An Original Equipment Manufacturer (OEM) is a company that makes products for another company based on their design. A good example is Foxconn, which makes phones for Apple. Foxconn doesn’t do any research or design for Apple’s products.
Apple designs their products, and even though they don’t make them, the products have unique qualities. The company that does the design keeps the intellectual property, not the OEM.
A non-tech example of this process is third-party reproduction. If a couple gives their baby’s genetic material to another person to carry the baby, the baby isn’t related to the person who gave birth to it.
In the OEM world, there aren’t many bad companies because news travels fast. For instance, if Apple entrusted the recipe for AirPods to an OEM. This OEM shouldn’t use that recipe for producing similar earbuds without Apple’s consent. Failing that, the OEM wouldn’t work for a big brand again.
Respecting proprietary information is crucial for success in the OEM world. This is why there aren’t many “bad” OEM companies. Those that don’t meet these standards often find it difficult to survive.
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BENEFITS OF PARTNERING WITH AN OEM
OEMs, or Original Equipment Manufacturers, are important, especially in the car and tech industries.
When a company works with an OEM, it gets a lot of benefits. Take Apple as an example. Apple designs the product, but they don’t have to worry about making it. This lets them focus on other things, like selling their products and advertising.
Apple can be referred as a Value-Added Reseller (or VAR). They purchase components from OEMs, add value through their proprietary technology and software. Then, they sell the final product to consumers.
VARs strategically don’t make all the parts they need for their final product. So, they get OEMs to make those parts for them. OEMs already have equipment and manufacturing expertise, which helps the VARs save money on production costs.
One big difference between OEMs and VARs is who they sell to. OEMs usually sell to other businesses, while VARs usually sell to the public.
In summary, here are the benefits you’d have getting the services of an OEM:
- Expertise: When you work with an OEM, you get to use their experience and specialization in some manufacturing or assembly processes. They know a lot about making products because they’ve done it for many years.
- Lead Time: Working with an OEM can make your product ready faster. They already have the tools and know-how to get your product from an idea to something you can sell quickly.
- Cost-Efficiency: An OEM can save you money on making your product. They use professional machines, leverage manpower, and a smart supply chain to make lots of products at once, which cuts down the cost of each unit produced.
- Quality standard: OEMs make sure your product is the best it can be. They follow your quality standards and use special equipment to check everything. This means your product will be just right, making your customers happy and your brand look good.
DISADVANTAGES OF WORKING WITH AN OEM
There are no disadvantages really. But for your product to stand out from the masses means more time and money spent.
- Development budget. If you’re going to work with an OEM that means that you will first invest a lot of money doing all the product research and development. You will also have to pay for setting up a new production line, including plastic injection molds which are always very expensive.
- Development time. Apart from spending a lot of money, you’ll spend a lot of time until you have a prototype that can then be taken to mass manufacturing. A typical plastic mold tooling takes about 6 – 8 weeks to be manufactured. You’ll also have to do testing to make sure the product meets any required certification – this can take months.
But you already planned for all of that, so what else could go wrong?
DON’T NEGLECT IP PROTECTION
Well, if your product becomes a hit in the market, chances are that someone will want to copy your product, after sending so much money on R&D that’s the least you want.
Make sure you do some work to protect your IP. In a way, many companies that use OEM must feel like Coca-Cola.
Carefully guarding their secret formula and ensuring no competitor gets their hands on it.
Some will go to the extent of splitting the manufacturing process into 2 or 3 plants, that way no one knows the full recipe.
You can also make sure to thoroughly research OEM companies to see if the previous companies that have used them are happy with them or have experienced any negative ripping off.
Some recommend using a fake design when trying to find your OEM manufacturing company so that not too many know the real design before they get started.
We definitely recommend protecting your IP. but as we mentioned in our DFM Rules article, do not take it too far. If you’re working on a new to the market electronic device make sure to check it out.
OEM VS ODM: WHICH IS BETTER FOR YOUR BUSINESS?
The difference between an OEM vs. an ODM is that the ODM manufactures a product as per their own specifications. The ODM own the design, not you. The manufactured product is then rebranded with your logo and released on the market.
An ODM generally allows for very small customization on their design, such as product color or printing logos and patterns on the housing. If you want to explore a more customized product, you’d head towards an OEM.
As mentioned above, the OEM route means you’d invest a big chunk of time developing your product. The challenges are especially present in the first run of production when the design is manufactured for the first time.
An OEM might not be the manufacturing partner you need if you’re trying to build a business around say, mass consumer electronics such as Bluetooth speakers or hair dryers.
For “generic” products that need low level of customization, ODM companies will be the ideal manufacturing partner for you; they already have invested in R&D, have the molds, and set up production lines that are ready to receive orders.
To find the right manufacturers in China, check out this article. I share my best strategies to get in touch with Chinese suppliers.
Keep in mind that by its own nature, OEMs deal with products that use up millions of dollars for development, they can not screw up as that would mean huge losses of money for their customers and risk never being in business again.
This sort of interaction is incredibly common among many well-known companies that you have probably heard of, for example, Foxconn, a Taiwanese OEM, makes products that are designed by Apple, Huawei, Google, Dell, and Nintendo.
WHAT IS OEM TRADE?
OEM trade usually refers to the sale and purchase of OEM parts, by OEM parts, we’re talking about original parts from the manufacturer.
This OEM trade, looking to but parts made by the manufacturer is something you’ll mostly hear about in the automobile industry.
Many, in an attempt to find a better deal, try to get parts directly from the car manufacturers instead of the car dealers, and so the OEM trade term is born.
OEM AND AFTERMARKET PARTS
Aftermarket parts are an important notion to grasp before jumping into the OEM ecosystem. First, let’s start defining what are aftermarket parts and why they matter.
To put it simply, let’s say you break an engine cover on your Toyota while doing some maintenance. You either buy an OEM part through an approved Toyota reseller, or you get a cheaper replacement part that has the same function as the original. This is what we call aftermarket parts.
Aftermarket parts are replacement parts of an original part (OEM part). The aftermarket part is cheaper, but on the flipside it might be less robust, durable and not fully compatible. In addition, you might face warranty issues if you claim repairs after installing aftermarket parts on you machine.
It would be wrong to say that aftermarket parts are necessarily poor quality. When prospecting for replacements, know that certified authorities ensure the quality and safety of such parts. Some well-known authorities are the Certified Automotive Parts Association, E-Mark and National Highway Traffic Safety Administration.
OEM PACKAGING
An OEM company is in charge of the complete manufacturing process, which includes final product packaging.
While a company like Apple, the product designer, will also be very specific on what the packaging designs will look and feel like, it is up to the OEM plant to source the materials and set up the packaging line.
OEM packaging also involves custom boxes, crates, skids, pallets, and other materials that are used to ship the product from the manufacturing plant to warehouses and then the retail store.
There’s a lot that goes into OEM packaging, which is why some OEM companies might even decide to outsource this particular operation to other companies.
Since we’re talking about packaging, here’s an article about sustainable packaging for electronics.
OEM WARRANTY
So, if a product is defective, who is responsible for fixing or replacing it?
Well, if you’re an end customer, say, you bought an iPhone and is defective, you would go to an Apple store and get it fixed or replaced according to the Apple warranty terms.
You, as an end customer, wouldn’t go to an OEM for warranty claims.
But if you’re Apple, and your OEM partner is Foxconn, and a whole batch of iPhones is defective, then of course Foxconn is responsible for fixing or replacing the defective product as it is probably stated in an OEM warranty agreement.
The OEM would identify the parts to replace or repair with the identification tag. There’s no solution that fits all as each type of parts can have different markings (Electrochemical etching, pad printing, pneumatic impact. laser marking, etc.).
A good quality marking shall be durable and last for the whole lifecycle of the part. Its purpose is to be able to identify the Part Number as well as the manufacturing date at all time of the product’s lifespan.
SOME OEM EXAMPLES
OEM is a business model that’s predominant is several industries:
- Automotive
- Communications
- Computers and Peripherals
- Consumer Electronics
- Industrial IoT
- Medical
- Aerospace
Here are some practical examples of familiar companies to help you picture the OEM concept better.
In the Automotive industry. Automotive companies like BMW, buy components from OEMs like Bosch and Continental. The purchased components are then integrated in the final car which is then sold under BMW’s name.
In Consumer Electronics. Samsung is a significant supplier for Apple products. The Korean giant provide display panels to iPhone. In that context, Samsung is an OEM. In the meantime they’re also competing against Apple with their own Samsung Galaxy smartphones.
In the Aerospace field. Airbus and Boeing buy engines from GE Aviation, or Safran Aircraft Engine. GE and Safran are both OEM that provide equipment to aircrafts that are eventually sold under Airbus and Boeing’s name.
FINAL THOUGHTS
Hiring the services of an OEM is common in all manufacturing fields. It’s the best way to speed up your entry to the market while owning the design requirements. The downside is that you’d have to entrust your design to a third party and make sure you’ve covered your IP.
