What's the Difference between ODM and OEM?

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.

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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.

OEM and ODM are terms commonly heard in manufacturing, but while they sound similar, they are not two names for the same concept. There are fundamental differences between an OEM and ODM, but these two words are often used interchangeably, adding to the confusion. In this article, we’ll review the characteristics of both OEMs and ODMs, and understand the key differences between them.

What is a Product Company?

Product companies perform market research in order to market and sell products to consumers. We encounter product companies on a daily basis. For example, Apple is a product company that sells iPhones, MacBooks, iMacs, and other Apple-branded devices to their customers. Similarly, HP is a product company that sells desktops, laptops, and other equipment, and Samsung is a product company that sells a wide range of electronic devices.

Samsung has the capability to design, market, and sell products to end users, but not all product companies have the ability to design or manufacture the products they sell. These functions can often be outsourced to other companies with the expertise to design or manufacture the products needed.

Product companies generate ideas for new products. They perform extensive market research to test the validity of the product idea, and if it’s not validated by market research, the product company will often go back to the drawing board. If the product idea is validated, the product company will then proceed with the next steps to bring the product to the market.

What is an Original Equipment Manufacturer (OEM)?

Once a product idea is validated, the next step is to design the specifications, functions, and other considerations required to manufacture the product. This can involve significant research and development expenditure, plus R&D expertise to execute the design phase.

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In instances where product companies have an R&D budget and the necessary design expertise, the design phase is performed within the product company itself. For example, Apple has the budget and the capability to design CPUs, and so the Apple silicon chips are designed in-house. However, they don’t have the capability to mass produce the chips and rely on TSMC to meet their production needs.

Here, TSMC is the original equipment manufacturer (OEM) for Apple, as they manufacture the chips in their foundry. Other product companies also rely on OEMs to manufacture the products they design. In short, OEMs manufacture end products for product companies that have the capability to design products but not the ability to manufacture them. Product companies then sell the product they designed with their branding.

What is an Original Device Manufacturer (ODM)?

When the product company lacks the R&D budget and/or design capabilities, they’ll depend on an Original Device Manufacturer (ODM). ODMs design the product for a fee, license, or some other business model.

In many countries, cell phone carriers sell devices with their branding but rely on ODMs to design and manufacture smartphones for them. This is where ODMs shine, providing design and manufacturing expertise for product companies.

In most instances, ODMs will have the capability to both design and manufacture the product. However, if the ODM does not have the necessary manufacturing acumen, the product company will need to find a suitable OEM to manufacture the product for them. When this happens, the product is researched by the product company, designed by the ODM and then manufactured by the OEM.

Many ODMs also produce white-labeled products and will have a range of electronic devices designed and ready for manufacturing. Product companies can then choose a design from the ODM’s white-labeled portfolio and the ODM will manufacture the product with the product company’s branding.

‘White-labeled electronics’ can be a major revenue stream for ODMs. In such instances, ODMs perform market research and then design and manufacture the product themselves. All that remains is for the branding to be customized to suit the respective product companies.

As we have seen, OEMs and ODMs do not perform the same functions. OEMs have the capability to manufacture designed products, but they often lack design capabilities. ODMs have the capability to design products for their clients and will typically have the manufacturing expertise too, but there are some ODMs that only perform the design side of the equation.

OEMs and ODMs are integral to the product supply chain of product companies, as they share their expertise in design and/or manufacturing with product companies that need those services.

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