What is an Original Equipment Manufacturer (OEM)?

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Definition:

Original equipment manufacturer (OEM) refers to a company that sells its products for use as a single component in the creation of another company’s product — which is typical in the auto and computer industries.

🤔 Understanding an Original Equipment Manufacturer (OEM)

Some companies create products or systems that other companies use in their end products. The companies that make those initial products or systems are original equipment manufacturers (OEMs). The company that buys the product from the OEM is the value-added reseller (VAR) because they add value to the original item by combining it with other products or features. The term OEM is most common in certain industries — specifically the automobile industry and the computer industry. In the case of automobiles, one company, the OEM, would create a car part. Then they’d sell that car part to the company that builds the cars.

Example

Imagine a fictional manufacturer, Jim’s Carburetor Supply. Jim’s company manufactures carburetors — that’s their only product. Other companies purchase Jim’s carburetors and use them to build cars. Those companies then sell their cars to consumers. Therefore, Jim’s Carburetor Supply is an original equipment manufacturer (OEM).

Takeaway

An original equipment manufacturer is like a company that only makes wheels for bikes…

The wheels are an essential step in putting the whole bike together, but it’s just that—a step. You can’t complete the bike without getting the handlebars, the seat, the gears, and the body. An original equipment manufacturer (OEM) produces the first step in someone else’s final product. You can’t get the final product without the purchase from the OEM, but there’s still more work to be done.

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How do OEMs work?

Original equipment manufacturers produce the goods that other companies buy to use in the creation of their products. The company that buys the product is a value-added reseller (VAR).

The OEM and VAR relationships can take a couple of different forms. First, an OEM might manufacture a product and sell it to many companies. Think of the example of a zipper. One company might build a particular type of zipper and put it on the market, and lots of clothing companies buy the zipper to include in their clothing designs.

The alternative is when a VAR enters into a contract with an OEM to manufacture a custom part specifically for their product. The VAR has a specific product design they want to bring to life, and they just need someone else to build it for them.

Original equipment manufacturers usually work within a business-to-business (B2B) model, meaning they are a business that sells to another business. The value-added resellers typically have a business-to-consumer (B2C) model, where their revenue comes from selling to consumers.

What are some examples of OEM companies?

Original equipment manufacturers are common in the computer and automobile industries. There are individual companies who specialize in making the parts to sell, while other companies buy those parts and specialize in building the finished product and selling it to consumers.

In the automobile industry, one example of an original equipment manufacturer is Goodyear. Goodyear is a well-known tire manufacturer that sells its tires to car companies. So while the brand name of the vehicle might say Ford or Toyota, the tires might say Goodyear.

In the world of computer software, Microsoft is a popular original equipment manufacturer. In fact, most computer brands on the market ship Microsoft Windows installed on their hardware.

While some original equipment manufacturers, like Goodyear and Microsoft, are household names, there are plenty of others that aren’t. For example, when Apple builds an iPhone, it doesn’t make the phone screens in-house. Instead, they contract with a different company that manufactures the screens. The company that produces the screens doesn’t leave their branding on the screen, nor do they advertise their products to consumers. They aren’t building a relationship directly with the people using their product as companies like Goodyear and Microsoft might.

Why are OEM products cheaper?

Historically, original equipment manufacturers created their products and then sold them to another company (the value-added reseller), which would incorporate that component into their own product sell directly to consumers. OEM products were cheaper because they weren’t a final product. Today, it’s a lot easier for consumers to buy OEM products themselves, and for a more affordable price, than they can get them elsewhere. Many OEM companies have become household names because of how common it is to purchase directly from them.

Think of the example of software companies. Companies like Microsoft create software products like Windows and sell them to companies that build computers. But you also can buy Microsoft products directly from Microsoft and install them onto your computer. Plenty of people go online and buy all of their computer parts directly from original equipment manufacturers, and then they put together the entire thing themselves.

Rather than buying a finished product that a company has put together and packaged in their branding, consumers can buy right from the source and opt-out of paying the added costs.

What is the difference between OEM and aftermarket?

When you purchase a product, the manufacturer has usually built it with a bunch of different pieces — these pieces are the OEM products. As a consumer, you have a couple of different options when it comes to replacing the parts in a product you’ve purchased. You can use OEM products, meaning you replace the parts with new original parts that are the same as the ones the company used to manufacture the product. You can also opt to replace parts with aftermarket products.

An aftermarket part is a replacement part that isn’t the same as the original part. A different company makes the aftermarket product, not the original equipment manufacturer. Aftermarket parts aren’t exactly the same as the original, but they’re usually close. They’re basically the generic version of an original product.

Imagine that you drive a Ford vehicle, and you need a replacement for one of the parts. You can take your car to the Ford dealership, and they’ll replace the part with an identical part from the original equipment manufacturer. Alternatively, you could take your vehicle to a local mechanic. They’ll replace the part with an aftermarket product. It’s not the same brand, but it’s basically the same part.

There are pros and cons to both options. The OEM specifically designed their product for your car, so they’re probably a safer option. They’re likely of higher quality, and they may come with a warranty should anything go wrong. If you’re looking for cost savings, though, an aftermarket product might be a better bet. You’ll pay less money for a product that’s quite similar to the original. There are no right or wrong options. It’s just a matter of preference and comfort level with the product you’re buying.

What is the difference between OEM and ODM?

An original design manufacturer (ODM), like an original equipment manufacturer (OEM), is a company that builds products for another company to use in their finished product. The difference between the two is that the ODM designs the product, as well as manufactures it.

For example, let’s say Car Company A needs to contract with a company to manufacture one of the parts for their cars. They’ve designed the product themselves; they just need someone else to build it. Car Company A might contract with an OEM to make their product.

Now let’s say Car Company B also needs a part for their car. However, they haven’t designed the product themselves and have no interest in doing so. Therefore, Car Company B contracts with an ODM. The ODM has its own design for the product, so they manufacture the part according to their blueprint and sell the product to the car company.

It would make sense for a company to work with an ODM instead of an OEM if the product they need isn’t really in their wheelhouse. For example, a car company will have certain parts that they’ve specifically envisioned and designed for their cars. They know exactly what they want because it’s their area of expertise. But then there are other parts, such as the car’s stereo, for which they may not have their own design. They know their vehicles need to have radios, but that’s not their specialty, so they choose to work with an ODM.

What is the alternative definition of OEM?

OEM usually refers to the company supplying a single product part to another company. The company buying that part is the value-added reseller. But in the world of computer software and hardware, OEM has another meaning as well. In the computer industry, OEM often refers to the company that buys another company’s product and repackages it as its own.

Let’s go back to our example of Microsoft. In the traditional definition of an original equipment manufacturer, Microsoft is the OEM. They might sell their product to a company like Hewlett-Packard (HP), who would be the value-added reseller. But many in the computer industry would consider HP to be the OEM of its computer products. So when someone refers to a company being an OEM, make sure you understand the lens through which they are looking at it.

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