What is OEM?
(1) Definition of OEM
OEM is a business model in the manufacturing industry.
It refers to manufacturing products under another company’s brand name based on a request from that company.
Generally, the product sales process follows these steps:
Planning → Development → Design → Manufacturing → Distribution → Sales
OEM is a system in which only the "manufacturing" step is outsourced to another company.
The client handles all other processes themselves.
Products manufactured by the OEM manufacturer are delivered to the client, who then sells them as products under their own brand.
In this way, OEM is a production method aimed at fostering partnerships regarding technology and sales, as well as improving corporate efficiency, and is utilized across various industries.
Recently, it has become common to find contract manufacturers through Alibaba sourcing, which can lead to OEM requests.
(2) Meaning of the Abbreviation "OEM"
The abbreviation OEM stands for “Original Equipment Manufacturer.”
It is generally translated as "original manufacturer" or "original producer."
(3) History of OEM
The concept of OEM was first used in the automotive industry.
Instead of a single company manufacturing the entire product, a production method was adopted in which the manufacturing of each component was outsourced to other companies specializing in those specific parts, with the final assembly performed in-house.
Since then, it has been widely adopted in many industries, such as the electronics and computer industries.
Benefits of OEM
(1) Benefits for the Client
A. Shorter Time to Market
By utilizing OEM, you can streamline product development and production processes, thereby shortening the time to market.
In particular, for products requiring specialized knowledge or equipment, utilizing an OEM is likely to allow for faster market launch than establishing in-house production facilities.
B. Utilization of Specialized Knowledge and Technology
With OEM, since product manufacturing is outsourced to companies possessing specialized technology and expertise, you can leverage skills and knowledge that your own company does not possess.
C. Cost Reduction
When producing an entire product in-house, numerous costs are incurred, including capital expenditures, labor costs, material costs, and maintenance expenses.
However, by outsourcing manufacturing to an OEM, it is possible to significantly reduce these costs.
D. Effective Use of Time
While outsourcing the manufacturing process to an OEM, the client will have more time available.
By making effective use of that time, the client can focus on growing the business—such as developing new products, building marketing strategies, and improving customer service.
You should also dedicate time to strengthening your brand strategy.
Focus on enhancing brand value through product branding, marketing activities, and improving the customer experience.
(2) Benefits for the Contractor
A. Increased Revenue
OEM manufacturers can generate revenue by accepting manufacturing requests from clients and selling the resulting products.
This allows them to expect higher revenue compared to selling only their own branded products.
B. Maximization of Manufacturing Capacity
OEM allows manufacturers to make the most of their own production capacity.
Even when their own-brand products are not selling well, they can maintain capacity utilization through OEM orders.
C. Brand Expansion
If products manufactured through OEM receive positive reviews, that reputation is reflected back on the manufacturer, thereby enhancing the value of your own brand.
Disadvantages of OEM
(1) Disadvantages for the client
A. Difficulty in Maintaining Brand Control
With OEM manufacturing, since production is outsourced to another company, it can be difficult to maintain complete control over product quality, design, and other aspects.
B. Difficulties with Quality Control
Since manufacturing is outsourced to an external manufacturer, quality control can become difficult.
In particular, products with complex manufacturing processes that require specialized knowledge are prone to quality variations.
C. Intellectual property risks
Sharing your company’s product designs and manufacturing technologies with other companies carries the risk that this information could be leaked to third parties.
This risk is particularly high for products that feature advanced technology and provide a competitive advantage.
(2) Disadvantages for the Contractor
A. Sacrifice of the Company’s Own Brand
In OEM manufacturing, products are manufactured under another company’s brand name, which may result in the manufacturer’s own brand being overshadowed.
In particular, even if high-quality products are manufactured, that reputation may not be directly reflected in the company’s own brand.
B. Difficulty in Responding to Fluctuations in Demand
It can be difficult to respond when the client’s demand decreases or increases suddenly.
Adjusting production volume in response to demand fluctuations affects production equipment utilization rates and staffing.
C. Unilateral constraints on transactions
When signing a contract, both the client and the contractor are concerned about price.
It is natural for both parties to want the lowest possible price or the highest possible quote, but it is not uncommon for the client to request, “Can you manufacture this at the lowest possible price?”
However, entering into a contract at an excessively low price can reduce profit margins and put the contractor at a disadvantage.
While receiving a contract is a welcome development, price negotiations must be conducted with caution, and an agreement must be reached within a range that is fair to both parties.
Success Stories of OEM Imports from China
China boasts high production capacity and cost competitiveness, and many products are manufactured there by leveraging the cost advantages of its labor force.
Furthermore, China’s manufacturing sector possesses the flexibility to handle a wide variety of products.
Here are some success stories of Chinese OEM imports that have leveraged these advantages.
1. Launching a Small-Scale Furniture Brand
Mr. A aimed to launch his own furniture brand in Japan, but due to cost and resource constraints associated with in-house manufacturing, he decided to utilize OEM.
Mr. A worked with a Chinese OEM manufacturer through an import agent, conveying his unique designs and specifications to commission production.
The import agent took on the role of translating the details and conveying them to the OEM manufacturer on behalf of Mr. A, who did not speak Chinese.
The OEM manufacturer produced the furniture based on the designs, while the import agent focused on quality control and delivery schedule management.
Mr. A focused his efforts on marketing and sales to establish his brand image.
Utilizing online shops and influencer marketing, he introduced his products to a wide audience.
As a result, the furniture sold by Mr. A was well-received for its unique design and high quality.
As demand grew, they successfully expanded production batches and improved profitability.
2. Sales of Miscellaneous Goods
Mr. B partnered with a Chinese OEM manufacturer introduced by an import agent to sell his own line of home goods.
Mr. B provided the product ideas and designs, while the OEM manufacturer handled production and packaging.
They sold the products through online marketplaces and at events, making improvements based on customer feedback.
As demand grew, B successfully increased production batches and expanded the product lineup.
What Makes a Reliable OEM Manufacturer?
(1) Track Record and Reputation
Track record and reputation are key factors when selecting a reliable OEM manufacturer.
The key is to select a manufacturer with a proven track record and products that are well-received in the market.
(2) Technology and Capabilities
The technical capabilities and production capacity of an OEM manufacturer are also important criteria for evaluation.
You need to verify whether they possess the technology required for your products and whether they are capable of mass production.
(3) Quality Control System
It is important that the manufacturer has established a quality control system.
Specifically, you need to verify whether clear quality control guidelines have been established and whether regular quality checks are conducted.
(4) Ability to Handle Lot Sizes
OEM manufacturers are expected to be flexible in handling production from small to large batches.
Given the fluctuating nature of market demand, it is advisable to select a manufacturer capable of adjusting production volumes in response to changes in demand.
(5) Corporate Stability
To develop a long-term business relationship, the OEM manufacturer must demonstrate financial stability and reliability.
Therefore, it is important to verify the manufacturer’s management status and financial soundness.
(6) If you are having trouble finding an OEM manufacturer, consult an import agent
Import agents possess years of experience and specialized knowledge, and have built a network of reliable OEM manufacturers.
They are well-versed in market conditions and industry trends, enabling them to identify excellent OEM manufacturers.
Of course, with an import agent acting as an intermediary, all communication with the OEM manufacturer can be conducted in Japanese.
In addition, import agents provide support ranging from selecting OEM manufacturers to product shipping and customs procedures.
They are also risk management professionals who oversee product quality and delivery schedules.
Even if any issues arise, the import agent will handle them, allowing you to proceed with your transactions with peace of mind.
OEM Market Trends and Future Outlook
(1) Current State of the OEM Market
In recent years, the OEM market has been expanding, driven primarily by China, due to demands for more sophisticated product development and cost reduction, as well as the progress of globalization.
Major OEM markets include electronics and apparel, and are utilized by major manufacturers, small businesses, and even sole proprietors.
The formation of global supply chains has created a market with a balanced supply and demand.
Furthermore, technological advancements and improvements in manufacturing process efficiency have made it possible to produce higher-quality products.
(2) Industrial Changes and Their Impact on OEM
Industrial changes, particularly digitalization and the evolution of AI, are having a significant impact on OEMs.
These technological advancements have made it possible to manufacture more sophisticated and complex products, thereby expanding the possibilities for OEMs.
(3) Future Outlook and Potential for OEMs
The OEM market is expected to continue growing.
In particular, the introduction of new technologies such as IoT and AI is expected to drive the development of new products and services.
Furthermore, due to growing interest in environmental protection and sustainable development (SDGs), demand for OEM services related to the manufacture of eco-friendly and recycled products is also expected to increase.
Summary
What did you think?
OEM is a business model in which the client and the contractor share various responsibilities, from manufacturing to sales, and its implementation holds significant strategic importance for a company.
However, to effectively utilize OEM, it is important to understand its advantages and disadvantages and select the right partner.
And be sure to proceed with an eye on market trends and future prospects.
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