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What is an 'Original Equipment Manufacturer - OEM'

An original equipment manufacturer (OEM) is a company whose products are used as components in the products of another company, referred to as the value-added reseller (VAR). The OEM generally works closely with the company that sells the finished product and customizes designs based on that company's needs. In the computer industry, OEM may also refer to the VAR, the company that buys products and incorporates or rebrands them into a new product under its own name.

BREAKING DOWN 'Original Equipment Manufacturer - OEM'

The overlap in the two definitions of OEM can be confusing. In some cases, OEM means the company that sells a component to a VAR, and other times it refers to the VAR acquiring a product from an OEM. The second definition is newer than the first definition and typically refers to companies in the computer industry. For example, a person may refer to Dell as an OEM when it buys parts from other companies, assembles them and sells a complete system under its own name.

Value-Added Reseller vs. Original Equipment Manufacturer

VARs and OEMs work together. Traditionally, OEMs make complete end products or subassembly parts to sell to VARs. Then, VARs put the parts in their products and resell them. For example, imagine Dell builds computers with Nvidia graphics cards and Intel processors, and then sells the computers directly to consumers and retail shops. In this example, Nvidia and Intel are the OEMs, and Dell is the VAR. However, because Dell is a computer company, it may also be considered the OEM, based on the phrase's second definition.

How OEMs Work

Traditionally, OEMs focused on business-to-business sales. However, an increasing number of OEMs are marketing their parts directly to consumers. For example, people who build their own computers can buy graphics cards or processors directly from Nvidia and Intel or retailers that stock those products. Similarly, if a person wants to do his own car repairs, he can often buy OEM parts directly from the manufacturer or a retailer that stocks those parts.

OEM vs. Aftermarket

OEM is the opposite of aftermarket. OEM refers to parts made specifically for the original product, while aftermarket refers to parts made by another company that a consumer may buy and use in the product after purchasing it. For example, if a person wants to replace the thermostat in his car, he may buy the OEM part, the exact copy of the thermostat that was originally used in his car, made by the same manufacturer, or he may buy an aftermarket part, a cheaper alternative made by another company, that mimics the OEM part.

Using OEM as a Verb

In rare cases, OEM appears as a verb instead of a noun. For example, a manufacturer might say it is going to OEM a new product, meaning it is going to produce a new product based on components bought from an OEM. Similarly, OEM often appears as an adjective, such as in the phrase "OEM parts."

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