OEM or commodity manufacturing: who holds the power?

Making to another brand's design and making a standard product are two very different businesses. The real question is who decides your price, and how to get more say in it.

When you set up a factory, you have to decide something that will shape the business for years: are you making things to someone else’s design, for them to sell under their name? Or are you making a standard product that many other factories also make, and selling it to whoever buys?

The first is usually called supplying an OEM, or OEM supply for short. The second is commodity manufacturing. Both can be good businesses. But they make money in different ways, they fail in different ways, and in each one a different party holds the power over your price.

A note on the word “OEM”. OEM stands for “original equipment manufacturer”. By the standard meaning, the OEM is the brand whose name is on the final product: the vehicle maker, the appliance company, the phone company. The factories that make parts or products to that brand’s design are its suppliers. People often say “OEM supplier” or “doing OEM business” loosely, but the OEM is always the brand. In this article, “OEM supply” means making to an OEM’s design and specification.

The two types, side by side

	OEM supply	Commodity manufacturing
What you make	Parts or products to the buyer’s drawing and specification	A standard product: boxes, bars, granules, fasteners, bricks
Who designs it	The buyer	Nobody in particular; it is a known standard
Who your buyers are	Often a few large companies	Often many buyers of different sizes
Who sets the price	Negotiated with the buyer, often revised every year	Mostly the market
What you compete on	Quality, on-time delivery, cost, trust	Cost, consistency, delivery, nearness to the buyer
Main risk	Losing or being squeezed by one big buyer	Market price falling below your cost; raw material swings

Where the profit comes from

In OEM supply, orders are usually steadier: a buyer who has approved your part tends to keep ordering it while their product sells. The price is agreed in advance, so you earn more only by making each piece more efficiently: less scrap, fewer rejections, full shifts, no late-delivery penalties.

In commodity manufacturing, the market sets the price. Your profit is the gap between your cost and what the market pays, so the winners have the lowest cost and fewest surprises: good raw material buying, low power cost per unit, little waste, and buyers close by so freight is low.

Five questions that tell you who holds the power

Power here means one simple thing: who has more say in the price and the terms. Ask yourself these five questions about your own factory.

How many buyers could you sell to tomorrow? If one customer takes most of your output, they hold the power. With dozens of buyers, no single one can hurt you badly.
How hard is it for your buyer to replace you? In many industries, such as automotive parts, a buyer has to test and approve a new supplier before switching. That works in your favour. If any workshop down the road can make your part, it does not.
Who owns the design and the tooling? If the buyer owns the drawings and the moulds or dies, they can move the work to another factory. Check your agreements, even if you paid for part of it.
How many others can do what you do? The rarer your skill or process, the stronger you are. At the extreme, a supplier with scarce technology can have real say even over a giant brand, as the iPhone example below shows.
Who owns the final customer? In OEM supply, the brand owns the customer. In commodity manufacturing, often nobody does; the buyer just wants the lowest price this week.

Hypothetical Two small factories in the same industrial estate

Unit A makes moulded plastic parts for one appliance brand. That brand takes about 70% of A’s output. Orders are steady. But when the brand asks for a 5% price cut at the start of the year, Unit A has little choice. The moulds belong to the brand, and losing this one customer would leave most of the machines idle.

Unit B makes standard corrugated boxes for about forty local businesses. No single buyer can dictate terms. But B cannot charge more than the going rate, and when paper prices rise, B often has to absorb the increase for a while.

Unit A’s risk is one buyer. Unit B’s risk is the market. Neither is safe; they are unsafe in different ways.

When the supplier holds the power: iPhone screens

Supplying an OEM does not always mean being the weaker side. It depends on what you supply.

Take the iPhone. Apple is the OEM: its name is on the phone, and it decides the design. The OLED screen panels inside many iPhones have been supplied by Samsung Display, a component supplier that makes them to Apple’s specification.

Samsung Display is not in Unit A’s position. Only a few companies in the world can make OLED panels of that quality in the very large numbers a phone like the iPhone needs, and building that ability takes years and huge investment. Apple cannot simply take the work to the next factory. So the supplier has a real say in price and terms, because its technology is scarce. This is also why large OEMs try to have more than one source for key parts; Apple has also bought OLED panels from other display makers.

Compare that with a commodity maker like Unit B, which has no such hold on any buyer. Power does not come from size. It comes from being hard to replace. For a small Indian factory, that might mean a difficult process, a hard-won approval, or know-how that few others have. Scarce technology is also the bridge to the top rung of the ladder.

How to get more say as a supplier to an OEM

Set your own limit on how much one customer can take. Above that share, actively look for a second and third customer.
Know exactly who owns what. Drawings, moulds, dies, fixtures. Where you can, own the tooling, or agree in writing what happens to it if the relationship ends.
Become the problem-solver. A supplier who suggests a cheaper material, a simpler design or a better joint becomes hard to replace, and may be asked to help design parts, not just make them.
Keep clean quality records. They convince a new buyer to approve you, and defend you when a buyer complains.

How to get more say as a commodity manufacturer

Know your cost per unit, honestly. Include power, labour, wastage, repairs and interest on the money stuck in stock. Without it, you cannot tell which orders make money.
Get very good at buying raw material. In a commodity business, buying well can matter as much as making well.
Sell close to home. Freight can eat your margin. Nearby buyers are often your most profitable buyers.
Look for small special products. A special size, a special grade, a quicker delivery promise. These lift you, a little, out of pure price comparison.

What this has to do with climbing the ladder

OEM supply teaches you precision, quality systems and how large companies think. Commodity manufacturing teaches you cost discipline. The next step is a product that is yours, something customers cannot easily get elsewhere, usually built on new technology, licensed or developed. That is Level 4.