What is the actual meaning of Original Equipment Manufacturer (OEM) and why is it important to define?

OEM is an abbreviation that can be seen in a range of industries – automotive, IT, aviation and marine among others. But while it seems like in most of them the definition is clear and quite broad, in the marine industry the letters OEM have led to discrepancy. The issues range from the words behind the abbreviation to who is entitled to use it in the conduct of their business, with larger companies in the marine industry often claiming they are the only ones to do so.

General Definition

The term “OEM”, although disputed, generally signifies a company that manufactures components or other equipment using its own drawings by its own design and using its own manufacturing facilities. In Asia, the term is used to refer to aftermarket/spare parts while in the USA, for example, to companies that produce the original/genuine equipment. Sometimes, it is put as the opposite of “aftermarket”, meaning companies that produce components specifically for the original product.

Taking a more neutral view, the Cambridge Dictionary defines OEM as “a company that makes parts and products for other companies which sell them under their own name or sell them in their own products”. Those other companies are often referred to as a value-added reseller (VAR) because by incorporating features or services, they add value to the original item.

The reality in the Marine Industry

Originally, the term OEM referred to the companies who manufacture and then supply their parts to other companies, which then resell those to the user. However, some large-scale engine manufacturers claim to be the only companies that can be referred to as OEMs. In reality, often times the latter only design and assemble the engines while the actual manufacturing of the parts is outsourced to another company. The usage of the term OEM here can be misleading because the OEMs, in this case, are not the original manufacturers.

The manufacturing companies can also sell these parts on the aftermarket with slight modifications so as not to affect the quality or infringe the patent protection. But when those parts are sold to the aftermarket and do not bear the brand of the engine manufacturer, they are not considered “OEM” or “genuine/original” but alternative spare parts.

The problem the ambiguous definition creates

Considering the disputed definition, an example can be given with the automotive industry. Automotive manufacturers refer to themselves as OEMs although the term is slightly inaccurate, considering they focus mostly on design, marketing, sales and assembly of the final product. This is an “unfortunate misnomer” since the parts that go into the assembly are often produced by other companies from the supply chain that work either exclusively for the OEMs or sell both to OEMs and the aftermarket.

Looking back at the literal definition of OEM and the example of the automotive industry, it becomes clear that the term can be used to the advantage of certain actors in the marine industry. Prohibiting manufacturers from using the term “OEM”, despite their parts being of high quality and manufactured according to original drawings, allows for large-scale engine manufacturers to gain a competitive advantage by creating an apparent yet sometimes unrealistic differentiation between their own products and those of the manufacturers. This is particularly important to ship owners as the final customers in the supply chain, as they would prefer faster, cheaper and safer options as well as having certainty especially when it comes to insurance and classification societies. However, the misconceptions about non-OEM parts that persist in the marine industry can be misleading. First, quality can be the same as there are numerous independent companies with a high level of technical knowledge and standards. Second, the prices of independently produced parts are lower. And third, the number of independent manufacturers is far higher thus the choice is greater.

How to avoid confusion

Without doubt, the definition behind the term OEM is very disputed, especially considering the many actors who following one or the other definition would be entitled to use it. In order to avoid confusion, one can refer to the company manufacturing the components as OEM, and the company designing and assembling the engine, as System Designers and Assemblers (SDA). This way, both get recognized for their work and the differentiation is more straight forward.

Overall, the lack of clarity surrounding the definition of the term OEM and subsequent uncertainty as to who is allowed to use it, can lead to an imbalance between large-scale and independent engine manufacturers in the marine industry, to the disadvantage of ship owners.

 

Our questions to you:

  • How do you think this confusion can be solved?
  • What do you think is the actual definition of OEM and who should thus be entitled to use it?