Since its invention in the ’60s, the copy and paste function has been a vital time-saving business tool.  With this tool, businesses eliminated repetitive work that was already done before. In other words, they didn’t need to reinvent the wheel again and again. What better time-saving shortcut is there for a business? Well…

What if I told you that there is another version of copy and paste. This version actually doesn’t make life any easier for your business, or yourself. In fact, this version of copy and paste steals the very idea or product that has taken you months, even years to build. And unlike on a computer, there is no undoing it. All your hard work is copied and pasted in an instant for someone else’s profit.

This is the danger of IP theft in outsourced manufacturing.

As we go further into this topic, we will discuss how IP theft happens in the big picture. First, we will talk about the different agents involved in stealing business IP. This is also known as industrial espionage. Then we will cover the ecosystem of outsourced manufacturing. White label manufacturing plays a big role in IP theft and is worth studying in this context. Following this section, we will look at some basic principles of protecting your company’s IP. Finally, we will talk about why trustworthy relationships go a long way towards protecting your IP. This includes a conversation between myself and a product design firm.

What is IP theft

According to the FBI (who I believe is credible for this topic), IP theft is stealing peoples’ and/or companies’ ideas, inventions, and creative expressions. These are intellectual properties- which include trade secrets, proprietary products, and media engagements. 

There are four main types of IP:

1. Trade secrets
2. Trademarks
3. Copyrights
4. Patents

IP theft is becoming a more prevalent issue as digital technologies and Internet file-sharing networks integrate into major business operations. For example, sensitive information transferred over the web is a prime target for internet hackers. We will discuss the different scenarios in which IP theft occurs later in this segment.

In general, IP theft happens more where trademark laws are less defined and harder to enforce. For example, overseas companies are major offenders of  US-based IP theft. In fact, Chinese theft of American IP costs the US between $225 billion and $600 billion annually. These numbers are from an investigation led by the United States Trade Representative. Additionally, those numbers match with a 2017 report from the Commission on the Theft of American Intellectual Property. As you can see, IP theft can result in serious economic damage and can stun business growth.

How does Ip theft occur?

There are many opportunities for thieves to steal intellectual properties. For instance, internal and external data mining can reveal lots of sensitive information. In other words, protecting your IP is not as simple as locking your front door and buying an SSL certificate for your website. We will discuss some best practices for protecting your IP later on. For now, let’s jump into who engages in industrial espionage and how they extract information.

The common IP thief

The internal agent: Someone who steals/ reveals their company’s IP from the inside. This person is someone who joins a company with the sole intent of spying to gain information. In other words, they were working for someone else all along. These internal agents can release sensitive data about your company. They can also hinder its competitive edge by taking proprietary tools. 

A disgruntled employee is another common IP perpetrator. This person takes revenge on his or her company for their perceived wrongdoing. They can also talk their peers into sabotaging the company from the inside if they’re persuasive enough. As a result, you may have many internal seeds working to compromise the company.

An expert moving within an industry is also a threat to intellectual property theft. Although less common due to non-compete agreements; someone can move companies within an industry and take some of the IP with them. Although this isn’t illegal in some cases, there are moral implications with this behavior.

And finally, there is always a potential for inside information to accidentally leak out. This happens when someone from inside the company sends information across unsecured channels. Or to the wrong recipient entirely. 

External Agents: Someone who infiltrates your company’s data through hacking or other forms of unsolicited collection. People who work in an office setting will come across many attempts to steal information. The most known methods: phishing, hacking, etc, are disguised well to imitate a familiar transaction. In fact, these information heists mimic high-profile people within a company. They will ask the receiver to send sensitive information with urgency. If successful, these attempts are devastating. And the recovery from such an event can take years if they recover at all. This is why having protected channels to send information is so important.

Common IP theft scenarios

Let us review some common scenarios where IP theft can occur:

• Internal Agents
• Leveraging privileged access 
• Spys/ investigators
• Disgruntled and persuasive employees 
• Accidental information leak
• External Agents
• Hacking/ phishing
• Surveillance
• Data mining (including paper trails)
• Security breach

How does IP theft affect me?

For those who are still reading and think “oh this will never happen to me or my business” think again. Many small and medium-sized businesses are targets of scammers, hackers, and IP perpetrators. And your company’s books aren’t the only thing they’re after. They are after anything they can pull from you and use for their own gain. If your company owns IP or holds customers’ IP, think what can happen if those “secrets” are in the hands of someone who can re-engineer it for themselves. 

Let’s look at this from the lens of a manufacturer– a business that manufactures goods for sale either for themselves or for other companies.

How is outsourced manufacturing involved?

Manufacturing plays a significant role in IP theft. As hinted earlier, a manufacturer holds an entire portfolio of IPs.  And holding these different properties gives the manufacturer a ton of responsibility. This responsibility isn’t always held close with a moral compass either. You will find some manufacturers steal ideas, products, and technologies from their clientele. They then reintroduce those products into the market under a different brand. 

In this next section, we will discuss what role outsourced manufacturing plays in IP theft. Also, we will discuss two manufacturing methods: White Label and Contract Manufacturing. While the two share some similarities, they both pose some risk to a company’s IP.  Furthermore, we will explore what a Copycat Manufacturer is and its role in IP theft. In the end, we will transition into some helpful ways to protect your IP.

White Label Manufacturing vs Contract Manufacturing

What is ‘white label’ manufacturing

White label manufacturing is a popular option for outsourcing manufacturing. In this process, a retailer or brand hires a manufacturer that produces a product they want to sell. The retailer purchases the product and slaps its label onto it. The idea behind this is a well-recognized label can make it look like it produces its own product line. When in reality they buy their product at wholesale prices from a manufacturer. To summarize, a white label manufacturer makes its own products but makes them available for sale to retailers. At the same time, the manufacturer can use its own sales channels to sell that product to other retailers or consumers.

what are the differences between white label and contract manufacturing?

A contract manufacturer is different from white label manufacturers in a few ways. For example, companies hire contract manufacturers to produce parts, components, or final products. The hiring firm first establishes the design specifications that the manufacturer must follow. Then the manufacturer orders the necessary consumables and runs its processes. Based on the agreed terms, the manufacturer produces a set number of parts over a specific timeframe. Once the manufacturer fulfills the order, the parts get shipped back to the hiring firm. At no point does the manufacturer sell these parts under their own, or any other label. In fact, both parties enter into a contractual agreement that protects their interests. This agreement involves sharing intellectual properties, designs, processes, and more. To learn more click the links here on contract manufacturing and NDA’s.

If you didn’t pick up on it, I will tell you the big difference between the two types. The big difference between contract manufacturers and white label manufacturers are:

1. White label manufacturers can make and sell products as their own.
2. Contract manufacturers make parts exclusively for another business.

Although this doesn’t seem like a huge revelation, there are a ton of implications. For one, the white label manufacturer can take a “new” product to market with little effort. 

Remember what I said about the moral compass?  Well… 

There are examples of overseas manufacturers that take someone else’s product to market. To put it in different terms, these manufacturers rip off an idea and sell it as their own. Whether IP is explicitly stolen, or they create off-brand products meant to mimic a large national brand; this process breeds something called Copycat Manufacturing.

Copycat manufacturers

A copycat manufacturer takes a product or idea and spins it to make it look like their own.  They even will clearly rip off the existing product label to trick consumers into buying their product.  For example, a copycat will keep the same branding as well-recognized products. This is so consumers will think highly of the product and choose it based on the discount price.

A great example here shows the many knockoff variations of Dr.Pepper.

Copycats are a huge problem in the manufacturing space. These manufacturers not only copy well-performing products, but they hurt the value of the existing products. 

Not only that, there is a huge negative impact on the US and global economy. The International Chamber of Commerce estimates that counterfeit products and stolen IP will negate a total of 4.2 trillion US dollars from the global economy by 2022.

To bring the point back around, not all white-label manufacturers steal IP and create their own product offerings. But, the ones that do are playing a huge role in this micro-chasm of stolen IP-turned rip-off products. This is the risk you run by not protecting your intellectual properties. And also by working with an unvetted manufacturing partner.

Now you understand the risks of unprotected IP. Next, let’s look at some ways you can stay vigilant and protect your business.

Managing the Risks of Outsourced Manufacturing

Is my IP at risk if I outsource manufacturing?

The short answer: yes.

But the risk of getting duped by a manufacturer you know and trust is quite low. The arrangement between producers and sellers is a time-tested affair that has worked for most businesses. The key to this relationship has been, and always will be, trust. 

While working with a circle of manufacturers you trust is important, you should still protect your IP. If someone steals your business’s IP, it is very hard to find and prosecute the thieves involved. And there is no telling how long it will take to recover your IP.

In this next section, we will cover some helpful tips for keeping your IP safe.

How do I protect my business from IP theft?

To keep your business IP safe follow these six principles suggested by Awake Security:

• Identify Your IP
  • Identify exactly what information you want to protect and from whom to protect it. Through this exercise, you can align your leadership group with your security goals.

• Locate Your IP
  • Without locating where your IP sits (IT systems, file cabinet, you name it) you won’t know how to protect it. Because we’re looking at this in the context of manufacturing, you will want to audit your third-party systems as well. This includes ERP systems, product catalogs, technology stacks, and more.
• Conduct a Risk and Cost-Benefit Analysis
  • Do you know how much it would cost you if you were to lose your high-profile assets? Do you have a priority list when it comes to IP? If not, this exercise will help you identify which assets will cause the most harm if they were lost. Also, this will help you identify where to invest in security systems to prevent a large loss.
• Educate Employees
  • Help the people in your organization understand what IP is at risk of exposure. By educating your team they can better protect and prevent IP breaches from happening.
• Identify Protection Gaps
  • There are many opportunities for a thief to attack your business. Auditing your systems by thinking from an attacker’s point of view is an excellent way to identify any gaps in your current system. Once you’ve identified some areas for improvement put on your thinking cap! Start with small adjustments and aim for continuous improvements. Also, consider making investments in your security to boost your protection.

What to Consider for Your Manufacturing Partnership

Choosing the right partner is time-consuming and has an incredible impact on your company’s success. But, not all manufacturers are created equal. That’s why vetting your potential partner is an essential step before doing business.

Before you put pen to paper- consider looking into your potential partner using these criteria:

• Location:
  • The location of your supplier is a huge consideration when you factor in time-to-delivery and responsiveness. Working with an offshore manufacturer might cost less upfront. However, I’m biased to working with domestic partners for several reasons. For one, you have more visibility into your supply chain. Second, you can communicate in your own language. This is key when situations arise that can be problematic. Choose the location of your next supplier wisely.
• Capabilities and Experience:
  • Would you choose the world’s best Sous Chef to cater for your company party? Maybe, but they probably aren’t the best choice. Choose a supplier who has an ample amount of experience working in your field. This will make the process seamless and your communication clear cut. They’ve worked with companies like yours before so they know the challenges you face.
• Check references:
  • This and the item above go hand-in-hand. Check references with other companies who are also supplied by the same manufacturer. Most of the time, these companies will have a scorecard, approved supplier list, or at least some nice words to say.
• Labor Practices:
  • Again, working domestically helps mitigate some best labor practice issues. Evaluating the working environment of your supplier will give you some insight into the culture of the company. Also, this will help you understand how they treat people inside and outside the company. Red flags? This is a sign that you might run into issues down the road.

To wrap this up, we would love to start a conversation about a potential partnership. If you’re looking for an experienced injection molder based in the US, then look no further than here! With over 40 years of experience, we’ve helped many companies with their projects. Plus, we keep a tight ship over here. So you can trust us with your intellectual properties. Give us a call and see how we can address your molding challenges!