What Is an Original Equipment Manufacturer (OEM)?

What Is an Original Equipment Manufacturer (OEM)?

Let me explain what an Original Equipment Manufacturer, or OEM, really is. An OEM is a company that produces goods used as components in the products of another company. In simple terms, you can think of an OEM as the creator of parts and components that other companies incorporate into their final products. These other companies are usually called Value-Added Resellers, or VARs. As someone who's looked into this, I can tell you that VARs work closely with OEMs, and the OEM often customizes designs based on what the VAR needs and specifies.

Understanding Original Equipment Manufacturers (OEMs)

You should know that OEMs traditionally concentrate on business-to-business (B2B) sales, while VARs handle sales to consumers or end users. This setup exists because the products OEMs design and sell are intended for other companies to complete their own goods and services.

OEMs typically produce parts to sell to VARs rather than complete, finished products. For instance, an OEM might manufacture electronic components for a VAR that produces high-definition TVs, like Samsung. Or, an OEM could supply customized fasteners with a branded monogram to a VAR, such as the RL monograms for the clothing company Ralph Lauren.

In the automotive world, parts like exhaust systems or brake cylinders are also made by OEMs. After manufacturing, the OEM sells these to an auto manufacturer, who assembles them into a car. The completed car then goes to auto dealers, who sell it to you, the consumer or end user.

Special Considerations

As I mentioned earlier, OEMs have traditionally sold their products directly to other businesses, allowing those companies to use the components in manufacturing and selling finished products to consumers. But in some cases, the lines have blurred, making the OEM definition a bit unclear. This happens because OEMs might also sell to the general public, essentially acting like VARs.

You'll see this in industries like computer and auto parts. For example, if you're an individual wanting to repair your car, you can buy OEM parts directly from the manufacturer or a retailer that stocks them.

Original Equipment Manufacturer (OEM) vs. Aftermarket

Let me clarify the aftermarket for you—it's the market for replacement parts, accessories, and equipment used to maintain an original product, such as a car after it's sold to a consumer.

In the car example I used before, while the OEM made the original parts for assembly, other companies produce equipment for the aftermarket. As a consumer, you can buy replacement equipment from these companies instead of the original parts.

Aftermarket replacement parts are often made to match the original specifications of the OEM's parts closely. Suppose you own a Ford and need to replace the thermostat, which was originally made by ABC Thermostats, an OEM. You could buy another from ABC or opt for an aftermarket part from a different company.

Many consumers stick with OEM parts for consistency, but some aftermarket options are actually higher quality. Take Hurst Performance gear shifters—they gained a reputation for superior performance, leading buyers to prefer them over originals. Eventually, manufacturers installed Hurst shifters in their factories, turning Hurst into an OEM.

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

I want to make sure you understand that an OEM is different from an Original Design Manufacturer, or ODM. An ODM is a third-party company that specializes in designing and manufacturing products based on another company's exact specifications.

A company might hire an ODM when launching a new product; the ODM produces parts to meet the client's precise needs, and the client then rebrands and labels the product for sale to its consumers.

Working with an ODM can save a company on research and development costs, and ODM products often have low minimum order quantities, which appeals to smaller clients.

Original Equipment Manufacturing (OEM) and Technology

In the digital world, it's become more common for companies to rebrand products from other manufacturers for resale. Companies like Dell and Hewlett-Packard have incorporated branded parts from external sources into their products over time. This has expanded the use of the term OEM—it can now function as an adjective, like in 'OEM parts,' or as a verb, such as when a manufacturer plans to OEM a new product.

This shift has changed manufacturing dynamics, affecting responsibilities for warranties, customer support, and other services. For example, when Dell included Intel processors in its computers, it advertised 'Intel Inside!' and positioned Intel and Dell as partners in processor and computer design.

What Does Original Equipment Manufacturer Mean in Cars?

In the auto repair industry, OEM parts are those used by a car manufacturer but produced by a different company. Aftermarket parts, on the other hand, are made by third-party manufacturers and may be compatible with the same vehicles.

What Does Original Equipment Manufacturer Mean in Software?

In computer and electronics sales, OEM can refer to software sold to another manufacturer for installation in its products. This software might be pre-installed on a new computer or device. A prime example is Windows operating systems, which Microsoft sells to computer makers like Dell and Lenovo to install in their hardware.

Is It Worth Paying for OEM Parts?

OEM parts are generally more expensive than those from third-party manufacturers, but they're made to exact specifications. Some third-party products are just as reliable and much cheaper. When you're looking for replacements, I recommend researching different brands to find the best mix of price and quality.

The Bottom Line

To wrap this up, an OEM supplies components for a VAR's finished products. OEMs usually handle B2B sales of parts and equipment, while VARs sell completed products to consumers. Once the final product reaches the consumer, OEM parts often face competition from generic replacements.