Exclusivity Agreements with Chinese Suppliers: A Complete Guide

An Exclusivity Agreement grants a company with the right to be the only importer and seller of certain products.

The purpose is to prevent other buyers from importing the same product, and compete with the buyer on their home turf. Or, prevent the supplier from doing the same thing.

In this article, I will explain how such contracts work, and why they rarely make sense for most businesses looking to import products from China.

1. Does the Manufacturer even own the product design and IP?

Most suppliers are not actively developing new and unique product designs. Many factories have their own brands these days, mainly for the purpose of selling on Taobao or Tmall.

However, in most cases, such products are relatively generic, and largely based on their customers OEM designs. Most suppliers simply don’t have any Intellectual Property to speak of, and therefore, an Exclusivity agreement is a non-starter.

If you intend to buy a private label product, or create your own OEM product, an exclusivity contract is also irrelevant.

Keep in mind that not any product can be patented or protected. In order to patent or protect a product, the following criteria must be fulfilled:

a. The product design must be new

b. The product design must be unique

c. The product must have a new and unique function

If a supplier claims to hold a patent, this shall be easy to prove. You can verify the patent by simply requesting the patent registration number.

2. Product exclusivity requires serious order volumes

To grand a buyer with exclusivity in a certain market is a serious risk for the supplier. What if the buyer is all talk and no substance? What if they fail to successfully sell the products in their target markets?

Clearly, a supplier cannot be expected to invest in product development, and grant exclusivity to anyone who can move 500 units per year.

Instead, all suppliers that have valuable IP require buyers to reach certain target volumes, on a yearly basis.

For example, the exclusivity contract may state that you must buy 5000 units during the first 6 months of the year, to maintain exclusivity during the following 6 months. And so on…

Indeed, the required volumes will be based on the target markets, and the estimated sales volumes. This can be estimated based on the population, but also local demand for the product.

It’s up to you to calculate a suitable yearly volume, and send a proposal to the supplier. Don’t expect them to be the active party.

Start as low as you can, as long as the number makes sense for the supplier. In the end of the day, they will only adhere to an exclusivity contract if they see that it benefits them.

And, don’t try to launch the product in too many countries (or states, if you’re in the US) at once.

The more countries you add to the list, the higher the yearly volume requirement.

3. Have an action plan ready if the supplier fails to comply with the agreement

What is a piece of paper to your average Chinese supplier?

Not much, but there are companies that invest serious money into their IP, and understand the importance of having a reliable partner that understand the local markets

But, never assume that they will adhere to the contract by default.

You must always have a backup plan ready, if they start selling to other buyers in your country, or even setup a local branch themselves.

Don’t bother with suing the supplier on the home turf. It’s too time consuming. Instead, target them in your market.

An exclusivity agreement, or agency agreement, can be enforced in your country, and thereby you can block the supplier from selling the product to other importers, or attempt to import and sell the product using a local subsidiary.

Try to make your supplier aware of this, in a subtle fashion.

4. Make sure you sign the exclusivity contract with the right company

Manufacturers often consist of more than one company. Even small factories may have a company registered in Mainland China, that owns the production facility – while they may have a different company, often in Hong Kong, acting as a trading company.

This is the company that receives the money. However, the trading company may not be the entity that owns the Intellectual Property.

Make sure you sign the Exclusivity agreement with the company that is the actual IP owner, and not a postbox company that doesn’t own anything but a USD bank account.

The IP owner is specified in the patent database, and other documentation that the supplier should provide as part of the agreement.

Conclusion

An Exclusivity agreement might sound like a good idea, but they rarely make sense.

If your intention is to buy a custom designed or generic private label product, there’s no exclusivity to be had.

Such contracts only make sense if the supplier do have valuable IP. In other words, they have a unique product that you want to launch in your country.

But, even then, it’s relatively risky – even if the supplier is not violating the contract.

You will be the one investing in marketing and sales, while paying every order upfront. Or, at least before they are shipped.

What happens when the contract expires a few years down the road?

What happens if you fail to reach the minimum volume due to a temporary downturn two years from now?

These risk scenarios are not unique to Chinese suppliers, but are relevant anywhere in the world. Including with suppliers in your home country.

Personally, I am not aware of a single truly successful case where an overseas company have prospered, backed by an exclusivity contract.

I am, on the other hand, aware of cases with buyers spending a ton of time negotiating contracts that didn’t go anywhere. And, suppliers that signed contracts, only to set absurd target volumes, or ignoring the terms outright.

Yet, I do think that we will see more and more companies in China with valuable IP, and a new generation of founders who understand the need for overseas partners.

Perhaps I am writing this article a decade too early…

But, at this point in time, you need a very good reason for bothering with an exclusivity contract.

My personal opinion is that being the IP owner is the key to success. Don’t try to succeed using another company’s product. Get your hands dirty and develop your own.

Even if it’s only a simple private label product with your own brand. At least it’s your brand.