Many companies take advantage of cheaper costs by sourcing products or components from South-East-Asia. While ASEAN countries can present SMEs with many benefits when sourcing there are also many challenges! Presented below are some of the most important issues concerning IP risks when sourcing from ASEAN countries. For an SME it is not an option to spend vast resources on protecting the company's assets – solutions need to be affordable and practical. But it is NOT recommendable to start sourcing from ASEAN countries without having made initial efforts to minimise IP risks and secure your business. IP has often turned out to be a show-stopper if not considered for SMEs in ASEAN countries.
The IP issues that should be considered by SMEs depend on which phase you are in:
Before Sourcing in ASEAN
Prior to any engagement in the ASEAN countries your company needs to consider what know-how is valuable for your business and how it is to be best protected in ASEAN nations. First steps are to 1) identify what IP and know-how is embedded in the component or product to be sourced, and 2) ensure that correct IP protection is in place in the ASEAN countries.
The Helpdesk expert emphasises:
"Often we see that SMEs haven´t considered how to protect their know-how and IP rights in the components or products to be sourced in ASEAN countries. This usually turns out to be the most crucial weakness when the SME wants to control their sourcing partner in ASEAN countries. To give an example, a company started sourcing a product in ASEAN from a sub-contractor without having registered their trade mark in Malaysia. The sub-contractor registered the SME´s trade mark behind their back. After a while the SME decided to move the production to another Malaysia-based company as the sub-contractor could not deliver the expected quality. However, as the sub-contractor was the legal owner of the SMEs trade mark they had to pay a substantial amount of money to get the ownership of the trade mark back (before they could move the production). Knowing that the trade mark could have been obtained for less than €300 (excluding agent fees) if registered by the SME in the first place it seems like an unnecessary risk for an SME to take."
Identifying the company´s IP rights can be a difficult task for an SME to perform, if the SME has no knowledge of IP. To read more, see 'Finding Your Way Around IP'. Also, remember that it is always possible to get an external IP advisor to check whether the IP rights identified really are of core value to your business. Having an overview prior to sourcing in ASEAN countries ensures that IP risks can be evaluated.
IP risks when looking for a supplier
When looking to identify your supplier, you should consider how you want the relationship to work and what controls you need to put in place to secure your rights. These issues need to be spelt out in a written agreement which can form the basis of a contract between the parties. It is not advisable to start sourcing in ASEAN countries without a signed contract. However, it is important to keep in mind, that a contract could be viewed as a "guideline for cooperation" in ASEAN countries, whereas in Europe a signed contract is viewed as legally binding. Contracts should not be rushed through, but should instead be a process where the contract can work more as a relationship manual.
As an SME you should ensure that the potential supplier really is who they say they are. This can be done in a number of ways, but initially check whether the company is legally registered, and whether it is trading under the registered name.
Helpdesk team leader, Simon Cheetham from ERINYES INTERNATIONAL, a firm with expertise in performing background checks, emphasises:
“Often we find that we can save SMEs a great deal of trouble and expenditure by doing a simple background check prior to negotiations with a potential supplier. In this way we can ensure that the legal entity that the SME is to enter into a sourcing contract with is also the company that can be held responsible for any wrong doing. It pays to know who you are dealing with.”
It is best that you or your local adviser conduct due diligence directly with the prospective partner such as requesting certified copies of its incorporation document so that you can decide if there is any red flag that requires further verification or investigation.
In the contract it is advised to clearly state which Intellectual Property Rights are owned in respect of the items to be supplied and to clearly state that any know-how, discovery, invention (whether patentable or not), design, drawing, computer program, photograph, plan or record relating to the development of prototypes and the subsequent final version of products or any future developments of products which are made, created, developed or acquired by the supplier (together with all Intellectual Property Rights and any future rights in respect of any such matter) will belong to the SME absolutely. Please see the 'Research and Development' section to read more.
A particular problem can also arise over ownership of tools developed by a supplier to manufacture products on behalf of an SME. Where the supplier has paid for the tools and the sourcing agreement is terminated, you may not be able to recover the tools or transfer it to an alternative supplier (although this does not necessarily mean the supplier can continue to use the tooling). Where the SME owns the tools then you will have the right to recover it. In order to avoid the risk of losing any Intellectual Property Rights any SME should be aware that they are the only entity that can authorise any production on its behalf. A supplier should not sub-contract production of components to other companies, if this happens you lose control over your product, and the related know-how.
It would be helpful to ask the supplier to promptly notify you of any actual or suspected infringement of any of your Intellectual Property Rights, which comes to their notice, and that the supplier will do all such things as may be reasonably required to assist you in taking or resisting any proceedings in relation to any such infringement or claim. Please see 'Dealing with Counterfeiting' to read more.
During Sourcing in the ASEAN region
It is a mistake to think that once a sourcing contract has been signed, everything is settled. This is not the case. As in most business relationships a hands-on approach will be best. Issues to be considered include:
- To ensure that IP and know-how will not leak – always monitor your supplier. It is good practice to include unannounced visits.
- Factories which know they must adhere to controls, procedures and standards will do so if they are subject to checks; those factories which are not subject to checks may rapidly deviate from procedures and standards.
- Establish how the supplier deals with your products, factsheets, know-how etc. Consider physical access to the production-site and how this access is secured. In general, if you have access to a competitors' production at your supplier´s factory, they will also have access to your production.
- A common issue in ASEAN is production overruns, this means that a supplier manufactures more than the agreed quantity, and sells overruns on the black market. A clear policy should be set out on handling overruns, as well as seconds and rejects. Failure to exercise control over these issues is one of the most common causes of infringements. This should also be monitored in the IP security Audits as well as in the contract.
After Sourcing in ASEAN If the right precautions have been taken from the start, it is not a problem to cease production with a supplier. However common issues include:
- Difficulties recovering tooling, either because ownership of the tooling has not been clearly established or because physically locating or recognising the tooling is difficult without some clear means of identification.
- Another common issue is that the supplier has acquired the know-how to manufacture even after production is moved elsewhere and keeps manufacturing the products. It is advisable to recover all tools, and any remaining components or completed items to ensure that the sourcing partner cannot continue manufacturing the products.