Original Equipment Manufacturer (OEM)

Original Equipment Manufacturer (OEM) Definition

Investopedia / Julie Bang

What Is an Original Equipment Manufacturer (OEM)?

An original equipment manufacturer (OEM) traditionally is defined as a company whose goods are used as components in the products of another company, which then sells the finished item to users.

The second firm is referred to as a value-added reseller (VAR) because by augmenting or incorporating features or services, it adds value to the original item. The VAR works closely with the OEM, which often customizes designs based on the VAR company's needs and specifications.

Key Takeaways

  • An original equipment manufacturer (OEM) provides components for the finished products of another company, known as a value-added reseller (VAR).
  • In the computer industry, OEM may refer to the company that buys products and then incorporates or rebrands them into a new product under its own name.
  • Traditionally, OEMs focus on business-to-business sales, while VARs sell to the public or other end users.
  • In manufacturing industries, OEMs stand in contrast to aftermarket products, which offer replacement parts that are generic and cheaper than OEM parts.
  • An OEM is also different from an original design manufacturer (ODM), a company that customizes its own products for resale by the client.
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Original Equipment Manufacturer (OEM)

Understanding an Original Equipment Manufacturer (OEM)

VARs and OEMs work together. OEMs make sub-assembly parts to sell to VARs. Although some OEMs do make complete items for a VAR to market, they usually don't play much of a direct role in determining the finished product.

A common example might be the relationship between an OEM of individual electronic components and a company such as Sony or Samsung that assembles those parts in making their HDTVs. Or a maker of buttons that sells customized fasteners to Ralph Lauren, with the branded monogram RL stamped on them.

Typically, no one integrated part from an OEM is recognized as playing an especially significant role in the finished product, which goes out under the VAR's corporate brand name.

Traditionally, OEMs focus on business-to-business sales, while VARs target the public or other end users. As of 2021, an increasing number of OEMs are selling their parts or services directly to consumers (which, in a way, makes them a VAR).

For example, people who build their own computers can buy graphics cards or processors directly from Nvidia, Intel, or retailers that stock those products. Similarly, if a person wants to do their own car repairs, they can often buy OEM parts directly from the manufacturer or a retailer who stocks those parts.

One of the most basic examples of an OEM is the relationship between an auto manufacturer and a maker of auto parts. Parts such as exhaust systems or brake cylinders are manufactured by a wide variety of OEMs. The OEM parts are then sold to an auto manufacturer, which then assembles them into a car. The completed car is then marketed to auto dealers to be sold to individual consumers.

There is a second, newer definition of OEM, typically used in the computer industry. In this case, OEM may refer to the company that buys products and then incorporates or rebrands them into a new product under its own name.

For example, Microsoft supplies its Windows software to Dell Technologies, which incorporates it into its personal computers and sells a complete PC system directly to the public. In the traditional sense of the term, Microsoft is the OEM, and Dell the VAR. However, the computer's product guide for consumers is most likely to refer to Dell as the OEM.

Original Equipment Manufacturer (OEM) vs. Aftermarket

An OEM is the opposite of a third-party manufacturer that produces parts for sale in the aftermarket. An OEM refers to something made specifically for the original product, while the aftermarket refers to equipment made by another company that a consumer may use as a replacement.

For example, say a person needs to replace their car thermostat, created expressly for their Ford Taurus by ABC Thermostats. They may buy the OEM part, which is a duplicate of their original ABC thermostat that was used in the original manufacturing of the vehicle. Or they may buy an aftermarket part, an alternative made by another company. In other words, if the replacement also comes from ABC company, it is an OEM; otherwise, it is an aftermarket product.

Aftermarket equipment can be cheaper than an OEM product, but it may also come with a significant downgrade in quality or product lifetime.

Usually, consumers buy an aftermarket product because it's cheaper (the equivalent of a generic drug) or more convenient to obtain. Although aftermarket parts may be compatible with the original product, there may be a significant tradeoff in product quality or performance.

On the other hand, sometimes aftermarket producers do such a good job in manufacturing a specific part that it becomes well-known to consumers, who actively seek it out.

An example of this is the success of Hurst Performance of Warminster Township, Penn., a manufacturer of gear shifters for automobiles. Hurst shifters became so well-known for their superior performance that car buyers actually preferred them to the original part.

Eventually, Hurst shifters became so trusted that major manufacturers chose to install Hurst shifters in their own factory designs, effectively turning Hurst into an original equipment manufacturer.

Original Equipment Manufacturer (OEM) vs. Original Design Manufacturer (ODM)

An OEM is also different from an original design manufacturing (ODM), a type of private labeling for manufactured parts. An ODM company can produce and manufacture a product according to their own needs, but they may alter the design to meet a client company's specifications. These products may then be sold by the client under their own brand.

An ODM arrangement does not have as much flexibility as an original equipment manufacturer, since the client is simply customizing an existing design. However, original design manufacturing has lower costs for research and development, leading to lower prices for the end consumer. Moreover, ODM products typically have a lower minimum order quantity, making them more attractive to smaller clients.

An original design manufacturer (ODM) tends to be less expensive than an OEM manufacturer. In addition, they may be willing to accept lower order quantities.

Special Considerations

In informal usage, the term OEM can sometimes be used as an adjective, as in "OEM parts" or even as a verb, as when a manufacturer says that it plans to "OEM" a new product. This somewhat contradictory evolution is usually attributed to the computer hardware industry.

Some VAR companies such as Dell, IBM, and Hewlett Packard started to accept branded parts from outside sources in their own products. So over time, OEM came to refer to companies that rebrand or openly use other manufacturers' products for resale.

Most of this had to do with which company was responsible for warranties, customer support, and other services, but it also reflected a subtle shift in the manufacturing dynamics. In one instance, Dell stopped using chips from anonymous makers and switched to Intel for the computer processors in its computers.

Since Intel is a brand name, it brought added value to Dell’s computers. Not only did Dell advertise this prominently (using the slogan "Intel Inside!"), but its marketing materials also suggested that Intel and Dell were equal partners in the processor and computer design.

This is a contrast with Dell just telling Intel how to build the processors, as it did with its old suppliers. All of this made Dell the OEM, both in the minds of companies supplying the assembled parts and in the public's mind (after all, people think of the finished hardware and software package they buy as "a Dell computer").

What Does Original Equipment Manufacturer (OEM) Mean in Cars?

In the auto repair industry, an original equipment manufacturer(OEM) refers to the original products used by a car manufacturer. These are different from aftermarket parts, which are made by a third-party manufacturer but may be compatible with the same vehicles. OEM parts are usually preferable to aftermarket parts since they are specifically designed to fit the needs of your vehicle and may have a higher quality. Although aftermarket parts tend to be cheaper, they may also wear out more often.

What Does Original Equipment Manufacturer (OEM) Mean in Software?

In computer and electronics sales, OEM refers to the software or hardware that comes pre-installed on a new computer or device. This is typically cheaper than licensing or buying those products as an individual consumer since retailers can bundle their software at wholesale prices.

Is It Worth Paying for OEM Parts?

OEM parts tend to be more expensive than third-party manufacturers, but they are also made to a more exacting set of specifications. However, some third-party products are considered just as reliable as OEM parts, and others may be significantly cheaper. When searching for replacements, it is worth researching the different brands to determine which manufacturer offers the best combination of price and quality.

Article Sources
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  1. PC Mag. "OEM."

  2. Hotcars.com. "A Detailed Look Back at Hurst."

  3. Autobytel. "Hurst Shifters and Original Equipment Manufacturers."

  4. Alibaba. "OEM vs. ODM Manufacturing: What's the Difference?"

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