“But, we signed an NDA”

A team from a developed country came to us the other day, with a business plan to build smart shared bicycles, similar to the ones flooding China:

As this bike solution is for a market with a much higher GDP per capita than China, they believe that  the demand and rental will be naturally higher than in China. Also, as people will generally be more civic minded, the assumption is that the bikes will have a lower damage ratio. The team has come out with a custom design of the bicycle which fits the ergonomics of the country’s population.

All in all, a winning business to them.

The supply was reasonably affordable in China – hence, the decision to manufacture the bikes from there.

My advice to the team: “Be very careful. This means your competitors from China will know EVERYTHING you do.”  I know a couple of Chinese players vying to enter the market the team is setting their sight on.

“But we signed an NDA with the supplier,” the team said, referring to the

Non-Disclosure Agreement. “They can’t reveal our conversations to any third parties or face consequences.”

Alas, this is a very naive thought.

Dark secrets of your supply chain

Supply chain in China is notorious for being the worst place to keep secrets. Many Chinese tech companies with a hardware product get their competitor (local or international) intel from their supply chain. These companies know which competitor uses which factory, what kind of order has been placed, which city the finished products will be shipped to, and by which date.

Not only information, supply chain is where products get leaked.

In fact, an acquaintance, who operates smart machines for the retail market, is almost religious about guarding his machines within the supply chain:

He makes sure the access to factories is tightly controlled, and the component manufacturers do not hold information about the whole picture.

When finished products are shipped, he often even follows the lorry himself (considering he is already a multi-millionaire) to ensure that competitors do not get hold of a machine and reverse-engineer. Once the machines are installed, CCTV cameras detect suspicious activities real time.

And of course, when he gets the chance, he reverse-engineers his competitors’ products.

Apple & the rest of us

This is the nature of the market (whether your supply chain is in China or not), and there is nothing you can do about it – unless you are Apple.

Apple has a very mature business operational process, a very reliable partner and big negotiating power (given the volume). All these take years to build up and requires lots of delicate skills. In fact, many believe that Tim Cook was chosen to succeed Jobs precisely because of his achievement in, and the continuous emphasis on, supply chain management.

But this team who came to us are not Apple.

Supply chain can also become easily a choking point for smaller players – controlling it is no easy feat. Trustworthy factories, not supported by major players, may not have the appetite or capacity to take on do not h smaller orders. Even if they do, the components upstream may be monopolised or oligopolized by your bigger competitors.

So in summary, if you have a customised (especially consumer) product that requires big volume to win the market (which is big and interesting enough) – your first priority will probably be getting funding, a lot of funding.

Only with that you can quickly build up your negotiation power with your suppliers, and fend off potential competitors.

Expecting an ‘NDA’ to protect your business from competition probably does not project the necessary confidence before investors.