An original equipment manufacturer, or OEM, manufactures products or components that are purchased by a company and retailed under the purchasing company's brand name. OEM refers to the company that originally manufactured the product.
When referring to automotive parts, OEM designates a replacement part made by the manufacturer of the original part.
Confusing and contradictory definitions
OEM may also refer to a company that purchases, for use in its own products, a component made by a second company. Under this definition, if company A purchases optical drives from company B to put in A's computers, then company A is the OEM.
An even more confusing, contradictory definition is a company that sells the product of a second company under its own brand name. For example, if Ford sells replacement parts (spares) made by TRW Automotive, both Ford and TRW may be called the OEM company, depending on whose definition of "OEM" is being used. Many of the parts in a new car are not made by the automotive company whose badge is on the front. Instead, there is a commercial ecosystem of suppliers (such as TRW) that participate competitively in a supply chain process whose end result is new cars. (Even entire makes and models may be rebadged.)
The companies who buy the suppliers' parts and then resell them with some amount of additional value added along the way (such as assembly and customer support) may be better termed value-added resellers (VARs) or resellers. In countries with value added taxation (VATs), the way the tax accounting is done tends to keep the concept clear in the minds of the public; whereas in the U.S. (which doesn't use VATs), the public is not used to terms such as "value-added reseller".
Economy of scale
OEMs rely on their ability to drive down the cost of production through economies of scale. Also, using an OEM allows the purchasing company to obtain the needed components or products without owning and operating a factory.
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