Original Equipment Manufactured in China is also called contract manufacturing or outsourced manufacturing. Here are the top four advantages.
Editorial Team
February 15, 2023
The internet is often asked what exactly is an OEM or Original Equipment Manufacturer. That’s a tricky question because the definition of OEM has undergone a slight shift over the years. Its meaning could also change depending on context.
Traditionally, however, Original Equipment Manufacturer referred to a company that manufactured a product for another company, which then sold it onwards – sometimes after adding value to it – under its own brand. It is very common in retail, such as for electronics or beauty products.
Today, it is largely understood to be manufacturing to order in which a manufacturing specialist makes a product or component for another company that provides it with the product design and other specifications. The buying company may sell this product or component individually or assemble it with other components (adding value) to make a product that is sold under its own brand name.
Original Equipment Manufacturer is also called contract manufacturing or outsourced manufacturing.
Advantages of Original Equipment Manufactured
Competitive pricing: Components are usually extremely cost-competitive because of the economies of scale. Large volumes, streamlined processes and efficient supply chains especially in low-cost regions such as China make OEM parts cheaper than if they had been manufactured by the buying company itself. When a good quality product is priced at a low or reasonable price, it leads to increased sales, revenue and profits.
Access to experts leads to good quality: Several companies have been using the same manufacturing process for years. This makes them experts in that process. Take die casting. An experienced manufacturer will know the reasons for manufacturing defects such as low wall thickness and high die surface porosity and take steps to prevent these defects from cropping up. Companies that do not have the vast experience with Original Equipment Manufacturers have will make mistakes that can be costly. Trial and error costs money so why reinvent the wheel, right?
Cut capital costs and protect yourself against fluctuations in operational costs: By outsourcing manufacturing, companies save on capital costs spent to acquire machinery and factory space. That’s not all. They benefit with regard to operational expenses such as costs of raw materials, some of which can fluctuate over time, upsetting the best-planned budgets. While outsourcing to China, companies often lock in the per unit cost of the product for a fixed period after negotiations with their supplier. This protects them against any fluctuations in the price of inputs such as raw material or even currency. So a company will know, say, that 100 units of their product will cost them $100 for the next 10 months. This aids planning and budgeting and prevents any nasty price-related surprises from popping up (except in extreme situations, which are rare). If you ran your own manufacturing facility, these risks are all yours.
Focus on product development, marketing and sales: Outsourcing manufacturing allows companies to invest more resources into research and development for new products or finding new markets and customers for their existing products.
Popular OEM industries
Computer hardware and consumer electronics: Several companies in this industry use Original Equipment Manufacturers to make their products and components. Apple Inc has been using components by different manufacturers in its iPhones for years, for instance, with the majority of its devices being assembled by Foxconn. Similarly, Lenovo used to manufacture IBM personal computers before it bought IBM’s PC business in 2004 and its x86 server business in 2014.
The automotive sector: Several car manufacturers worldwide use several parts made by OEMs while assembling their cars. These could include exhaust systems, plastic injection molded automotive parts and tyres and car electronics.
Start-ups: OEMs are particularly suitable for start-ups or entrepreneurs. If you are an entrepreneur who has a great idea for a product, have done your research and development, and your market research says there is a clear demand for that product, getting an OEM to manufacture your product is the fastest and most efficient way to get it to the market. All you have to do is find an experienced manufacturer possibly with the help of a China sourcing agent, share a prototype, ask for a quote, sign an agreement with them and then wait for your shipment to reach your shores. Much easier than setting up a factory from scratch, right?
Sourcing Allies is a team of expert China sourcing agents that has helped western customers manufacture and source products from low-cost regions since 2006.
