OEM vs ODM explained – what's best for manufacturers?

As a manufacturer, you will likely see two acronyms used a lot when referring to potential business models. These are OEM and ODM, and there’s a lot of discussion these days around which is which – and whether one is better than the other.

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OEM stands for Original Equipment Manufacturer, and ODM stands for Original Design Manufacturer. Here’s what the two terms mean.

• Unpack manufacturing in detail in our full length Modern Manufacturing Guide here

Understanding OEM versus ODM

Original Equipment Manufacturers (OEM) sell highly customised products designed to suit a client’s specifications. Meanwhile, Original Design Manufacturers (ODM) produce their own products and essentially lease them out to clients on a private label or white label basis so they don’t have to invest in building their own consumer brand.

OEM explained in detail

An OEM is a type of manufacturer capable of creating a product to a customer’s precise specifications – or at least as close to spec as the manufacturer is capable of, given any equipment or supply restrictions.

OEMs are a vital piece of the product development puzzle for companies that have all the skills and resources required to ideate a product and perform the required market research, but lack the manufacturing capacity to produce it (especially at scale). Essentially, OEMs allow a business to produce a product and get it to market without needing to build, staff and run a factory.

Depending on the client’s requirements, an OEM may produce a wholly custom new product or a product from the OEM’s range that has been heavily customised. OEMs also sometimes offer guidance on product design to ensure the end result can actually be manufactured. In any case, the client generally retains their intellectual property rights as it is their design, and would only give up parts of their IP if they have had to rely on the OEM for more than just manufacturing.

Additionally, OEMs may produce sub-components, for their clients to use within their own manufacturing process.

What the OEM’s customer does:

• Product design
• Market research
• Marketing
• Product testing

What the OEM does:

• Manufactures the product

OEM versus Contract Manufacturing (CM)

Contract Manufacturing (CM) is a step beyond OEM. While an OEM may offer products to be customised or may otherwise guide and help in the product design stage, a CM is just that – a manufacturer for hire.

If you run your business as a CM, clients approach you with their product specs and all you are required to do is produce the product. The client retains all IP rights but, in return, must provide all design requirements.

Example of an OEM business

Apple’s relationship with Foxconn is one of the most well-known examples of the OEM model. Apple is a multinational corporation with huge R&D resources, but it lacks a manufacturing component. Instead, Apple outsources its manufacturing to the Chinese company Foxconn which then builds products such as the iPhone. Apple retains its IP and receives a high-quality manufactured product.

In addition, Apple also frequently engages other OEMs to produce sub-components that are then sent to Foxconn.

ODM explained in detail

Original Design Manufacturers work differently from their OEM counterparts in that they typically do a lot of the product design work in-house, and in a sense lease out their products for other businesses (clients) to sell.

Companies will often use ODMs as either a way to get an idea to market very quickly, with less R&D cost, or because they see an opportunity in the ODM’s line of products and decide to approach the ODM to lease some of them. In these cases, the products are actually the ODM’s, and they have simply been altered in some way – usually just rebranded, but sometimes slightly customised in other ways – to suit the brand that wishes to sell them. This is also known as white label manufacturing. 

That said, not all ODMs operate exclusively as white label manufacturers. Some offer a custom product service for clients who have great ideas but lack the resources to design them.

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For example, if a client had an idea for, say, a new footwear item but could not design it on their own, they might approach an ODM – almost like pitching a new business idea. If accepted, the ODM would manufacture it to be sold as a private label product (see below). In this case, most of the IP rights remain with the ODM.

What the ODM’s customer does:

• Product ideation
• Spots a new market opportunity for their brand

What the ODM does:

• R&D
• Product testing
• Product manufacturing
• White or private label offerings

Do ODMs offer white label or private label products?

First, some definitions. It’s common for the terms ‘white label’ and ‘private label’ to be used interchangeably, and while they are close in definition, they’re technically different.

What’s the difference between white label and private label?

• White label: If you offer white label products, you are designing and producing generic products that clients (i.e. retailers) can purchase from you and re-sell under their brand. You control the IP, multiple clients may purchase the same product, and customisation is limited – typically only the branding. You’re basically producing a complete product with a blank label, hence the name.
• Private label: If you offer private label products, it’s basically the same as white labelling except more exclusive. When you engage in a private label manufacturing contract with a client, you are offering your product to them exclusively for re-selling and you will likely offer a greater degree of customisation.

As we’ve hinted, you can get either of the above from an ODM. In both cases, the ODM does most of the product development legwork and retains the majority of IP rights. It is, after all, their product.

When clients want to take advantage of a market opportunity quickly without minimal up-front investment, they may opt to buy white label products that are market-ready more or less instantly. However, their product may look like a clone of some of their competitors depending on how many businesses in their area also purchase the same white label product.

If a client feels they have a little extra time to ‘get it right’, as it were, they might choose the more exclusive private label option and opt for an extra degree of customisation – with the added advantage of exclusivity.

Of course, if they really want heavy customisation, they may look instead to an OEM instead of an ODM.

• Learn more about manufacturing: What is Good Manufacturing Practice, and why is it important?

The pros and cons of becoming an OEM

There are cost benefits to being an OEM, from a product development standpoint. One of the big pros is that you will have few if any costs associated with researching, designing and testing new products – clients will bring their ideas to you, and you just have to be able to make them.

Additionally, you may not need to upgrade your facility yourself to produce custom products for big clients. A lot of the time, OEMs pass on the cost of new tooling and moulding equipment to their clients in the form of up-front fees, or by building them into their pricing. Of course, this may mean they have more leverage over your facility and can demand that you only use the equipment to service their needs, but even in that scenario you’re getting an upgrade that you pay comparatively little for.

The flip side, however, is that there are a lot of OEMs on the market. The global healthcare OEM market alone is worth US$250 billion, with 40% of facilities residing in North or South America. That means, right out of the gate, you will have strong competition in a lot of specialist niches and will need to work harder to differentiate yourself and grow your customer base.

OEM stands for Original Equipment Manufacturing, and refers to products that are fully designed by one company and then licensed out to a manufacturer to produce. The Apple iPhone, for example, was invented and designed by Apple, and then licensed out to Foxconn to produce. As a result, the iPhone enjoys a higher level of product differentiation because its design is only available to Apple and its licensed manufacturer.

Many other brand name electronics and appliances are OEM. Custom designed clothing, as opposed to a generic garment with a custom logo, is another example of OEM.

The main advantage of OEM is that the designer retains total creative control over the design. Whereas ODM products are restricted to a predetermined design, OEM products can be made according to any specifications. The only limitation is the designer’s imagination (as well as budget).

The disadvantage of OEM manufacturing is that it is much more resource intensive. OEM designers often invest millions of dollars into research and development over several years in order to create unique products. Because of this, OEM designers have to guard their designs as intellectual property, lest it be copied and sold by another company for a lower price.