Pronounced as separate letters, OEM is an acronym for original equipment manufacturer. An OEM is a company that produces and distributes something in bulk (a hardware component, accessory, software program, etc.) to be branded and sold under a different company’s portfolio. OEMs may also be called contract manufacturers.
Sometimes an OEM creates a component that will then be replicated by aftermarket manufacturers to be used when an OEM part breaks and cannot be repaired. These parts are typically less expensive and easier to access, but they also often void the manufacturer’s warranty since the replacement part isn’t identical to the original.
OEM vs. VAR
Although the term is sometimes used incorrectly, an OEM is a vendor that sells its products to another company (called a value-added reseller, or VAR) that will then add other hardware, software, or customizations and package it for end users. This is similar to raw materials suppliers, such as a farmer who provides produce to a restaurant. OEMs have the expertise and resources to create the product the VAR needs quickly, in large quantities, and at a low wholesale price a VAR uses an OEM part because it’s economical to do so.
Because an OEM’s parts are sometimes critical to a VAR’s supply chain, the relationship between OEM and VAR can be very complicated. The OEM’s part is not always distinguished from the complete VAR solution when it’s marketed, so if the component or software malfunctions, the VAR is usually the one held accountable by the consumer instead of the OEM. This means an OEM is expected to offer a solid warranty for the parts supplied and quality customer service in case things go awry.
This is not always an exclusive partnership; many OEMs will make a product that is licensed to numerous VARs and even sold directly to the public in the OEM’s own solution. Likewise, a VAR might use parts from multiple OEMs in their own product.
Examples of OEMs
OEM parts are most prevalent in the technology and transportation industries. For example, a car manufacturer like GMC or Toyota (in this case the VAR) might source the steering wheel or windshield wipers from an OEM. While the customer will not usually make a distinction between who makes the part and who makes the whole, the VAR has the benefit of saving on production costs by outsourcing the less significant parts.
A prominent example of an OEM product in the technology industry is Microsoft Windows. Introduced in 1985, Windows is the operating system for an estimated 90% of all personal computers meaning manufacturers like Dell, HP, Samsung, ASUS, and Lenovo all have licenses with Microsoft to use Windows as the operating system for their laptops, desktops, and tablets. Of course, Microsoft also uses Windows as the operating system for their Surface devices, so Microsoft profits from both the sale of their own computers as well as the sales of their competitors.