Original Equipment Manufacturer (OEM)

A company that resells products or parts of a product of another company under its own branding

What is an Original Equipment Manufacturer (OEM)?

An Original Equipment Manufacturer or OEM is a company that manufactures and sells products or parts of a product that their buyer, another company, sells to its own customers while putting the products under its own branding. OEMs commonly operate in the auto and computer industries.

 

Original Equipment Manufacturer

 

An OEM is often the direct client of a retail company that sells directly to consumers. For instance, a Lenovo laptop computer’s parts aren’t all manufactured by Lenovo. Some parts, such as its processor or memory module, may be the products of an OEM.

 

Original Equipment Manufacturer vs. Value-Added Reseller

Essentially, Value-Added Resellers or VARs sell products from an OEM but incorporate certain added features before doing so. The two share a mutually beneficial relationship, as VARs help OEMs sell their products and OEMs entrust their products to VARs, allowing them to sell them with more features that will enhance the operation of the products.

 

Original Equipment Manufacturer vs. Aftermarket

While an Original Equipment Manufacturer produces original equipment, an aftermarket manufacturer, on the other hand, makes products that are made to look like and work interchangeably with those of the OEM.

In simpler terms, the parts are not original products because they’ve been manufactured by companies, locally-based or foreign-based, without approval from the OEMs to produce such products. Though usually cheaper, the products are not guaranteed to function as well as the OEM product.

 

Example of an Original Equipment Manufacturer

To better illustrate how OEMs work, let’s consider an example. Say Company A is into manufacturing memory cards. They will not produce only one type of the product but several versions of it, which are then, in turn, sold to various computer manufacturers/retailers. Those companies are value-added resellers who market directly to the public.

 

Other Characteristics of an Original Equipment Manufacturer

 

1. OEMs sell licenses

OEMs typically sell product licenses to use their parts to the value-added resellers they market to.

 

2. OEM for hardware

Hardware can be easily bought off the internet, whether from a retail product manufacturer or through an OEM. However, OEM hardware is usually shipped incomplete of parts such as cables and adapters that are necessary for the installation and operation of the hardware.

 

3. OEM for software

OEM software, like the hardware, usually doesn’t come with a lot of stuff, except for the basic software and its license key.

 

Benefits of Buying Original Equipment Manufacturer Products

Here are some benefits one gets from buying OEMs:

 

1. Good quality

And why not? After all, an OEM product is the same product manufactured by the original manufacturer. Though there are cheaper versions, the price of the OEM product reflects its quality.

 

2. Durability

Such products are usually not only of good quality but are also durable. For example, when buying a spare tire, an OEM tire is typically better than getting an aftermarket tire because one can be sure of the materials used in making it.

 

3. Lifespan

OEM parts often have a longer lifespan than aftermarket parts.

 

Additional Resources

CFI offers the Financial Modeling & Valuation Analyst (FMVA)™ certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following CFI resources will be helpful:

  • Economies of Scale
  • Substitute Products
  • Supply Chain
  • Value Added

Financial Analyst Certification

Become a certified Financial Modeling and Valuation Analyst (FMVA)® by completing CFI’s online financial modeling classes and training program!