An original equipment manufacturer, or OEM for short, is an initial supplier. OEMs manufacture products or components, but do not sell them to end customers themselves.
The term is interpreted differently in some cases: In the IT industry, for example, an OEM is a manufacturer of hardware or software and components that it does not sell itself but resells via dealers. Examples of original equipment manufacturers would be Dell or Microsoft, which deliver their PCs via Microsoft Windows.
In the automotive and mechanical engineering industries, the term OEM refers to manufacturers of products that are assembled from many other (self-manufactured or third-party) products to form a complete product (for example, a car). The OEM brings the respective products onto the market under its own name. In this case, the original equipment manufacturer is the machine or automobile manufacturer itself.
Many brands act as OEMs, but also sell almost identical products as versions for the independent aftermarket. The OEM products are often slightly modified or adapted to the special needs of the target group.
Unfortunately, the term OEM is not unambiguous even in the limited field of the automotive industry. Thus, the term can be used for vehicle manufacturers, for suppliers as well as for parts producers.
A distinction is made between three different meanings:
As already mentioned, a different definition of original equipment manufacturer applies in the automotive industry. Here, it is mostly the end manufacturers who take over the distribution of the manufactured products.
Due to the fact that large machines such as vehicles are assembled from numerous individual parts, the number of suppliers is very large. This gives rise to huge value chains – often spread over several countries – in which suppliers are classified according to so-called "tiers". While manufacturers of systems supplied directly to the OEM are considered Tier 1, Tier 2 refers to manufacturers of components supplied indirectly to the OEM. Raw material and part suppliers follow in a third tier, i.e. Tier 3.
But what are the reasons for the external production of individual components? This is primarily due to the ever-increasing complexity of vehicles. Nowadays, it is almost impossible to have all the parts of an automobile developed and manufactured in a single plant.
In recent decades, original equipment manufacturers have gained enormous importance as partners for vehicle manufacturers. For some manufacturers, these dependencies have even become a threat.
The reason: Some system suppliers have developed such market strength that their products are indispensable to vehicle manufacturers. Although manufacturers in the automotive industry continue to specify quality and delivery terms for parts and components, they now only produce an average of around 25 percent of their vehicles themselves. In the case of such OEMs, one can therefore already speak of development partners of the vehicle manufacturers, and no longer of mere suppliers.
Automotive manufacturers who rely on OEM components have to reckon with advantages and disadvantages. The disadvantage for the manufacturers is their great dependence on the OEMs. If production problems occur at the supplier, this also has a negative impact on the vehicle manufacturer. They are also less flexible when it comes to adjustments and specifications.
On the other hand, purchasing large quantities results in more favorable purchasing of components and greater long-term planning capability. In addition, manufacturers and suppliers usually work so closely together that the components can be adapted to their own requirements. OEMs also frequently work together on the development of modern manufacturing processes and automation .
OEMs in the aftermarket or secondary market are a problem above all for end customers. They often do not know what the award actually means in terms of quality and whether they are purchasing exactly the same spare parts that are installed in the factory.
It often turns out that the quality of the components varies greatly – depending on which manufacturer you buy from. Many have production carried out in low-wage countries and bring poor-quality products to the German market. So the customer cannot always assume quality management as one is used to from German component manufacturers.
Frequently, spare parts purchased outside the vehicle manufacturer’s distribution network correspond only in shape and size to the original components installed in the new vehicle. This also means that the term OEM in the aftermarket does not promise absolute certainties with regard to the quality of the components.
In the automotive and mechanical engineering sectors, the term OEM refers to manufacturers who combine in-house or externally sourced components into machines or vehicles and sell them independently. The main reason for the third-party production of components is the ever-increasing complexity of the products. It also results in cost savings for the OEM because they transfer the expensive development of systems to experts. The end customer also benefits from the high quality of the products. A disadvantage is the dependence on suppliers. Faulty parts can sneak into final production unnoticed, leading to gross defects in the end product.
