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Original Equipment Manufacturer (OEM): How It Works and Its Advantages

Last updated 03/20/2024 by

SuperMoney Team

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Summary:
Original equipment manufacturer (OEM) is a business model in which a company manufactures a product or component that will be sold to another company for use in its products. This model is widely used in the consumer electronics industry due to high competition, the complexity of products, and cost savings. The OEM business model offers several advantages, including quality control, cost savings, and branding opportunities for the purchasing company. However, there are potential drawbacks, such as the lack of control over the manufacturing process.
Though some companies provide goods and services directly to consumers, others provide raw materials or components of a larger product to other companies. This practice or business model is often called original equipment manufacturer and is particularly prevalent in the consumer electronics industry, where many well-known brands use OEMs to manufacture their products.
Understanding the OEM business model and its advantages can be crucial for both manufacturers and consumers. In this article, we’ll delve into the basics of OEM, how it works, its advantages, and its importance in various industries, particularly in consumer electronics.

What is OEM?

Original equipment manufacturer (OEM) is a business model where a company manufactures a product or a component that will be sold to another company for use in their products. The purchasing company then sells the product or component under its own brand name.
In this business model, the OEM is responsible for designing, manufacturing, and testing the product or component. The purchasing company, on the other hand, takes credit for the product and sells it to the end-user. In some cases, the end-user may not even know that the product or component was manufactured by the OEM.
The OEM business model can apply to various industries, from automotive to consumer electronics. In the automotive industry, for example, car manufacturers may purchase components such as engines or transmissions from an OEM and incorporate them into their cars. Similarly, in the consumer electronics industry, smartphone manufacturers may purchase components such as camera modules or displays from an OEM and incorporate them into their phones. The OEM may also produce entire products, such as laptops or gaming consoles, for other companies to sell under their brand names.

Pros and cons of original equipment manufacturer

While there are many benefits to the original equipment manufacturer business model, there are also some potential downsides.
WEIGH THE RISKS AND BENEFITS
Here is a list of the benefits and drawbacks to consider.
Pros
  • Cost savings
  • Quality control
  • Brand opportunities
  • Reduced risk
  • Reduced time-to-market
Cons
  • Dependence on a single customer
  • Difficulty in establishing a brand identity
  • Pressure to keep costs low
  • Limited control over end products
  • Vulnerability to supply chain disruptions

Pros explained

  • Cost savings. By outsourcing the design and manufacturing of a product or component, the purchasing company can avoid the costs associated with setting up and maintaining their own manufacturing facilities. This can include expenses such as equipment, labor, and quality control.
  • Quality control. Because the OEM specializes in the design and manufacturing of the product or component, they’re often able to produce high-quality and reliable products. This can result in a better end-user experience and can help the purchasing company establish a positive reputation for its products.
  • Brand opportunities. By using an OEM, the purchasing company can focus on marketing and promoting its brand rather than investing resources into designing and manufacturing its own products or components. This can result in a wider range of products under the brand name and can help the company expand its market share.
  • Reduced risk. OEMs can reduce their risk by diversifying their customer base. By providing parts or products to multiple customers, they can reduce their dependence on any one customer and mitigate the risk of losing revenue if a customer goes out of business or switches to a competitor.
  • Reduced time-to-market. OEMs can produce parts or products more quickly than companies that produce their own parts or products. This can help their customers bring their end products to market and respond to changes in market conditions faster.

Cons explained

  • Dependence on a single customer. When an OEM relies on a single customer for a significant portion of its revenue, it can be vulnerable to changes in that customer’s demand or market conditions. If the customer decides to move its business elsewhere, the OEM could experience a significant loss of revenue.
  • Difficulty in establishing a brand identity. OEMs often work behind the scenes, producing parts or products that aren’t marketed under their own brand. This can make it challenging to build a brand identity and differentiate themselves from competitors.
  • Pressure to keep costs low. OEMs are often under pressure to keep costs low to remain competitive. This can lead to a focus on cost-cutting rather than innovation and quality, which can result in a lack of differentiation and a lower perceived value proposition.
  • Limited control over end products. Because OEMs produce parts or products for another company’s end product, they have limited control over the final product and how it’s marketed. This can make it difficult for the OEM to influence the end customer’s perception of the product.
  • Vulnerability to supply chain disruptions. OEMs are typically part of complex supply chains, and disruptions at any point in the chain can have ripple effects on the entire system. This can lead to delays in production or delivery, increased costs, and a loss of revenue.

OEM and consumer electronics

The OEM business model is particularly prevalent in the consumer electronics industry. Many well-known brands use OEMs to manufacture their products, from smartphones and laptops to televisions and gaming consoles. In fact, it’s estimated that more than 50% of the world’s smartphones are manufactured by OEMs.
One reason for the prevalence of OEM in consumer electronics is the high level of competition in the industry. Companies are constantly trying to release new products with the latest features and technologies, while also keeping costs low. By using an OEM, companies can focus on marketing and promoting their brand, while leaving the design and manufacturing of the product to a specialized company.
Another reason for the prevalence of OEM in consumer electronics is the complexity of the products. Consumer electronics products often require a range of specialized components, from processors and memory chips to displays and cameras. With the help of an OEM, companies can ensure that these components are of high quality and work seamlessly together to create a reliable and user-friendly product.
Some well-known brands that use OEMs in their consumer electronics products include Apple, Samsung, and Dell. For example, Apple is known to use OEMs such as Foxconn and Pegatron to manufacture their iPhones and iPads. Samsung also uses OEMs such as Hynix and Micron to manufacture the memory chips used in their smartphones and other devices.
Overall, the OEM business model plays an important role in the consumer electronics industry, allowing companies to offer a wide range of high-quality products under their brand names.

FAQs

What is the difference between an original equipment manufacturer and an original design manufacturer?

While OEMs focus on just manufacturing products or components, original design manufacturers (ODMs) are responsible for both the design and manufacturing of the product or component. In other words, ODMs are responsible for creating the product from scratch, while OEMs use the specifications provided by the purchasing company to create the product.

What does original equipment manufacturer mean for shoes?

In the context of shoes, an original equipment manufacturer would be a company that manufactures a specific component of the shoe, such as the sole or the insole. This component is then sold to another company, such as a shoe brand, for use in their products. The purchasing company can then market and sell the shoe under its own brand name, while the OEM remains behind the scenes as the manufacturer of the component.

What is manufacturer equipment?

Manufacturer equipment refers to the machinery, tools, and other physical assets used by a manufacturing company to produce its products. This can include everything from large-scale manufacturing equipment — such as assembly lines and injection molding machines — to smaller tools like screwdrivers and wrenches. The quality and reliability of the manufacturer equipment can play a significant role in the quality of the final product.

Key Takeaways

  • Original equipment manufacturer describes a business model in which a company manufactures a product or component that will be sold to another company for use in their products.
  • The OEM business model is widely used in the consumer electronics industry due to high competition, the complexity of products, and cost savings.
  • Though the model offers several advantages, OEMs also come with risks like minimal brand recognition and a lack of control over the final product.
  • Overall, the OEM business model plays an important role in various industries. It allows companies to offer a wide range of high-quality products under their brand names, while also focusing on marketing and promoting their brands.

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