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09 Sep, 2021 / BY Neil Sharp

Why you should sign a prenup with your electronics manufacturer

You have different values, you don’t see a future in the relationship, you just don’t trust each other any more. There are innumerable reasons you might want to end your relationship, despite how difficult that may be. But sometimes a clean break and moving on is exactly what you need to do to grow—as an individual or a business. 

One lesson Original Equipment Manufacturers’ (OEMs) should learn from Hollywood is that a clean break depends on how well the lawyers have negotiated the prenup. Steven Spielberg’s scribbled prenup on a napkin didn’t convince a judge and ended up costing him $100 million. The same rules apply for your OEM when negotiating with an Electronics Manufacturing Service (EMS) provider. The devil is in the (prenup) detail. 

Here are the three potential stages of an OEM / EMS relationship cycle:

Stage 1: Love at first sight

You have designed a great product that is going to sell. And you are sold on the benefits of outsourcing the manufacturing and supply chain ownership. Your business will be able to benefit from additional engineering resources, your staff will be able to prioritise focusing on engineering and product development, and you will be able to eliminate manufacturing equipment and process expenses. 

This is potentially a perfect match. You focus on what you do best and let experts take care of the rest—the product design, sourcing the parts, and manufacturing the product.

Stage 2: The relationship is on rocky ground

It seemed that you and your EMS were perfect for each other. Perfect until a catastrophic event changes the whole geopolitical landscape—the UK might decide to divorce from its biggest trading partner, for example, or a huge cargo ship could run aground, blocking the world’s trade artery. 

You realise that these events change your business absolutely. Maybe it becomes impossible to keep your manufacturing partner in a particular country, or them being so far away from home may make business too unstable. Whatever the reason, you need to change your electronics manufacturer.  

Stage 3: The breakup

The decision to end the relationship with your electronics manufacturer has been made, and you are preparing to enter talks with another EMS. So you do four essential things:

  1. Make sure you know what your objectives are
  2. Determine the services you will need
  3. Write down all the questions you want to ask
  4. Prepare your build pack

1, 2, 3...check. But 4, your build pack? You don’t have your Bill of Materials (BOM), or your PCB Gerber files, or your CAD data, or your Drill files, or your Assembly drawings, or your Custom drawings, and you don’t know your Revision levels. Your current EMS has all this information, but when you tell them you would like access to it as you are going to find another partner, they are not so forthcoming. It becomes evident you are being held hostage by your electronics manufacturer.

At this point, the relationship really starts to sour, and you are faced with the reality of answering difficult questions that were never before addressed such as: 

  • Who owns the intellectual property (IP)?
  • What responsibility does your provider have in terms of ‘giving back’ your data?

These questions are difficult to answer as they depend on a multitude of factors including: 

  • The jurisdiction in which your manufacturing partner is located
  • Who owned any existing IP
  • Were any trade secrets used in the course of developing your product?

These points can only be resolved by a complex legal battle that may be incredibly difficult for the OEM to win—possibly even more so in a foreign jurisdiction where the courts favour the national company.

The only way of ensuring that you are in control of your data and that you can change manufacturing partners whenever the situation arises involves writing a clear, legally binding prenup, or as we call it, manufacturing agreement.

What should the agreement include?

From the very beginning, you should consider the following: 

  • Who will own the copyright of a design produced by a manufacturing partner?
  • Who owns the already existing IP?
  • Who will own the new IP that is created during the course of the business?
  • Agreeing terms regarding patents, copyright, trade marks, designs, know how, and trade secrets.
  • Who will own the rights to any inventions, trade marks, copyright, or designs when a new or improved product comes into being? 
  • Do you need to establish confidentiality/non-disclosure agreements?
  • What will happen if the business relationship finishes?
  • Where will the product data be recorded and who will have access to it?
  • Workmanship standards
  • Warranty clauses
  • Mechanisms to manage price and/or service changes
  • How will relationship termination be managed?

These questions should be debated and answered internally. Your legal team should then negotiate a manufacturing agreement with the EMS and establish in writing how data and IP will be managed throughout the course of the relationship and after it has finished.  

Conclusion 

When you initially chose an electronics manufacturing outsourcing partner it may seem as if nothing will ever go wrong—it is easy to get caught up in the excitement and the challenge of the venture. But planning for what could go wrong and making carefully crafted decisions that will ensure you feel comfortable and own your data and IP are essential for your business.

Celebrities sign prenups because they know they have something to potentially lose—and so can you. Your data and IP are your business. Without it you will have to go through the drawn-out and potentially very expensive process of reverse engineering your product. Choosing the right EMS is very personal and is not a decision that should be taken lightly. But, ultimately, the partnership should be based on trust. The right EMS will have no problem in drawing up a manufacturing agreement to make the scope of your relationship clear from the outset.

Value Engineering guide for manufacturing

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