China’s Evolution as the Hub for IoT Products and Complexities Regarding Intellectual Property

The emergence of China as a manufacturing powerhouse has been overwhelming. As recently as 1980, China was trailing behind Italy in the seventh place and by 2011, it overtook the United States to become the world’s largest manufacturer of goods. At present, IoT or Internet of Things products are a huge sensation across the four corners of the globe. China offers unrivalled economies of scale for IoT than any other country. The biggest problem in this industry is that very few of the Western organizations, including those in America, Australia and Europe, are aware of intellectual property tied to their IoT product. Most companies are clueless about who really owns the right to the product and this leads to a lot of problems.

It took China years to become the leading sourcing location for IoT products and this progression has been divided into three stages. But, as manufacturing capabilities started evolving, the complexities regarding intellectual right and ownership deepened. Take a look at how procuring products from China has worked its way through the following stages.

# The First Stage

China product sourcing between 1981 to 1995 was mostly simple. There were primarily two possibilities.

• The manufacturer in China created a basic consumer product and the Western buyer purchased that product. At the most, the Western buyer required the Chinese manufacturer place the buyer’s logo or trademark on the product. Here, the intellectual property ownership is clear - the Chinese manufacturer owned the design of the product and the Western buyer owned the trademark or logo.
• The product was already developed by the Western buyer. The buyer enters into a contract with a Chinese manufacturer, so that the manufacturer produces the Western buyer’s product in China. In this situation, the IP ownership is clear - all the intellectual property was owned solely by the Western buyer.

# The Second Stage

A new form of relationship developed between the Chinese manufacturers and the Western buyers between 1995 to 2015. During this time, buyers from the Western countries began to travel to China, without any clear-cut idea of a complete product. In this situation, the Chinese manufacturer worked with the Western buyer to co-develop a product. At times, the role of the manufacturer was only to find out how to produce a completed prototype in bulk.

In the process of co-developing a product, the Chinese manufacturer often performed development work at their own expense and this was bounded by an implied agreement that the product will be exclusively produced by the particular manufacturer. This process typically proceeded from where the First Stage left off, but led to serious issues of the ‘who owns what’ problem.

Due to the absence of any agreement, a set of issues arise. For instance - Who is the owner of the product design? What compensation is owed to the manufacturer, if the buyer decided to manufacture the product by a different factory? Is the Chinese manufacturer under any obligation to agree with the Western buyer’s quantity requirements and price? Is there any consequence, if the manufacturer decided to terminate its relationship with the buyer and manufactures the product under its own logo or trademark? The Chinese manufacturer is always in the strongest position, under such circumstances.

# The Third Stage

The IoT era arrived in stage three roughly from 2015 till date. The already existing China product sourcing issues in the stage two era are amplified in the designing, developing and manufacturing of products for the Internet of Things market. During the second stage, there was at least the existence of two entities for designing and manufacturing a product. But, the situation with IoT is a lot more complex than that. The process of development has expanded to include the following:

• A product concept from a Western buyer
• An international design firm developing the external design of the product
• An IoT product app design for mobile devices
• The internal design and function of the product owned by either the Western buyer or the Chinese manufacturer, and/or third-party provider of sensors and other components required to connect the IoT product to the outside network.

There exist two separate sets of software in an IoT product - a communication-sending software that resides in the IoT product and a communication-receiving software that resides in multiple forms in the IoT product. Similar to the internal design, these components may be designed or written by more than one party - the Western buyer, the Chinese manufacturer and third-party software design firms.

Over the years, sourcing products from China has evolved and become complicated. As with the development and designing of IoT products, the relationship between the Western buyer and the Chinese manufacturer is a complex one due to the inclusion of third-party design firms. When procuring IoT products from China, Western companies need to prepare a clear-cut contract that defines the intellectual property ownership to avoid future problems.

Conclusion 

What is your opinion regarding the latest development of IoT products in China? What problems did you face when sourcing IoT products from China? Please share your thoughts and experiences in the comments section below.

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