Preserving Intellectual Property with CEMs

The world today is a global village – seamlessly interconnected digitally. As with taking any product to market, establishing viability in an extremely competitive environment is crucial. Original equipment manufacturers (OEMs) instinctively use this interconnection to explore overseas Contract Electronics Manufacturers (CEMs) for more cost-effective production alternatives. This approach has helped many western businesses create their distinct competitive advantage and offer measurable benefits of higher profits and leveraging economies of scale.

Offshoring is not a new concept in manufacturing. After World War II, American manufacturers realized the value of relocating production to the South where costs were lower. With escalating local and federal tax rates, tedious regulations to be fulfilled for government agencies, and labour unions pushing for higher benefits and wages, western companies found the cost of manufacturing prohibitive with declining profit margins. Seeing an opportunity, China in the latter part of the 20^th century positioned itself as a source of abundant and low-cost labor. This opened a portal for western companies to manufacture equipment and electronics at a fraction of the cost of producing them domestically. Numerous large-scale companies shifted their manufacturing to Asia, among them the likes of General Electric, Element Electronics, NCR and and Whirlpool[1].

Past the Internet boom of the 1990s, as technology eradicates the boundaries of time and distance, companies have access to global workforces, skills, and factories.

The lure of a low-cost commodity can often blind an OEM to the risk of intellectual property.

What is Intellectual Property?

It refers to the intangible creations of human innovation such as inventions, literary and art works, symbols, images, graphics and names. In the late 20^th century, laws were established to grant people and organizations the rights to the intellectual property they created for a certain period of time. Common examples are copyrights, patents, trademarks, and trade secrets. These rights are outlined in Article 27 of the Universal Declaration of Human Rights. For manufacturers this could represent the distinct competitive advantage that separates them from their competitors – the scalable difference to de-commoditize the commodity.

Risks of offshoring

When intellectual property is shared across vast distances, and with regions with different codes of ethics and concepts of integrity, there is the risk of misappropriation, mishandling and in some cases replication.

Protecting your intellectual property becomes increasingly difficult when your CEM is located in another part of the world, often in vastly different time zones. You’re establishing trust and protection with a partner that may carry a completely different set of values, code of ethics, tax laws, and legal recourse. Often there may also be language and cultural barriers which can hinder communication and expectations. Upon transfer of property, security is also not a well-defined variable.

Domestic laws related to patents, trade secrets, and layout designs of integrated circuits (i.e. mask work) usually will not provide much protection in overseas production locations. It may not always be easy or financially practical to bring offshore CEMs to the law of the land where your business is based.

The manufacturing industry is among the most prone to and least protected from cyberattacks that cause disruption to business processes, loss of finances and leaking of intellectual property.

It will require significant investment in people, systems, and resources to keep a vigilant eye on how your industrial designs, manufacturing processes and concepts are used.

Benefits of ‘reshoring’ with a local partner

In contrast, using a local CEM partner alleviates many of these concerns. A local partner offers a level of security and trust among common legal recourse, business ethics and accountability. There is a foundation of established history and governance of client relations.

With local CEMs, it is also more likely that Non-Disclosure Agreements and confidentiality clauses will be more enforceable because you are bound by the same law in the same jurisdiction. Numerous industries also carry multiple quality regulations and standards to which material is sourced and manufactured. This value system may not be as transparent overseas.

With increased socio-economic and political unrest, we are seeing several companies shift philosophy and are beginning to bring manufacturing back. Combined with the concerns on intellectual property protection these are strong motivators to establish trust among a common value set.

When considering options on manufacturing, it’s important to consider the impact of choice relative to intellectual property and the risk management.

We encourage open dialogue among our community and we welcome your feedback and experiences. For further discussions or to book a facility tour please contact us.

[1] Mainstream Management. Reshoring 101: Rebuilding U.S. Manufacturing through Right Sizing and Right Shoring. Thought Leadership Report, October 2012.