plus.
Speed is your number one asset
“If you’re not shipping, someone else will,” wrote Frank Tobe of the Robot Report after lookalikes of the Jibo companion robot were spotted on Chinese websites. Going fast entails finding the best expertise, partners and capital you can to reach each product and business milestone, which often means going to meet them wherever they are.
For prototyping and manufacturing hardware, Shenzhen’s markets and supply chain offer tremendous speed and expertise, which can also broaden your options. In case you didn’t know, Steve Jobs managed to switch the screen of the first iPhone from plastic to glass in just six weeks—an impossible feat in other places. Startups coming from Silicon Valley tell us that “one week in Shenzhen is worth a month back home.” Fast execution also brings increased morale, and investors love both.
Leave competitors in the dust with your speed of innovation, and don’t rest on the laurels of a first successful product – the world always catches up with success. Like the Red Queen says in Lewis Carroll’s Through The Looking Glass, ‘it takes all the running you can do, to keep in the same place.’
Get on a plane
Eventually, the best way to have eyes on the ground is to bring your own. If you’re based outside Asia, it might seem costly to go back and forth to Shenzhen, but it is a sound investment to ensure that your supplier does not sideline you in favor of bigger customers.