Today, businesses are closely connected all over the world. Thanks to the internet and technology, it's easier for all kinds of companies, big or small, to buy and sell things globally. International commerce is far less problematic than it used to be.
But there is one area of international business that certainly hasn’t become any easier:
Outsourcing your manufacturing to China is as headache-inducing now as it ever was. Unless that is, you employ the services of a specialist in this field (more on that, later).
If outsourcing production is something you are willing to set up and manage without professional help, you might need to brush up on some basic knowledge as you manage the project. Through a series of blog posts and articles, we have covered some of the basic principles, strategies, and subtle nuances of outsourcing manufacturing.
In this article, we are looking at a common question received almost daily here at MorphoMFG: What is the difference between OEM and ODM? Fortunately, it isn’t complicated and should only take a minute to explain.
So, let’s get on with it and do exactly that.
For those who prefer video content, here’s a video summary of what you’re about to read below.
What Is OEM, Exactly?
In its most basic terms, OEM is the process of handing over your product design and specific requirements to the manufacturing facility. The term ‘OEM’ simply stands for ‘Original Equipment Manufacturing’. OEM is a form of manufacturing where a company outsources production to the exact specs that the company requires. The design and specifications are, of course, controlled by the client.
Adapt or Modify?
OEM falls into two categories. The most common OEM practice is to adapt a product already in production by modifying its size or design. Alternatively, you can start from the beginning with an entirely new design – in which case the relationship with your manufacturer will be classed as “contract manufacturing.”
Manufacturers may need to create specialized molds or invest in new tools, which usually (but not always) means an upfront payment to cater for these additional expenses. Sometimes, the manufacturer might cover these costs and later incorporate them into the product’s final price.
We are often asked about OEM ownership rights, and the answer is always the same, and something we like to stress: having designed the product and provided the specification, the client always retains the intellectual property rights.
To take that one step further, if the client funds the creation of original molds and tools, they usually own those as well – potentially limiting the manufacturer from repurposing them for other clients (assuming you are working with an established OEM manufacturer who honors agreements, that is).
Advantages and Disadvantages of OEM
Like any business decision, OEM has strengths and weaknesses requiring balanced consideration. Let’s take a look at both extremes.
Many Chinese manufacturers specialize in OEM, making it relatively easy to find a suitable factory (extreme caution is advised, however).
OEM offers the flexibility to engineer products bespoke to your market.
With proper agreements secured, you will retain full rights to the intellectual property.
Introducing a unique product to the market now becomes feasible through OEM.
Covering the costs for specialized tools and molds can require quite a heavy investment in some cases (especially with more intricate customizations).
Developing new tools or molds can extend timelines, sometimes taking several weeks, with lots of potential missteps along the way.
Responsibility for the product’s design and detailed specifications rests on the buyer – this requires extreme clarity and precision to ensure the manufacturer fully grasps the requirements.
What Is ODM, Exactly?
Standing for ‘Original Design Manufacturer,’ ODM pertains to a manufacturing process where products are created on the buyer’s design, albeit based on pre-existing products. With ODM, the buyer usually purchases items already in the factory’s portfolio.
While many buyers retain the original packaging and branding, certain buyers might ask for slight alterations, like adjusting the product’s dimensions, color, and shape, or maybe something like the introduction of a unique logo. The main differences between ODM and OEM mostly lie in the extent of customization, with ODM skewed more towards marketing pre-existing products with minor tweaks.
One concern with ODM centers around the issue of intellectual property rights. Given that the factory either adapts or develops the design, they often retain IPR. By the same token, buyers would then possess the rights to any added branding elements.
Anyone who is venturing into this for the first time (and without support) could face challenges in this regard, as buyers might be rightly fearful of manufacturers selling their branded products.
While ODM agreements might restrict manufacturers from using specific branding or customization elements from a buyer, they don’t necessarily restrict them from marketing them, either.
Advantages and Disadvantages of ODM
As with OEM, ODM also comes with its own set of positives and negatives. Let’s take a look at some (but by no means all) of the most common.
Fast product development – often, products are shipped within days.
Quicker market entry.
A large number of manufacturers are open to making minor alterations upon request.
No additional expenses tied to the development of molds and tools.
Product choices are limited to the manufacturer’s existing offerings, with scarce customization possibilities.
Competitors might gain access to and sell identical products, potentially flooding the market.
A lack of intellectual property safeguards for the buyers.
OEM or ODM: Which Is Best For You?
Deciding between OEM and ODM hinges on several aspects, including your expertise, required product quality, and budget. Both have distinct advantages and challenges.
OEM is ideal if you’re aiming for distinctive products. Automotive and electronics sectors, for example, often rely on OEM due to the intricacy and multitude of components. Prioritizing quality, many businesses expect first-class products from their OEM partnerships.
ODM suits businesses aiming for a quick market launch, which also eliminates the need for in-depth R&D and design. The downside is that ODM often results in similar product lines, so differentiation among competitors might be something of a challenge in some cases. Those downsides, however, are greatly eliminated when using a specialized, experienced agent to select and deal with manufacturers and apply a few tweaks here and there.
So there you have it. It’s all rather simple, really.
Basically, while OEM and ODM might seem very similar, they have distinct differences centered around product development. With OEMs, the buyer dictates the design and specifications – meaning they shoulder the research and development – which can be time-consuming and tough to get right.
ODM suppliers oversee the research and development, expediting the production process, an approach that streamlines interactions for the buyer at the expense of not retaining intellectual property rights.
Negate Potential Issues With MorphoMFG
Sourcing a reputable manufacturer in China is as tough now as it ever has been, with a huge amount of hurdles to overcome for anyone who is new to the process.
On the face of it, it seems like a fairly simple premise.
Through the usual sourcing methods, such as extensive internet searches and directories, you simply need to find Chinese manufacturers with a track record in manufacturing products within your niche. Then, simply make contact, work out a deal, visit the factory (if you need to), and arrange for samples.
In theory, it sounds almost effortless.
But anyone who has direct experience with Chinese production outsourcing will vouch for it being anything but straightforward. From communication barriers to quality inconsistencies and even cultural differences, production outsourcing is an extremely testing process for anyone who lacks the experience, connections, and infrastructure to do so.
Experience is Key
We have created a successful, well-established business model in handling production outsourcing to China, amassing thousands of satisfied clients worldwide.
Having faced just about every logistical and bureaucratic issue you could possibly imagine (those headache-inducing moments we mentioned earlier), we have a huge amount of experience in this field. Most people would probably describe MorphoMFG as the industry leader in this niche, actually.
Lean On Our Experience
Having run a successful business, you have almost certainly overcome previous obstacles and challenges. That’s just the nature of trade. You might feel confident enough to deal with Chinese manufacturers, unsupported. More power to you, as they say.
However, as you may suspect, this is an area that can be incredibly challenging. Impossible? Absolutely not. Every day, there are plenty of companies outsourcing to China for the first time. Many will encounter problems, however, because international manufacturing is certainly no straightforward process.
Working with Chinese manufacturing isn’t just about finding a factory, it’s about creating strong partnerships with companies you can trust. At MorphoMFG, we have already established strong partnerships and can offer a range of services to get your manufacturing project over the line smoothly.
Just starting out in your manufacturing journey or just have a budding idea? Let us help you! Schedule a call with our easy-going, pressure-free business development manager to learn about our full range of services, including product manufacturing, sourcing, prototyping, and import & export.
Our experienced manufacturing experts are here to provide advice, whether you’re a seasoned business owner or just starting out, ready to change the world.
No hidden costs. No obligations. Just a quick, genuine, friendly conversation about your goals and aspirations with international manufacturing.
Looking forward to hearing from you!