Original Equipment Manufacturer (OEM): Definition and Examples

What Is an Original Equipment Manufacturer (OEM)?

An original equipment manufacturer (OEM) is a company whose goods are used as components in the products of another company, called a value-added reseller (VAR). The VAR works closely with the OEM, which often customizes designs based on the VAR’s needs and specifications.

Understanding an Original Equipment Manufacturer (OEM)

Traditionally, OEMs focus on business-to-business (B2B) sales, while VARs sell to consumers (end users).

Usually, OEMs make parts (versus complete, finished products) to sell to VARs. For example, an OEM may manufacture electronic components for a VAR that makes high-definition TVs, such as Samsung. Or, an OEM may sell customized fasteners with a branded monogram to a VAR—for example, “RL” monograms for the clothing company Ralph Lauren.

Car parts, such as exhaust systems or brake cylinders, are also manufactured by OEMs. After the parts are manufactured, the OEM sells them to an auto manufacturer. The auto manufacturer assembles them into a car, and the completed car is marketed to auto dealers. Finally, the auto dealers sell the completed cars to consumers (end users).

While OEMs usually sell directly to other businesses, they may also sell to the general public. For example, an individual consumer who wants to make car repairs can buy OEM parts directly from a manufacturer—or a retailer that stocks those parts.

Original Equipment Manufacturer (OEM) vs. Aftermarket

The aftermarket is the market for replacement parts, accessories, and equipment for the care of an original product. The original product may be an automobile after it has been sold to a consumer.

In the previous example, the OEM manufactured the original parts that were used to assemble the car. However, additional companies sell equipment for the aftermarket. The consumer can buy replacement equipment for the original parts from these companies.

Suppose the owner of a Ford car needs to replace the car’s thermostat. The original thermostat was manufactured by ABC Thermostats, an OEM. The consumer can either buy another thermostat manufactured by ABC Thermostats, or they can buy an aftermarket part, manufactured by a different company.

Consumers often choose to buy replacement parts from the OEM for consistency. However, some aftermarket equipment is of higher quality than equipment made by the OEM. Cars’ gear shifters manufactured by Hurst Performance, for example, became known for their superior performance; car buyers preferred them to the original part. Eventually, Hurst shifters were so trusted that manufacturers chose to install Hurst shifters in their factory designs, effectively turning Hurst into an OEM.

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

An original design manufacturer (ODM) is a third-party company that specializes in the design and manufacture of products based on another company’s exact specifications,

A company may hire an ODM when it’s looking to bring a new product to market; the ODM would then produce manufactured parts to meet this company’s (their client’s) exact specifications. Afterwards, the client rebrands and labels the product for sale to its consumers.

A company may choose to work with an ODM to save on its own research and development costs. And, ODM products usually have a low minimum order quantity, making them attractive to smaller clients.

Technology and Original Equipment Manufacturing

In the technology industry, it’s become more common for companies to rebrand other manufacturers’ products for resale. For example, Dell and Hewlett-Packard have accepted branded parts from outside sources in their products over time.

As a result, the usage of original equipment manufacturing (OEM) as a term has expanded. The phrase now can be used as an adjective, as in “OEM parts,” or as a verb, such as when a manufacturer says it plans to “OEM” a new product.

This has created a shift in manufacturing dynamics and, as a result, changes in responsibility for warranties, customer support, and other services. As Dell incorporated Intel processors into its computers, for instance, Dell advertised that it had “Intel Inside!” and marketing materials suggested that Intel and Dell were partners in the processor and computer design.

The Bottom Line

An OEM provides components for the finished products of a VAR. Typically, OEMs manufacture parts and equipment for business-to-business (B2B) sales, while VARs sell their finished products to consumers (end users). After the final, finished product is sold to the consumer, OEM parts often compete with generic, replacement parts.