Key Takeaways

  • An OEM agreement defines the terms between an Original Equipment Manufacturer and another company, typically a Value-Added Reseller (VAR) or distributor, for producing and selling components or products under another brand.
  • These agreements address branding, intellectual property rights, quality control, pricing, exclusivity, liability, and termination terms.
  • OEM relationships can involve full products or sub-components and can be business-to-business or direct-to-consumer.
  • Properly drafted OEM agreements help avoid disputes over brand identity, product quality, warranties, and confidentiality.
  • Modern OEM arrangements often include provisions for e-commerce sales, global supply chains, and overlapping OEM/VAR roles.

An original equipment manufacturer, OEM, agreement is used by a company that takes components of products from one or more companies in order to build one product which it then sells under its own brand and company name. A value-added reseller (VAR) is the term for the second firm involved, because by incorporating features of the service and augmenting the product, value is then added to the original product.

The term original equipment manufacturer is a broad one which describes the combination of relationships within the following parties:

  • IT hardware vendors
  • Component markers (like microprocessor manufacturers and software vendors
  • Channel partners (like resellers and distributors)

What is an OEM?

The VAR generally works closely with the OEM. The OEM will customize designs based on the specific needs and requests of the VAR company. One example of a company that is a supplier to the OEM market is IBM. IBM is also an OEM on its own, because IBM uses some parts of other companies in some of its own products. There are several computer hardware manufacturers that use their own brand-name products and are able to derive significant revenue streams by reselling that product or important parts of the product to OEM companies that are competitive in the same market.

Since the dynamics of OEM are always changing, some OEM relationships fail to meet the official definition of this term. In the past, OEMs were always direct customers of the manufacturers. In these scenarios, the buyer-seller dynamics generally prevailed. In recent years, both OEMs and the manufacturers have concluded that the customer of the OEM is the party that causes the flow of profits into the OEM and then to the manufacturer.

Key Provisions in an OEM Agreement

A well-structured OEM agreement should outline the rights and obligations of each party to prevent future disputes. Common provisions include:

  • Scope of Work and Specifications – Define exactly what products or components will be produced, including technical drawings, performance standards, and compliance requirements.
  • Branding and Trademark Use – Specify whether the OEM can use the buyer’s branding, and set rules for logo placement, packaging, and marketing references.
  • Intellectual Property Rights – Clarify ownership of designs, software, patents, and other proprietary materials. State whether IP created during the partnership belongs to the OEM, the buyer, or both.
  • Quality Control and Inspection – Outline inspection procedures, defect handling, and remedies for substandard goods. Include any required certifications or testing protocols.
  • Pricing, Payment, and Minimum Orders – Set unit prices, payment schedules, and minimum purchase commitments. Address potential price adjustments due to raw material changes.
  • Exclusivity and Territory – State if the OEM is restricted to selling the product only to the buyer within certain markets or timeframes.
  • Warranties and Liability – Define warranties for product quality and the allocation of liability for defects, recalls, or customer claims.
  • Term and Termination – Specify contract duration, renewal terms, and conditions for early termination, including notice periods and buy-back obligations.

OEM Branding and Control

It is important to work out the issues of control and branding at the outset of forming an OEM agreement. One tough issue in particular when creating an OEM agreement is the issue of brand identity. It is necessary to consider the implications, including the following:

  • Should the OEM product get publicity?
  • Will the buyer acknowledge through advertising that the product is to come from another source?
  • Is the seller allowed to publicize the fact that the technology has been outsourced to another, established brand?

These questions must be answered and resolved before the final OEM agreement is drafted in order to ensure the parties are in agreement.

Negotiating Brand Identity in OEM Relationships

Branding decisions in OEM agreements can impact market perception and legal rights. In negotiations:

  • Determine whether the OEM’s role will remain confidential (white-label arrangement) or publicized.
  • Address co-branding possibilities if both parties want recognition.
  • Define marketing approval processes to ensure brand consistency.
  • Include guidelines for handling product returns, customer service, and warranty claims under the buyer’s brand.

Failure to address these factors may lead to brand dilution or unauthorized marketing practices, especially when OEMs also sell directly to consumers.

How do OEMs Work?

Previously, OEM was a term that referred to the company that was credited with building a specific product, when that product was subsequently sold to other companies for the purpose of reselling and rebranding the product.

As years have gone by, however, the term OEM has now become a label that is used to describe multiple companies and the relationships within them. It is not unusual for a company to act both as an OEM and also to sell systems to different OEMs. These relationships commonly overlap within companies with the purpose of bringing IT products to the market. Ambiguous relationships are formed within these companies, due to the blurred lines between product designers, resellers, and product manufacturers.

Although some OEMs build completed items for a VAR to place in the market, generally, the OEMs do not play a large role in determining the aspects of the finished product. OEMs frequently build sub-assembly parts which they then sell to VARs. One example of this type of relationship includes that of an OEM of individual electronic components and another company, such as Samsung or Sony which then assembles these parts in order to make its own product, such as an HDTV. Another example would include a company that makes buttons and then sells part of the product (fasteners with customized lettering) to Ralph Lauren.

OEM Agreement Best Practices

To create a strong OEM agreement, businesses should:

  1. Conduct Due Diligence – Assess the OEM’s manufacturing capabilities, quality systems, financial stability, and compliance history.
  2. Protect Confidential Information – Use non-disclosure clauses to safeguard trade secrets, formulas, and processes.
  3. Align on Supply Chain Logistics – Establish delivery timelines, packaging requirements, and customs responsibilities for cross-border shipments.
  4. Plan for Dispute Resolution – Specify governing law, jurisdiction, and arbitration or mediation procedures.
  5. Address End-of-Life Products – Decide how outdated inventory, tooling, or molds will be handled at the end of the contract.

OEMs Today

In the past, OEMs typically focused their efforts on sales between one business to another, while VARs engaged in marketing to the outside public or other users. Now, an increasing number of OEMs have decided to sell their services or parts to consumers directly. This, in a way, makes these companies a VAR. One example of this is a person who can build computers on their own computer by purchasing graphics cards and processors directly from Intel or another retailer that stocks these products.

Trends in Modern OEM Agreements

OEM arrangements have evolved beyond traditional B2B manufacturing:

  • Direct-to-Consumer Sales – Many OEMs now sell components or complete products directly online, sometimes competing with their buyers. Agreements must address such scenarios to avoid channel conflicts.
  • Global Sourcing – Multi-country supply chains require clauses that address international compliance, tariffs, and currency fluctuations.
  • Sustainability Clauses – Increasingly, buyers require OEMs to follow environmental standards, use recyclable materials, or reduce carbon footprints.
  • Technology Integration – OEM agreements may cover software licensing, IoT connectivity, and ongoing firmware updates alongside physical components.

Frequently Asked Questions

1. What is an OEM agreement?

An OEM agreement is a contract between a manufacturer and another business to produce products or components for sale under the buyer’s brand.

2. How is an OEM different from a VAR?

An OEM manufactures products or parts, while a Value-Added Reseller (VAR) enhances them with additional features or services before resale.

3. What clauses are most important in an OEM agreement?

Key clauses cover intellectual property, quality control, branding, exclusivity, warranties, pricing, and termination terms.

4. Can an OEM sell the same product to others?

It depends on the contract. Some agreements allow sales to others; others include exclusivity provisions limiting such sales.

5. Do OEM agreements cover software or just physical products?

They can cover both. Modern OEM agreements often include software licensing terms, especially in electronics and tech products.

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