OEM License Agreement: Everything You Need to Know
The OEM license agreement exists between the various parties to address issues of branding, confidentiality, payment, quality assurance and timeframes.4 min read
Updated November 2, 2020:
The OEM license agreement exists between the various parties to address issues of branding, confidentiality, payment, quality assurance, and timeframes.
An original equipment manufacturer (OEM) is a company that makes parts that may then be marketed to another manufacturer. For example, if Company A manufacturers cords that can be used as phone chargers, and Company B manufacturers cell phones that provide Company A’s cords with the purchase of their phones, then Company A is an OEM. Company A will manufacturer the cords using the branding and specifications stated by Company B. While Company B is going to be ultimately focused on a relationship with the consumer, Company A, as the OEM, is focused on a business to business (B2B) relationship; their consumer is another company.
While an OEM is largely concerned with their relationship with their business clients, it is sometimes possible for individuals to purchase items directly from the OEM. For example, if you are someone who knows a lot about cars and has the capability of making repairs yourself, rather than going to a mechanic, then you may choose to purchase that muffler or new radio directly from the manufacturer. As such, consumer relationships are a growing area for companies that may otherwise be considered OEM’s.
The two largest industries in which an OEM applies are the car industry and the tech industry. For example, if you buy a new Honda from a licensed Honda retailer, the muffler may not have been manufactured by Honda, but rather by an outside OEM. Another example is when you buy a Sony computer at Best Buy that comes with Microsoft Windows already installed. Microsoft is then the OEM.
Additionally, the muffler manufacturer ultimately does not have much (if any) input as to the final design of the car, and Microsoft probably is not too interested in the color of the computer. Additionally, should the muffler not work or should Microsoft Office not function correctly, it is the responsibility of Honda or Best Buy to make any necessary repairs. The OEM license agreement has ensured that the muffler or software was properly made, and then, in turn, installed properly by Honda or Sony.
What to Consider
If you are in a position of entering into an OEM license agreement, there are many factors to consider. While this type of B2B relationship can be highly valuable in helping you grow your business, you will also want to ensure that you are being diligent in protecting your brand. This is true for all parties involved.
Things to ask both yourself before entering into such an agreement include:
- Branding. Will the OEM provide your company’s brand on the item they are manufacturing or will they insist upon their own? In some cases, this may not matter much: most average drivers do not see their muffler or pay much attention to it, so Honda may not particularly care if the muffler manufacturer insists on putting their own brand on the item. However, people do see their cell phone chargers all the time. As such, it may end up being a point of contention for the cell phone company if the manufacturer of their cords expects their own brand to be prominently stamped on it.
- Marketing. Is the OEM going to expect any publicity for being the manufacturer of a component of your product? If so, how does that affect your own brand and how will that expectation affect your own marketing plan.
- Payment. Will the OEM be paid per piece they manufacturer or per piece that ultimately gets sold with the final product. If it’s the former, are you financially prepared to provide payment for unsold merchandise?
- How long will this relationship last? Given all of the details that go into an OEM agreement, no company wants to be jumping around from one manufacturer to the next. It creates headaches for the companies involved, and customers will notice changes, at least in more visible components such as phone chargers or computer cords.
- Confidentiality. Is the OEM permitted, for their own business purposes, to advertise that they produce X for your company? If so, in what arenas? Is this something that will be limited to trade publications and conferences?
- Intellectual property protection. How much access to your company’s intellectual property is the OEM going to have? What additional measures will you be taking to ensure that your intellectual property is protected? Additionally, as an OEM, what measures are being taken to protect your intellectual property, depending upon the level of access the other company may have.
While there are a great many things to consider, entering into an OEM license agreement can be a strategic way to grow your business, if you are asking the right questions.
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