In 2006, Fellowes, one of the world’s leading paper shredding companies, established a joint venture with a manufacturer in China. Fellowes would bring in its technology and IP while its partner would contribute land and labor. The relationship quickly soured when the Chinese partner seized the company’s proprietary assets and shut down the entire operation in a hostile takeover. By 2011, Fellowes had lost approximately $100 million — all because it had failed to properly vet its OEM partner
Fortunately, the century-old family business was able to recover from this chapter in its history; it now owns and controls 100 percent of its assets. But Fellowes’ story serves as a cautionary tale for all hardware entrepreneurs. You can’t rush into an OEM partnership. And while cost is a huge consideration — you can manufacture anywhere from 30 to 80 percent less in China — it most definitely shouldn’t be the determining factor.
When we started LimeBike in January 2017 with the goal of having our bike-sharing service up and running in the U.S. within six months, we launched a painstaking search for an OEM partner that could work with us closely, make lightning-quick iterations, and scale up fast while being nimble. No small task!
Here are a few key lessons we learned on the way:
1. Start with good-quality leads.
First and foremost, you need to find reputable players. One very good way to go about the search is attending trade shows to find suppliers. The Canton Fair is the largest in China and is held twice a year outside Hong Kong in Guangzhou. Or try the East China Fair, which is the largest regional show held in Shanghai.
You can also hire a commission-based China sourcing agent, who can identify and verify suppliers and communicate on your behalf. Agent fees usually range from 3 to 10 percent of the purchase price.
Finding potential partners is only the first step, though. It’s the vetting you do from there that really counts.
2. Watch out for conflicts of interest.
Your OEM must have your best interests in mind. It should demonstrate a willingness to work side-by-side with you to quickly iterate design changes and innovations as you scale up your business.
Look for a partner that doesn’t manufacture any competitor goods, or anything that remotely resembles a competitor’s goods. Only an exclusive partnership can ensure that all parties stay focused, have the production capacity, and will not expose your trade secrets. This may not be the cheapest route to go, but it will certainly save you time and money in the long term.
Your manufacturer must believe you are totally committed to the partnership at all levels in your company, particularly with executives and board members. If they don’t have that sense, you won’t get the high level of scrutiny on quality control, safety, and performance needed to prevent mistakes and drive quality and on-time production.
3. Focus on open and honest collaboration with your partner.
Don’t sacrifice quality for lower costs. Your first step when vetting a partner should be to develop a detailed RFP that expresses exactly what you’re looking for. The biggest mistake you can make early on is failing to clarify your standards and expectations, so enlist as many experts as you can to aid in the RFP development.
From our end, we also applied the concept of DFM, or design for manufacturability, to our product. This means streamlining your product design so it’s simple for manufacturers to produce, which really increased our efficiency and cut down costs greatly. I also recommend hiring an in-house project manager who can oversee the entire manufacturing process to provide quality assurance every step of the way. This person is located at your office, fluent in Mandarin, and well-versed in dealing with Chinese manufacturers. They should also make regular visits to the manufacturer to oversee production.
4. Vet potential OEM partners in person.
The major and initial issue in choosing a Chinese manufacturer is determining whether the manufacturer is “real” or not. Chinese companies can sometimes beguile in order to make some quick money off unsuspecting startups. They use the Internet and sourcing websites to make themselves look much better than they actually are. But they can also hide the reality even on site. So you have to develop an efficient system for breaking through the façade to get to reality as quickly as possible.
Easiest way to do that? Get on a plane and visit manufacturers on your shortlist before making a final decision. Thorough onsite investigations are essential for quality control and ensuring your standards are being met. Visiting your OEM partners will provide you with a sense of their scale, capabilities, and performance. You will also have the opportunity to assess the quality of the equipment and staff performance and give feedback to plant managers.
Toby Sun is cofounder and CEO of LimeBike. He previously worked as a venture capitalist for Kinzon Capital (backed by Fosun Group), investing in Silicon Valley-based companies like Tapingo, uSens, StyleSeat, and Grubmarket. Prior to that, he was a management consultant at Deloitte Consulting and a marketing manager at PepsiCo, where he led the launch of Gatorade in new markets and managed 7UP in Asia for many years.