OEM vs. ODM: What are the differences in business?

OEM vs. ODM: What Are the Differences in Business? (Typical Examples)

OEM and ODM are two elements you've probably heard of before in business, but you may be confused about them. They are actually two important and common types of cooperation models in industrial society, especially in international trade.

This blog will explain the meaning, products, and business models of OEM and ODM through typical examples, and will tell you how to select OEM and ODM services and suppliers.

Meaning of OEM in the business model (OEM examples)
Meaning of ODM in the business model (ODM examples)
Meaning of OBM
What is the difference between OEM and ODM?
Pros and cons of OEM and ODM
Why and how to select OEM and ODM services?
Identifying a good OEM and ODM service provider
OEM and ODM product processes in China
FAQs about OEM and ODM

What does OEM mean in the business model? (OEM examples)
Meaning of OEM
OEM stands for Original Equipment Manufacturer. In my words, brand owners use core technology to carry out design and development and control sales channels. They will cooperate with other companies to help them complete production. Factories focus solely on manufacturing without any involvement in design.

Examples of OEM business models
Nintendo, a renowned Japanese company specializing in computer game development, handles the software design and development itself. It merely provides firmware and equipment to Foxconn, and assists Foxconn in analyzing statistics and testing products.

And Foxconn simply completes manufacturing, with no opportunity to access the source code. Sales of the final product, including time to market, price, and sales regions, are determined by Nintendo.

Furthermore, many processes are dominated by Nintendo, such as the selection of types and price negotiations for CPUs, DDRs, and other components. Foxconn simply implements Nintendo's decisions accordingly. With the exception of Nintendo, Apple, another typical example of an OEM, cooperates with Foxconn on the same business model.

Therefore, the typical characteristic of the OEM model is that the brand-name company has the design and R&D capabilities, and simply cooperates with a factory located in areas with a wealth of human resources to help them carry out the manufacturing process. The cooperation model between Foxconn and Nintendo, these brand-name companies, is a typical OEM model.

You might think that these types of examples from famous brand companies are uncommon for small businesses. Let's take another OEM example. Last year, we received an OEM order from the Middle East, and the buyers wanted to customize a completely new type of ring design, but they would provide the design themselves.

They prepared the ring design in advance, specifying specific product parameters such as length, width, diameter, material selection, logo carving, etc.

What they wanted us to help them with was simply finding a reliable factory with a competitive price, helping them track production, arrange shipping, etc. Like Nintendo, the client was in charge of product design, and we helped them track production and shipping from the factory.

What does ODM mean in the business model? (Examples of ODM)
Meaning of MDG
ODM stands for Original Design Manufacturer. In this model, the brand company doesn't need to design or conduct R&D. The factory will complete the entire process, from design to maintenance, and provide several existing product styles for the brand company to choose from.

In some cases, a manufacturer produces a type of product, and other companies choose that product and ask the manufacturer to produce it under their brand or with a slight change to the design. In this way, the manufacturer is called an ODM manufacturer, and the product they produce is called an ODM product.

This process is similar to reserving a cake. When you reserve a cake, the staff typically offers you several styles to choose from, and then you choose a style and make some changes, such as the material or decorations.

Examples of ODM business models
As in the previous example, small companies that choose ODM manufacturing typically lack R&D capabilities. They purchase existing products from China and make minor changes to the product's accessories or other aspects, then print their own logo before selling them.

Especially for some common small items, what you need to do regarding customization is simply inform the factory about your requirements.

Let's take a small company's ODM as an example. One of our clients wanted to purchase beer bottle sleeves from China, but found the existing product style unsatisfactory. He then wanted the factory to add an element: the bottle-opening function, as shown in the following image:

Another example: many e-commerce courses tell you a tactic for making money selling online: to increase the competitiveness of your products, you should sell products under your private label. These private label products are also called ODM products.

What does OBM mean?
OBM stands for Original Brand Manufacturer. In other words, foundries themselves create their own brands as private labels (different from private brands) and use these brands to sell in the market. Their business encompasses everything from design and procurement to production and sales.

However, it requires them to invest a lot of money in building a perfect marketing system, OBM business costs more than OEM and ODM business, and even conflicts with their own OEM and ODM customers.

Therefore, fewer foundries would like to do large production in the OBM business.

For example, many manufacturers offer OEM or ODM products and services on Alibaba. And on this website, you can find many factories producing a wide variety of products. But most of these products are rarely sold under their factory brand names. Why is this?

The reason is that they can benefit more from providing ODM and OEM products directly to their customers than from investing heavily in marketing their own brands and selling products. However, there are also some large ODM or OEM companies that do both simultaneously.

What is the difference between OEM and ODM?
What is the process of OEM and ODM services?
According to the above ODM product process, I briefly conclude the whole process of ODM service and OEM service as shown in the following charts:

In the graphs, you can see that ODM manufacturing has more process steps than OEM manufacturing. The differences between ODM and OEM manufacturing processes are as follows:

For manufacturers

They are involved in all aspects of ODM manufacturing.
While they are only involved in the production of OEM products
For customers

They provide all the necessary information and materials to manufacturers in OEM manufacturing
While they are less involved in ODM products, they only make decisions in the final steps.

What are the advantages and disadvantages of OEM and ODM?

Detailed information about OEM and ODM should give you a better understanding of the two business models. For small businesses, I'll list the pros and cons of OEM and ODM for your reference.

Advantages of the OEM business model
Product design control
Customers have full control over product design. Product intellectual property also belongs to the customers. Therefore, they can choose different OEM manufacturers to produce their products. They can flexibly decide on product design and different product standards.

Reduction of production load
OEM manufacturing reduces the production burden for customers, especially large companies. They only need to pay for material and processing costs, without purchasing any production equipment or building a factory. They can flexibly place orders based on demand and market changes.

Generating a creative advantage
In the OEM business model, customers aren't overly concerned with production, but rather focus more on product R&D to generate a competitive advantage through innovation. Like Apple, consumers would care more about product innovation than how the product is produced when purchasing electronics, right?

Disadvantages of the OEM business model
High costs
Product design requires a significant amount of resources, including R&D costs, professional knowledge, skills, and capabilities. These investments always entail potentially high risks. Meanwhile, the design must also be protected from being copied by other companies.

Long product cycle
If customers provide the product design, it takes a significant amount of time to prepare and finalize it before mass production. From design to final product, the entire product cycle is much longer than that of ODM products.

Advantages of the ODM business model
Time saving
For small businesses, there aren't enough resources to develop a new product from design to production, like cosmetics. It requires a large investment. But if you choose ODM, you can acquire the product and sell it in a short time.

R&D cost savings
In this model, customers can save a lot of costs on new product development. They can focus more on the product's marketing strategies. Like the beer bottle sleeve, this product already exists, so why design a completely new one? You can simply add a few differences and think more about how to sell it.

Short product cycle
ODM helps you save time and money developing a new product. It shortens your product lifecycle, allowing you to quickly enter the market with a full range of products.

Disadvantages of the ODM business model
Highly competitive
The ODM business model cannot avoid product competition with others in terms of price, product types, and designs. It lacks price superiority in its products, and product similarities would reduce its profits.

Just like with the ring product, if my clients choose ODM manufacturing, they would not have design styles or brand advantages in the market.

Poor product control
Customers don't own the intellectual property rights of the product, so there's little they can do to change the design or standard of the product. Their product choices are limited; in most cases, they can only decide whether they're satisfied with the product or how many they want to order.

In short, you may be wondering which is the best option: OEM or ODM? There's no definitive answer to choosing between them.

My advice is that the OEM model can help large or small companies establish professional production capabilities to ensure high product quality; while the ODM model is more suitable for companies looking to save costs and enter the market quickly.

Why and how to select OEM and ODM services?
Why is OEM service needed and chosen?
For many small businesses, investing in factory construction is expensive, and the risk is unmanageable. Furthermore, recruiting and managing tens of thousands of workers is complicated. Many companies tacitly adhere to a principle: professional jobs should be distributed to professional companies.

For example, companies focused on R&D and innovation, such as Apple, Nintendo, Microsoft, and IBM, will let foundries like Foxconn, Pegatron, Flextronics, and Inventec complete production and assembly.

Why is ODM service needed and chosen?
There are two situations to adopt ODM service.

Situation 1

Branded companies have extensive sales channels and market capacity, but lack R&D capabilities. They will therefore seek out a factory with strong R&D capabilities to manufacture the product according to their requirements.

Situation 2

Branded companies have R&D capabilities, but some low-end products with low profits aren't worth the time and effort to develop. Therefore, they typically choose a type of existing product from other companies and make some adjustments, then sell the products under their brand name.

In international trade, for many common products such as beer bottle sleeves, many companies often make some minor changes to existing products.

Where to find OEM and ODM suppliers?
Through the explanation of OEM and ODM in the previous section, you must have known that all kinds of businesses need OEM and ODM to realize product ideas or reduce product costs, regardless of whether they are large or small companies.

In this section, I will focus on teaching small business operators or startups how to find reliable ODM or OEM manufacturers and suppliers and how to identify them.

There are 3 main channels to find OEM and ODM manufacturers and suppliers:

B2B websites online
Offline trade shows or wholesale markets
Supply agents

B2B websites online

For small business owners, searching online for ODM and OEM suppliers is the most convenient and cost-effective way. There are many factories you can choose to cooperate with. Major B2B websites include the following:

Alibaba
Global Source
Made in China
DHgate
Most suppliers on these websites will explain whether they offer OEM, ODM, customization, private label, or white label services on the product listing page. If they don't clearly state whether they can provide this service, you can ask the suppliers directly if they offer this service.

In the meantime, you can try searching for suppliers on Google or some social media platforms. Although there aren't as many suppliers as on wholesale websites, you can also try to find good suppliers:

Google
Some social networks like LinkedIn or Facebook
Trade shows or offline wholesale markets

If you think searching online for suppliers isn't a reliable option, you can visit local wholesale markets to find suppliers. There are two reasons to choose this method: convenience and high efficiency.

If you can come to China directly, you can attend some Chinese trade shows or visit wholesale markets. Compared to finding suppliers in your home country, finding suppliers in China can be more challenging, although it may ultimately be a more cost-effective solution for your business.

Problems you can expect include the language barrier, significantly higher hotel and transportation costs, and you'll also need to know the main district where the wholesale markets and trade fairs are located: Shenzhen, Guangzhou, or Shanghai.

Therefore, you need to make a detailed agenda before visiting China. But there are also advantages to visiting China. The most advantageous point is that you can have more OEM or ODM suppliers to choose from and obtain products at very competitive prices.

Supply agents

In recent years, sourcing agents have become popular among importers, especially new importers. A professional sourcing agent has extensive resources in OEM or ODM factories, like ours. We can help you select the right manufacturer to manufacture your products, negotiate prices, track production, control quality, inspect products, arrange shipping, and more.

Our attentive and comprehensive service will be useful for your business.

How to identify a good OEM and ODM service and product provider?
Whether you're looking for OEM and ODM suppliers online or offline, keep these five key points in mind when selecting a good manufacturer and supplier to partner with.

A good balance between quality and price
Good communication
A good attitude towards problems and ways to solve them
Full authentication of own factory qualification
If you use a new mold, make sure the mold can be recovered or not.
Note: Larger factories aren't always a good fit for you, and you should select the best one based on your current situation. Remember to choose a factory that takes your order seriously and is patient in communicating with you.

What are the processes for OEM and ODM products in China?
OEM products are products designed by customers and produced by manufacturers; while ODM products refer to products designed and produced by manufacturers. Most products can be selected as either OEM or ODM.

Below are seven main steps in the OEM and ODM product processes. There will be slight differences in some steps for different products. Let's take cosmetics, ODM, and OEM as an example. I'll explain their work processes, but I'll focus primarily on explaining the ODM process, as both models are similar.

Step 1: Create a prototype or design of your product

The factory will select the appropriate cosmetic formulas and create a sample based on your product requirements, which will then be delivered to you for testing.

Step 2: Find a Chinese manufacturer

After the trial, if you are satisfied with the cosmetic sample and price, you will need to come to the factory for an in-person inspection, including R&D capacity, production capacity, workshop, etc.

Furthermore, since makeup will be used directly on the skin and its safety must be guaranteed, it's very important to work with reliable and qualified factories. However, if you import other small items, such as the beer bottle covers mentioned above, you can choose not to visit the factory on-site.

Step 3: Calculate the cost of the entire project

After the field visit, you will sign the contract with the factory. In the meantime, the factory will collect a deposit. (NOTICE: The amount varies from factory to factory.)

Step 4: Make a pre-production sample

The factory will be responsible for the package design and sourcing of the package material, which is generally a free service provided by factories. Of course, they will design the package to meet your requirements and then let a professional packaging factory make some PP package samples for you to choose from.

Step 5: Choose your private label and packaging solutions

After confirming the cosmetics' materials, ingredients, and packaging design, the factory will submit the product to the FDA for testing and registration.

Step 6: Start mass production

After testing and registration, the factory will complete the filling, packaging, and quality control process. It generally takes 15 to 20 days to complete the entire mass production process. Once the entire manufacturing process is complete, you must pay the balance.

Step 7: Delivery

The factory will arrange the shipment and choose the best shipping method based on delivery time and volume. Cosmetics are generally shipped by sea.

FAQs about OEM and ODM
What is OEM service on Alibaba?
As mentioned above, OEM services can be found on online B2B websites, and Alibaba is always the first choice for businesses large or small. Many suppliers or manufacturers on Alibaba can provide such products. You can also find other product services on Alibaba, such as ODM and customization.

What is the difference between ODM and private label?
There is no clear distinction between ODM and private label. The essence of both models is that vendors make improvements to an existing product to adapt to the needs of end customers and sell the products under their own brand. In fact, many of our foreign clients also refer to "ODM" as "private label."

How to start OEM or ODM services?
Before choosing OEM or ODM services, you should be clear about your current situation and the type of products or business models you want. Whether you choose OEM or ODM, the commonality is that it reduces your production costs and increases your profits, making your business more secure.

What does CM mean?
Contract manufacturing means that companies sign contracts with other manufacturers, and these manufacturers produce products, while those companies are responsible for sales. This cooperation is beneficial for improving the utilization of existing resources and refining industrial chains to achieve large-scale and specialized production.

What does JDM mean?
JDM stands for Joint Design Manufacturing. This model means that manufacturers work with their clients to develop products and then promote new products to more industries and customers. It's pioneered by Chinese server manufacturers; they conduct joint design with many large internet companies to gain a foothold in the internet market.