What Is an Original Equipment Manufacturer (OEM)?

An original equipment manufacturer (OEM) traditionally is defined as a company whose goods are used as components in the products of another company, which then sells the finished item to users.

The second firm is referred to as a value-added reseller (VAR) because by augmenting or incorporating features or services, it adds value to the original item.

“In the computer industry, OEMs stand in contrast to aftermarket products, which offer replacement parts that are generic and cheaper than an OEM's parts.”

Understanding an Original Equipment Manufacturer (OEM)

VARs and OEMs work together. OEMs make sub-assembly parts to sell to VARs. Although some OEMs do make complete items for a VAR to market, they usually don't play much of a direct role in determining the finished product.

A common example might be the relationship between an OEM of individual electronic components and a company such as Sony or Samsung that assembles those parts in making their HDTVs. Typically, no one integrated part from an OEM is recognized as playing an especially significant role in the finished product, which goes out under the corporate brand name.

For example, people who build their own computers can buy graphics cards or processors directly from Nvidia, Intel, or retailers that stock those products. Similarly, if a person wants to do their own car repairs, they can often buy OEM parts directly from the manufacturer or a retailer who stocks those parts.

There is a second, newer definition of OEM, typically used in the computer industry. In this case, OEM may refer to the company that buys products and then incorporates or rebrands them into a new product under its own name.

For example, Microsoft supplies its Windows software to Dell Technologies, which incorporates it into its personal computers and sells a complete PC system directly to the public. In the traditional sense of the term, Microsoft is the OEM and Dell the VAR. However, the computer's product guide for consumers is most likely to refer to Dell as the OEM.

Some VAR companies such as Dell, IBM, and Hewlett Packard started to accept branded parts from outside sources in their own products. So over time, OEM came to refer to companies that rebrand or openly use other manufacturers' products for resale.

Most of this had to do with which company was responsible for warranties, customer support, and other services, but it also reflected a subtle shift in the manufacturing dynamics. In one instance, Dell stopped using chips from anonymous makers and switched to Intel for the computer processors in its computers.

Since Intel is a brand name, it brings added value to Dell’s computers. Not only does Dell advertise this prominently (using the slogan "Intel Inside!"), but its marketing materials also suggest that Intel and Dell are equal partners in the processor and computer design. This is a contrast with Dell just telling Intel how to build the processors, as it did with its old suppliers. All of this makes Dell the OEM, both in the minds of companies supplying the assembled parts and in the public's mind (after all, people think of the finished hardware and software package they buy as "a Dell computer").