What is OEM? Short for Original Equipment Manufacturer, it is an acronym you might be familiar with if you get your products manufactured by another company, possibly in another country such as China, for example. By its basic definition, an OEM is a manufacturer that specializes in making a particular product or part for another company that provides it with the design and specifications. An OEM part therefore is manufactured to order.
China is the world’s largest manufacturer by output, a position it has held on to for 11 years. It is also the world’s largest automotive manufacturer. It produces more vehicles in a year than the United States, Europe and Japan combined, accounting for 30% of global production. The success of China’s automotive industry rests largely on the performance of its OEMs. China’s auto parts industry is estimated to be worth $550 billion. This is just one example of how China is a specialist when it comes to OEM products.
In this piece, we take an in-depth look at OEMs, how they work and how you can do business with one, especially in China. Read on to know:
- What is an OEM?
- The benefits and challenges of working with an OEM
- What to watch out for when working with OEM China
What is an OEM and how does it work?
To fully understand what an OEM is, we need to go beyond the simple definition provided above. An OEM manufactures goods not for retailers but for another company, which sells these goods under its own brand. This explains the origin of the term OEM, which is said to come from the Dutch phrase “onder eigen merk”, loosely translated as “under own brand”. The company that buys an OEM product is called a “value-added reseller” (VAR). Usually, it improves the product or component or adds more components to it, thereby adding value to it before selling it.
Traditionally, an OEM works on a business-to-business (B2B) model while a VAR sells directly to customers. However, recently, more and more OEMs are selling directly to niche groups of customers (for example, technology enthusiasts who customize and assemble their own computers).
An OEM works in one of the following two ways:
1. It manufactures specific components for the VAR, which uses these in its final product. For example, Microsoft sells its Windows operating system and Intel sells its chip to PC maker Dell. This makes Microsoft and Intel the OEMs and Dell the VAR.
2. It assembles and completes the product for the VAR to resell. Taiwan-based Foxconn, which assembles Apple iPhones, is one such OEM. Its largest factory – a 1.4-square-mile iPhone plant – located in the Longhua District of Shenzhen city, China. If you look at the back of any Apple product, you will find the printed statement “Designed by Apple in California Assembled in China”.
Working with an OEM – Benefits and Challenges
Outsourcing your manufacturing to an OEM can be lucrative for the following reasons:
- Expertise: An OEM does not make hundreds of different types of products but specializes in just a few. It mass-produces these goods, which means it knows the most efficient and cost-effective way to manufacture them. Because it might make similar products for other clients, its knowledge of the engineering and development processes of such goods is the best in the business. An OEM product is almost always associated with quality and originality.
- Inexpensive: It costs much less for an OEM to manufacture a product or part than for the reseller to do it themselves. Low cost is a huge benefit of mass production, especially in a low-cost manufacturing region like China. By outsourcing production to an OEM, the reseller is also saved the expense of setting up and operating their own manufacturing unit.
- Fast: Being a specialist, an OEM can fulfil large orders in a short amount of time. This ensures your final product reaches the market that much faster.
- Flexibility: By leaving the manufacturing to an OEM, you can focus on other areas of your business, especially research and development (R&D). Do not forget, an OEM is just the manufacturer. It only produces goods you have designed and conducted market research for. Hence, time spent on R&D is time well spent.
- Warranty: A reputed OEM will back up its products with a manufacturer’s warranty. Insist on one when you outsource to a China OEM.
Read our detailed blog on the “Four advantages of OEM”
