China OEM Agreements. You Are Naked Without A Good Bill Of Materials

This post was written by Jon Zimmerman, a new attorney at my law firm. Jon may be new to our firm, but he certainly is not new to the world of Chinese or international law. Jon has been practicing international law for nearly 18 years and has been heavily involved in China law for 15 of those years. Jon was even at one time the General Counsel for the Chinese electronics firm, Sichuan Changhong Electric Co. Ltd, or Changhong. He now represents both Chinese and Western companies in their international transactions, with an emphasis on intellectual property licensing.

Manufacturing agreements between foreign companies and their Chinese manufacturers typically come with all sorts of clauses dealing with choice of law, indemnification, time of delivery, failure rate, price, payment, and various other contractual provisions. But, it is oftentimes the Bill of Materials that will make or break the success of the manufacturing relationship, but far too often this document is either ignored or given far too short a shrift.

The Bill of Materials is simply a list of the components to be used in fabricating the proposed product. A good Bill of Materials, inserted as an appendix or addendum to an Original Equipment Manufacturing (OEM) agreement, should specify in painful detail exactly what the Chinese manufacturer must use in manufacturing the product. A well drafted and precise Bill of Materials minimizes the likelihood of confusion and future mistakes, which in turn saves money. It can help minimize product defects and recalls.

I have seen far too many OEM manufacturing agreements that did not have a Bill of Materials and far too many OEM agreements where the Bill of Materials was not made a part of the contract. Perhaps even worse, I have seen Bills of Materials that were made a part of the contract, but that allowed the Chinese manufacturer to substitute any component in the Bill of Materials whenever it felt like it. There is oftentimes nothing wrong with allowing your Chinese manufacturer to make substitute materials with your knowledge and approval, but there is a lot wrong with a Bill of Materials that gives your Chinese manufacturer complete discretion to substitute in materials.

When a problem arises, you should be able to cross-reference your Bill of Materials with the actual product to see if the correct components are present. When I see Chinese manufactured products with high return or defect rates, the cause is almost invariably the Chinese manufacturer having used cheaper components. But far too often, I also find that there was nothing in the OEM contract or in the Bill of Materials (or in the two of them working together) that contractually prevented the Chinese manufacturer from having done exactly what it did.

If you want to reduce your chances of defective or dangerous product, you cannot just rely on your Chinese manufacturer to do the right thing in terms of your product’s materials or components. It is your responsibility to make sure your Chinese manufacturer is using the correct materials in manufacturing your product. A well drafted Bill of Materials is the first step towards that.

For more on OEM agreements, check out the following:

– Why You MUST Have A China OEM Agreement.

– China OEM Agreements. Why Ours Are In Chinese. Flat Out.

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