Updated July 7, 2020:

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.

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.

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.

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.

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