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, known as 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 OEM

OEMs make parts to sell to VARs. Although some OEMs make complete items for a VAR to market, they usually don’t determine the finished product. An OEM may manufacture electronic components for a company like Samsung, the VAR that makes high-definition TVs. An OEM may sell customized fasteners to Ralph Lauren with the branded monogram RL.

Traditionally, OEMs focus on business-to-business sales, while VARs target the public or end users. Car parts, such as exhaust systems or brake cylinders, are manufactured by OEMs. The OEM parts are then sold to an auto manufacturer, which assembles them into a car. The completed car is then marketed to auto dealers to be sold to individual consumers. However, OEMs may also sell to the general public. An individual can buy OEM parts directly from the manufacturer or a retailer that stocks those parts to make car repairs.

OEM vs. Aftermarket

The aftermarket is the market for replacement parts, accessories, and equipment for the care of the original product, such as an automobile, after it has been sold to a consumer. The OEM manufactured the original parts, but the aftermarket equipment is made by another company that a consumer buys as a replacement.

A Ford car owner may need to replace a car thermostat manufactured by the OEM, ABC Thermostats. The consumer may buy the OEM part, a duplicate of their original ABC thermostat, or an aftermarket or generic part made by another company.

Consumers often choose an OEM part over a generic one for consistency. However, some aftermarket equipment proves more successful than the OEM replacement. Hurst Performance, a manufacturer of gear shifters for automobiles, became known for their superior performance, and 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 original equipment manufacturer.

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

An OEM differs from an original design manufacturing (ODM), a type of private labeling for manufactured parts. An ODM produces a product to meet a client’s specifications. The client labels and sells the product under a brand name.

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

Technology and OEM

OEM can sometimes be used as an adjective, as in “OEM parts,” or as a verb, such as when a manufacturer plans to “OEM” a new product. This evolution can be attributed to the computer hardware industry.

VAR companies such as Dell and Hewlett Packard accepted branded parts from outside sources in their products over time. In the tech industry, OEM became synonymous with companies that rebrand or openly use other manufacturers’ products for resale. This reflected a shift in the manufacturing dynamics and defined which company was responsible for warranties, customer support, and other services.

As Dell incorporated Intel processors in its computers, Dell advertised that it had “Intel Inside!” and marketing materials suggested that Intel and Dell were equal partners in the processor and computer design. Dell was considered the OEM, both in the minds of companies and the public.

The Bottom Line

An original equipment manufacturer (OEM) provides components for the finished products of a value-added reseller (VAR). OEMs manufacture for business-to-business sales, while VARs sell to the public or other end users. OEM parts often compete with aftermarket replacement parts after the product has been sold to the consumer.