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What is an 'Original Equipment Manufacturer - OEM'

An original equipment manufacturer (OEM) traditionally is defined as a company whose goods are used as components in the products of another company, which then sells the finished item to users. The second firm is referred to as a value-added reseller (VAR), because by augmenting or incorporating features or services, it adds value to the original item. The VAR works closely with the OEM, which often customizes designs based on the VAR company's needs and specifications.

BREAKING DOWN 'Original Equipment Manufacturer - OEM'

One of the basic examples is the relationship between an auto manufacturer and a maker of auto parts. Parts such as exhaust systems or brake cylinders are manufactured by a wide variety of OEMs. The OEM parts are then sold to an auto manufacturer, which then assembles them into a car. The completed car is then marketed to auto dealers to be sold to individual consumers.

However, there is a second, newer definition of OEM, typically used in the computer industry. In this case, OEM may refer to the company that buys products and then incorporates or rebrands them into a new product under its own name. For example, Microsoft supplies its Windows software to Dell Technologies, which incorporates it into its personal computers and sells a complete PC system directly to the public. In the traditional sense of the term, Microsoft is the OEM and Dell the VAR. However, the computer's product guide for consumers is most likely to refer to Dell as the OEM.

So the OEM can refer to the company that sells a component to a VAR. But in some cases, it refers to the VAR acquiring a product from an OEM. 

Why Does OEM Have Contradictory Meanings?

This somewhat contradictory evolution in the use of the term OEM (which can also be used as an adjective, as in "OEM parts" or even a verb, as a manufacturer saying it plans to OEM a new gizmo) is usually attributed to the computer hardware industry.

Some VAR companies such as Dell, IBM and Hewlett Packard started to accept branded parts from outside sources in their own products. So, over time, OEM came to refer to companies that rebrand or openly use other manufacturers' products for resale.

Most of this had to do with which company was responsible for warranties, customer support and other services, but it also reflected a subtle shift in the manufacturing dynamics. In one instance, Dell stopped using chips from anonymous makers and switched to Intel for the computer processors in its computers. Since Intel is a brand name, it brings added value to Dell’s computers. Not only does Dell advertise this prominently (using the slogan "Intel Inside!"), but its marketing materials also suggest that Intel and Dell are equal partners in the processor and computer design. This is contrast with Dell just telling Intel how to build the processors, as it did with its old suppliers. All of this makes Dell the OEM, both in the minds of companies supplying the assembled parts and in the public's mind (after all, people think of the finished hardware and software package they buy as "a Dell computer").

How OEMs Work

However squishy the definition, the fact remains that VARs and OEMs work together. OEMs make sub-assembly parts to sell to VARs. Although some OEMs do make complete items for a VAR to market, they usually don't play much of direct role in determining the finished product. A common example might be the relationship between an OEM of individual electronic components and a company such as Sony or Samsung that assembles those parts in making its HDTVs. Or a maker of buttons that sells to Ralph Lauren its little fasteners customized with the letters RL stamped on them. Typically, no one integrated part from an OEM is recognized as playing an especially significant role in the finished product, which goes out under the corporate brand name.

Traditionally, OEMs focused on business-to-business sales, while VARs marketed to the public or other end users. However, an increasing number of OEMs are selling their parts or services directly to consumers (which, in a way, makes them a VAR). For example, people who build their own computers can buy graphics cards or processors directly from Nvidia, 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 who stocks those parts.

OEM vs. Aftermarket

OEM is the opposite of aftermarket. OEM refers to something made specifically for the original product, while aftermarket refers to equipment made by another company that a consumer may use as a replacement.

For example, say a person needs to replace his car thermostat, created expressly for his Ford Taurus by ABC Thermostats. He may buy the OEM part – a duplicate of his original ABC thermostat that was used in the original manufacturing of the vehicle. Or he may buy an aftermarket part, an alternative made by another company. In other words, if the replacement also comes from ABC company, it is OEM; otherwise it is aftermarket.

Usually, consumers buy an aftermarket product because it's cheaper (the equivalent of a generic drug) or more convenient to obtain. But sometimes OEMs do such a good job in manufacturing a specific part that it becomes well-known to consumers, who actively seek it out. An example of this is the success of Hurst Performance of Warminster Township, Penn., a manufacturer of gear shifters for automobiles. Hurst shifters became so well-known for their superior performance that car buyers would insist on having them as a replacement part, or sometimes would purchase and install them before the originals even needed replacing.

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