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China and the First to Market Fallacy
When we recommend to our clients that they take advance steps to protect their product from being copied in China, they often push back by using the “first to market” argument. Their argument goes like this: you lawyers just don’t understand the modern market for electronic products. Product comes and goes. Fashion turns on a dime. We simply cannot take the time to plan carefully, to register our IP or to protect ourselves with contracts. Those are just frills that only established companies with settled, old fashioned brands need to worry about. We new market entrants need to focus only on designing an innovative product and bringing it to market as fast as possible. If we do that, we can stay ahead of the clones and the rip offs and this is the key to success in today’s market.
Though this argument sounds plausible, it is almost always false.
This first to market argument is based on an approach that was popular in the 70s and 80s for many sorts of products and in the 80s and early 90s in the shoe and sportswear market. when the view was that any style or model had at most a six month shelf life.
The approach in those days was to change models regularly. The idea was that it took the copiers about three to four months to get to market. So as long at the manufacturers changed their styles every six months, they could stay ahead of the competition. However, this approach is no longer used because the copiers can now get their clones to market in a matter of days, not months. The big shoe and sportswear manufacturers long ago abandoned this first to market approach in favor of the sort of aggressive IP registration and contract protection our China lawyers advocate for everyone.
The first to market approach similarly fails in the electronics manufacturing market of China today. The simple truth is that if you have not protected your product design, you probably will not be first to market. You will either never make it to market at all or you will be met in the market by your direct competitors who will beat you on price, destroying the market for your product. Simply put, there is virtually no first to market advantage in today’s world of instant cloning.
How does this work on the ground? There are two types of Chinese factories that will copy your product. The first and most obvious is the very factory you have hired to make your product. Your manufacturer is in control of the molds and tooling. Your manufacturer has developed the production prototypes. Your manufacturer may even know your future or intended customers. All your manufacturer need do is quote you an unreasonable price or otherwise refuse to make the product for you. Or better yet, charge you a reasonable price for your product but delay production. Your manufacturer then enters the market with your exact product. You then are not only not “first to market,” you are “never to market.” For more on how this sort of thing can go down, check out China and The Internet of Things and How to Destroy Your Own Company.
The other type of Chinese company that will copy your product is one of the many electronics manufacturers in China that specializes in reverse engineering the designs of other companies. This type of company has a very sophisticated system. They understand that manufacturing a cloned product is not enough. Even more important is the requirement that they sell the cloned products.
These clone shops therefor have developed a worldwide network of retailers that specialize in selling clones of the most recent innovative products and they make active use of the internet. Since these manufacturers do not need to worry about quality control and brand reputation, they can normally get their clone to market at almost exactly the same time as your original product, if not before. These clone manufacturers then ride on the coattails of the legitimate manufacturer, making use of the legitimate manufacturer’s advertising, promotion and buzz for their own purposes. They set up their system so that every search for the original product also produces a hit for the cloned product. Since the cloned product is normally substantially cheaper, they can make strong sales at the very outset of product release. With Amazon’s recent push to bring on more Chinese sellers, this problem has only gotten worse.
In this way, the your legitimate product never has any real first to market advantage. If you have not defended yourself from the clone manufacturers, your product will be drowned out in a sea of imitators. Your first to market advantage is meaningless and your hard work and innovation and great design are mere fodder for a clone manufacturer who thanks you sincerely for your hard work in helping it (not you) to succeed.
So enough with the first to market argument. It neither works nor even applies to the modern world of China manufacturing. In China, you must protect yourself from copying by your manufacturer. And you must protect yourself from copying by the clone factories. This requires substantial work in IP registration and in written agreements, all done before you take you product to market. If you do not prepare properly you will not be first to market. You may never make it to market at all.
We will be discussing the practical aspects of Chinese law and how it impacts business there. We will be telling you what works and what does not and what you as a businessperson can do to use the law to your advantage. Our aim is to assist businesses already in China or planning to go into China, not to break new ground in legal theory or policy.
Source: http://www.chinalawblog.com/2016/10/china-and-the-first-to-market-fallacy.html
