Transitioning from a contract manufacturing business model to one that emphasizes ODM and OBM has increasingly become a popular strategy during the past two years. Suppliers have realized how focusing on OEM can depress their bottom line and overall development. Not only are such companies often at a disadvantage in price negotiations, but many of their products are also slapped with anti-dumping and anti-subsidy duties by importing countries.
ODM companies design products as per other company’s specifications and OEM helps the purchasing companies to lower their production costs. When we look at OEM vs ODM, we will see similarities and differences.
As with most developments in China’s export manufacturing industry, it is the large enterprises that have taken the first step toward reducing OEM’s share of their business. But even they cannot stop receiving contract manufacturing orders completely as doing so could prove disastrous.
One of the most common ways suppliers are taking to promote their brands is to work with reputable distribution agents or franchisers in their target markets. This is the strategy employed by Wenzhou Shengli and TCL Lighting Electrical Appliances Co. Ltd. After penetrating the Middle East and Southeast Asia, TCL is now focusing on cultivating brand recognition in the US, which currently accounts for less than 3 percent of TCL’s OBM exports.
Some large suppliers, on the other hand, have opted to purchase an internationally established brand to promote their own. This is not a new strategy, and was employed by Lenovo when it bought IBM’s PC arm in December 2004. Now, it is the big garment and footwear companies in Zhejiang and Fujian provinces that are looking to acquire European brands. These labels come from small and midsize businesses, but are said to be well-known, especially among the upscale set.
The downside of OEM
Due to rising costs and price-sensitive buyers, many OEM-oriented companies in China have seen their profits dwindle in recent years. In most cases, margins are just enough to keep their businesses afloat. A TV maker in Shenzhen, Guangdong province, even said the markup for an LCD TV may sometimes be less than what a porter at electronics market Hua Qiang Bei receives, which is between 50 and 250 yuan.
Household appliance companies in Shunde, Guangdong, said they sometimes carry out OEM orders at cost just to maintain the capital flow. But they only do so for long-term clients that place large-volume orders.
But while suppliers have very little sway over OEM price negotiations, they have the upper hand when it comes to ODM. The microwave ovens, air conditioners, refrigerators and washing machines Guangdong Galanz exports to the Middle East and South America with its own brand earn 8 to 10 percent more profit than OEM models.