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Original equipment manufacturer
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An original equipment manufacturer (OEM) is a company that produces parts and equipment that may be marketed by another company. However, the term is ambiguous, with several other common meanings: an OEM can be the maker of a system that includes other companies' subsystems, an end-product producer, an automotive part that is manufactured by the same company that produced the original part used in the automobile's assembly, or a value-added reseller.[1][2] OEM manufacturing is also widely used in the packaging industry, particularly in the production of customized gift boxes for wine and spirits. These OEM producers allow brands to create unique holiday packaging without maintaining their own manufacturing facilities.[3]
Automotive parts
[edit]When referring to auto parts, OEM typically refers to the manufacturer of the original equipment, that is, the parts which are then subsequently assembled and installed during the construction of a new vehicle. In contrast, aftermarket parts are those made by companies other than the OEM, which might be installed as replacements or enhancements after the car comes out of the factory. For example, if Ford used Autolite spark plugs, Exide batteries, Bosch fuel injectors, and Ford's own engine blocks and heads when building a car, then car restorers and collectors consider those to be the OEM parts.[4][5] Other-brand parts would be considered aftermarket, such as Champion spark plugs, DieHard batteries, Kinsler fuel injectors, and BMP engine blocks and heads.
Many auto parts manufacturers sell parts through multiple channels, for example to car makers for installation during new vehicle construction, to car makers for resale as automaker‑branded replacement parts, and through general merchandising supply chains. Any given brand of part can be OEM on some vehicle models and aftermarket on others.[6][7]
Not all auto parts are available in OEM versions. In some cases, vehicle manufacturers secure exclusive sales rights for specific components. These parts are produced by contracted suppliers and carry the automaker's branding, but the suppliers are not permitted to sell them independently under their own name.[8]
Computer software
[edit]Windows
[edit]Microsoft is a popular example of a company that issues its Windows operating systems for use by OEM computer manufacturers via the bundling of Microsoft Windows. OEM product keys are priced lower than their retail counterparts, especially as they are purchased in bulk quantities, although they use the same software as retail versions of Windows. They are primarily for PC manufacturer OEMs and system builders, and as such are typically sold in volume licensing deals to a variety of manufacturers (Dell, HP, ASUS, Acer, Lenovo, Wistron, Inventec, Supermicro, Compal Electronics, Quanta Computer, Foxconn, Pegatron, Jabil, Flex, etc.).
These OEMs commonly use a procedure known as System Locked Pre-installation, which pre-activates Windows on PCs that are to be sold via mass distribution. These OEMs also commonly bundle software that is not installed on stock Windows on the images of Windows that will be deployed with their PCs (appropriate hardware drivers, anti-malware and maintenance software, various apps, etc.).
Individuals may also purchase OEM "system-builder" licenses for personal use (to include virtual hardware), or for sale/resale on PCs which they build. Per Microsoft's EULA regarding PC manufacturers and system-builder OEM licenses, the product key is tied to the PC motherboard which it is initially installed on, and there is typically no transferring the key between PCs afterward. This is in contrast to retail keys, which may be transferred, provided they are only activated on one PC at a time. A significant hardware change will trigger a reactivation notice, just as with retail.[9]
Direct OEMs are officially held liable for things such as installation/recovery media, and as such were commonly provided until the late-2000s. These were phased out in favor of recovery partitions located on the primary storage drive of the PC (and available for order from the manufacturer upon request) for the user to repair or restore their systems to the factory state. This not only cut down on costs, but was also a consequence of the gradual obsolescence and phasing out of optical media from 2010 onward. System builders also have a different requirement regarding installation media from Direct OEMs.[10][11]
While a clean retail media of Windows can be installed and activated on these devices with OEM keys (most commonly using the SLP key that's embedded in to the system firmware already), actual OEM recovery media that was created by the PC manufacturer (not system-builder, nor retail Windows versions) typically only works on the PC model line that was designed for it. For example, a recovery disc/USB for a Toshiba Satellite P50-B will only work on that model, and not a Satellite S55T.
Android
[edit]The OEM smartphone manufacturers, such as Samsung, Sony and Xiaomi, are manufacturers of hardware and software of smartphones. Such manufacturers usually customize and adapt suitable Android operating system, with manufacturer components such as One UI and MIUI.
Skateboards
[edit]Skateboard decks are primarily produced by a small number of specialized OEMs, such as PS Stix, BBS, and Dwindle.[12] These manufacturers handle the entire production process, including sourcing high-quality wood, crafting molds, gluing and pressing multiple layers of veneer, and applying graphics designed by the brands to the decks.[13] Once completed, the finished products are distributed to skateboarding brands, which sell them under their respective labels.
Economies of scale
[edit]OEMs rely on their ability to drive down the cost of production through economies of scale. Using an OEM also allows the purchasing company to obtain needed components or products without owning and operating a factory.
See also
[edit]
References
[edit]- ^ Kidder, John Tracy (1981). "1. How to Make a Lot of Money". The Soul of a New Machine. United States: Little, Brown and Company. ¶ 17. ISBN 9780316491709.
Many customers, such as the Department of Defense, wanted to buy complete systems, all put together and ready to run with the turn of a key; hence the rise of companies known as original equipment manufacturers, or OEMs—they'd buy gear from various companies and put it together in packages.
- ^ "Original Equipment Manufacturer (OEM)". Practical Law. Archived from the original on 19 June 2024. Retrieved 19 June 2024.
- ^ "5 Creative Ideas for Holiday Wine Gift Boxes That Impress". Fordico OEM. 25 June 2025. Retrieved 4 July 2025.
- ^ Khartit, Khadija; Kvilhaug, Suzanne (15 April 2015). "What Is an Original Equipment Manufacturer (OEM)? Definition". Investopedia. Archived from the original on 24 January 2022. Retrieved 19 June 2024.
OEM stands for Original Equipment Manufacturer. The OEM is the original producer of a vehicle's components, and so OEM car parts are identical to the parts used in producing a vehicle. Aftermarket parts are produced by other vendors and do not necessarily have a consistent level of quality or compatibility with the vehicle.
- ^ "OEM - Encyclopedia". Automotive Fleet. Archived from the original on 21 September 2020. Retrieved 19 June 2024.
In the automotive industry, OEM refers to the company that designs and manufactures the original components and systems used in vehicles during their initial assembly.
- ^ Kagan, Julia; et al. (20 June 2005). "Original Equipment Manufacturer (OEM): Definition and Examples". Investopedia. Archived from the original on 4 January 2024. Retrieved 19 June 2024.
In the auto repair industry, OEM parts are those products used by a car manufacturer. Aftermarket parts are made by a third-party manufacturer but may be compatible with the same vehicles.
- ^ Delbridge, Emily; et al. (29 July 2013). "OEM Parts vs. Aftermarket Parts: What's the Difference?". The Balance. Archived from the original on 19 September 2022. Retrieved 19 June 2024.
OEM parts are made by the car manufacturer, and aftermarket parts, which may cost less, are made by another company.
- ^ "OEM vs Original vs Aftermarket Auto Parts: Complete Guide 2025". AAASTAND. 12 July 2025. Retrieved 24 July 2025.
- ^ "General Info on Microsoft OEM COA's, CDs, Ect". eBay. Archived from the original on 12 February 2014. Retrieved 9 September 2015.
- ^ "Licensing FAQ: System builder licensing". Microsoft. Archived from the original on 2 October 2015. Retrieved 1 October 2015.
- ^ "OEM System Builder Licensing Guide" (PDF). Microsoft. Archived from the original (PDF) on 8 March 2014. Retrieved 9 September 2015.
- ^ Gifted Hater (25 May 2022). Skateboard Woodshops w/ Ben Degros. Retrieved 18 January 2025 – via YouTube.
- ^ Touring PS Stix with Professor Schmitt!. Retrieved 18 January 2025 – via YouTube.
Original equipment manufacturer
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Definition and Fundamentals
Definition
An original equipment manufacturer (OEM) is a company that produces parts, components, or subsystems that are incorporated into the products of another company, typically sold under the latter's brand name to end consumers.[1] These OEM-produced items are often undifferentiated and lack the OEM's own branding, allowing the brand-owning company to integrate them seamlessly into their final offerings.[2] A key distinction exists between an OEM and an original design manufacturer (ODM); while an OEM focuses primarily on manufacturing products or components based on designs and specifications provided by the client, an ODM takes responsibility for both the design and production of the product, which the client then rebrands and markets. Examples of ODM products include generic phone chargers and store-brand accessories, where the ODM designs and manufactures the items for rebranding by retailers or other companies.[7][8] This separation highlights the OEM's role as a specialized producer in the supply chain, emphasizing efficiency in fabrication rather than innovation in product conception.[9] Examples of OEM products include generic components such as engines, circuit boards, or fasteners supplied to assemblers, where the end product— like a vehicle or consumer electronic device—bears only the brand owner's label. Highly branded items like Apple devices often involve OEM partnerships where the brand, such as Apple, controls the design and outsources manufacturing to OEMs like Foxconn.[10][1] In practice, companies like Intel provide processors to computer manufacturers such as Dell, illustrating how OEMs enable customization, often with visible co-branding in the final product.[1] The term OEM originated in the mid-20th century, with its first known use documented in 1967, though the underlying concept of specialized component manufacturing traces back to the mass production era of the early industrial period, particularly gaining prominence in sectors like automotive where suppliers provided parts for vehicle assembly.[11] Over time, the term has evolved beyond its initial manufacturing focus to encompass broader applications in technology and electronics, while maintaining their core production role.[5]Key Characteristics
Original equipment manufacturers (OEMs) primarily operate in a business-to-business (B2B) environment, supplying components or subsystems to other companies that integrate them into final products sold to end consumers, thereby maintaining a low public profile and avoiding direct consumer marketing efforts.[1] This anonymity in branding allows OEMs to concentrate resources on production efficiency rather than building consumer-facing brand identities, fostering long-term partnerships with value-added resellers (VARs) who handle final assembly and distribution.[12] A core strength of the OEM model lies in its capacity for customization and scalability, enabling manufacturers to adapt designs and specifications to meet the diverse needs of multiple clients while scaling production volumes as demand fluctuates.[1] For instance, an OEM might produce tailored electronic components for various smartphone brands, adjusting features like size or functionality per client requirements, which supports efficient resource allocation across projects without overhauling core manufacturing processes.[12] This flexibility is achieved through modular production techniques that allow rapid iteration and high-volume output, ensuring OEMs can serve industries from automotive to consumer electronics without significant retooling costs. OEMs place a strong emphasis on adhering to rigorous quality standards and obtaining relevant certifications to satisfy client-specific demands and ensure product reliability in integrated systems.[13] Standards such as ISO 9001 provide a framework for quality management systems that help OEMs measure and maintain consistent output, reduce defect rates, and implement corrective actions, which are critical for meeting the stringent requirements of sectors like aerospace and medical devices.[14] Certification to these standards not only builds trust with clients but also facilitates compliance with regulatory needs, minimizing risks associated with supply chain disruptions due to quality failures.[13] The cost structure of OEMs is characterized by reduced expenditures on marketing and branding, offset by a heavy reliance on high-volume production to achieve profitability through economies of scale.[1] By forgoing direct-to-consumer advertising, OEMs allocate more funds to operational efficiencies, such as optimized supply chains and automated manufacturing, which lower per-unit costs as order volumes increase.[12] This model thrives on stable, large-scale contracts from B2B partners, where profitability hinges on spreading fixed costs over substantial output, though it exposes OEMs to risks from demand volatility or client consolidation.[15]Historical Development
Origins in Early Manufacturing
The roots of the original equipment manufacturer (OEM) model trace back to 19th-century industrialization, where the development of interchangeable parts facilitated the division of labor, laying the groundwork for later external specialization between component producers and final assemblers. In the firearms sector, Samuel Colt's Hartford factory exemplified this shift during the 1840s and 1850s by employing precision machinery to create standardized, interchangeable revolver components through internal specialized production, enabling efficient mass assembly of branded firearms.[16] This system reduced production time and costs while allowing focus on high-volume, standardized output for Colt's branded revolvers.[17] Similar dynamics emerged in the textile and machinery sectors across Europe and the United States during the Industrial Revolution, as unbranded suppliers provided essential components and equipment to larger manufacturers. Specialized firms in Britain, such as those producing power looms and spinning frames, supplied these machines to textile mills without branding them for the end product, enabling operators to focus on fabric production under their own labels.[18] In the US, immigrant entrepreneurs like Samuel Slater imported and adapted such European machinery designs, sourcing parts from regional metalworkers to equip New England mills, which then branded the resulting cotton goods.[19] This supplier ecosystem supported the rapid mechanization of textile production, with components like spindles and gears produced anonymously for integration into branded mill outputs. Early influences on the OEM model appeared in the automotive industry during the 1910s, as Henry Ford established supplier networks to support Model T production. Ford contracted with external providers for raw materials and subcomponents, such as steel from specialized mills and transmissions from firms like the Dodge Brothers, allowing his assembly lines to incorporate unbranded parts into Ford-branded vehicles.[20] This proto-OEM approach, building on interchangeable parts principles, optimized efficiency by outsourcing non-core manufacturing while maintaining control over final assembly.[21] A key milestone in formalizing OEM practices occurred in the 1920s through General Motors' supplier ecosystem, particularly the 1919 contract with Fisher Body for automobile bodies. This agreement mandated exclusive supply of closed bodies at cost-plus 17.6% pricing, creating a structured relationship where Fisher produced unbranded components for GM's branded cars, influencing broader industry standards for vertical coordination without full ownership.[22] The contract's provisions for quality control and volume commitments exemplified early OEM dynamics, enabling GM to scale production amid rising demand.Expansion in the 20th Century
Following World War II, the automotive and electronics industries underwent a significant shift toward mass production, driven by economic recovery and technological advancements. In the automotive sector, production volumes surged, particularly in Japan, where output grew from negligible levels in 1950 to become a global leader within three decades, emphasizing efficient supply chains with specialized suppliers.[23] This era marked the institutionalization of original equipment manufacturer (OEM) practices, as automakers increasingly outsourced components to dedicated suppliers to achieve economies of scale in high-volume assembly. In electronics, Japanese firms similarly expanded through modular production, capturing markets in consumer goods by the 1970s, which facilitated the integration of OEM-sourced parts like semiconductors and displays.[24] A notable development in this domain was the rise of semiconductor OEMs, such as Intel, which from the late 1960s supplied unbranded processors to computer assemblers like IBM, enabling the modular PC ecosystem and scalable innovation without direct consumer branding.[25] A pivotal example of this expansion was Japan's keiretsu system, which evolved post-war from the dissolution of pre-war zaibatsu conglomerates into interconnected supplier networks. These horizontal and vertical alliances fostered long-term, trust-based relationships between assemblers and suppliers, enabling rapid scaling of production. Toyota exemplified this model, relying on affiliated first-tier suppliers for critical components such as engines and transmissions, which supported its global export push starting in the 1950s and accelerating through the 1960s. By the 1970s, keiretsu structures had become integral to Japan's automotive dominance, with suppliers investing alongside OEMs in overseas facilities to localize production and mitigate trade barriers.[26][27] The 1960s and 1970s saw the globalization of OEM practices, with Asia emerging as a hub for component manufacturing amid rising labor costs in the West. Taiwan played a central role in the personal computer (PC) industry, transitioning from radio assembly in the 1960s to PC kit production in the late 1970s, leveraging dense networks of small and medium-sized enterprises (SMEs) for original design manufacturing (ODM) and OEM services. Key milestones included the 1982 development of Apple II clones following a government ban on electronic games, and the subsequent shift to IBM PC-compatible systems, which positioned Taiwan to supply over 70% of global motherboards by the 1990s. This model separated design from fabrication, allowing Taiwanese firms to serve international brands like IBM and Compaq through cost-effective outsourcing.[28] The 1970s oil crises accelerated OEM specialization in the automotive sector, as soaring fuel prices and supply disruptions compelled manufacturers to prioritize efficiency and quality improvements. The 1973 embargo quadrupled oil prices, slashing U.S. vehicle sales and exposing vulnerabilities in vertically integrated production, while the 1979 shock deepened the downturn, with domestic output falling up to 47% by 1982 compared to 1978 levels. In response, U.S. OEMs adopted elements of the Toyota Production System, increasing reliance on specialized suppliers for lightweight, fuel-efficient components and just-in-time delivery, which reduced inventory costs and enhanced adaptability. Japanese firms like Toyota benefited, with sales rising 15-40% during the crises, underscoring the resilience of their OEM-centric supply chains.[29][30] In the 1980s, deregulation further propelled OEM growth, particularly in software-integrated equipment. The 1982 AT&T divestiture ended its telecommunications monopoly, opening markets to competitive suppliers and reducing equipment costs by over 70% from 1984 to 1991 through standardized interoperability. This enabled OEM models in computer-telecom hybrids, where third-party manufacturers provided hardware with embedded software, fostering the PC boom and licensing ecosystems like Microsoft's deals with hardware assemblers starting in 1981. Overall, these developments drove a marked increase in manufacturing outsourcing; for instance, U.S. automotive vertical integration declined substantially from 1975 to 2000, with the number of mega-suppliers (over $10 billion in revenue) rising from three in 1992 to ten by 2004, reflecting OEMs' shift toward specialized external sourcing.[31][32]Applications in Major Industries
Automotive Industry
In the automotive industry, original equipment manufacturers (OEMs) encompass suppliers that produce essential components such as brakes, tires, and electronics for vehicle assembly by major automakers. For instance, Bosch supplies fuel injection systems and braking components to Ford and Toyota, while Delphi (now part of BorgWarner) provides fuel pumps and sensors to these same brands, ensuring integration with original vehicle designs.[33][34][35] The industry relies on a tiered supplier system to streamline production, where Tier 1 suppliers deliver complete assemblies or systems directly to OEM vehicle assemblers like General Motors or Volkswagen, and Tier 2 suppliers provide sub-components to Tier 1 firms. This structure facilitates just-in-time (JIT) delivery, a lean manufacturing practice where parts arrive precisely when needed on the assembly line, minimizing inventory costs and reducing waste for OEMs such as Toyota, which pioneered JIT in the 1970s.[36][37] Globally, Canadian-based OEMs like Magna International specialize in high-end components and full vehicle assembly for luxury cars, including body structures for Mercedes-Benz models. In Asia, CATL dominates the electric vehicle (EV) battery market, supplying lithium-ion packs to OEMs like Tesla and Volkswagen, capturing approximately 38% of global EV battery share in 2024 and powering over one-third of EVs worldwide.[38][39] OEM-dependent production faces significant challenges from supply disruptions, as seen in the 2021 semiconductor chip shortage, which led to over 11 million vehicles being removed from global production schedules and billions in losses for automakers reliant on Tier 1 electronics suppliers.[40]Electronics and Consumer Devices
In the electronics and consumer devices sector, original equipment manufacturers (OEMs) play a pivotal role in producing key components that are integrated into final products by various brands and assemblers. For instance, Samsung Display supplies organic light-emitting diode (OLED) screens to multiple brands, including Apple for iPhone models and Google for Pixel devices, enabling high-quality displays across competing product lines. Highly branded items like Apple devices often involve OEM partnerships where the brand controls the design and outsources manufacturing to partners such as Foxconn, which assemble the final products based on Apple's specifications. These OEM contributions allow brands to focus on design and marketing while leveraging specialized manufacturing expertise to meet demand for smartphones and other portable electronics.[1][10] OEMs such as Qualcomm provide processors and modems that are integrated into devices by assemblers, supporting advanced features like 5G connectivity in smartphones and laptops from vendors like Dell and HP. Similarly, memory producers like SK Hynix supply RAM and storage modules used in consumer electronics, enabling customized configurations without brands needing in-house production.[41][42] Geographically, OEM operations in electronics are concentrated in key regional hubs that facilitate efficient supply chains and innovation. Shenzhen, China, stands as the dominant global center for electronics manufacturing, producing over 90% of the world's consumer gadgets, including components for smartphones, wearables, and home appliances, thanks to its dense ecosystem of over 500,000 electronics professionals and integrated suppliers from design to assembly. Since the 2010s, Vietnam has emerged as a rising alternative, with its electronics sector growing to account for about 40% of national exports by the early 2020s, driven by investments from companies like Samsung that established massive smartphone assembly plants, shifting production from higher-cost regions and boosting local OEM capabilities. OEMs have increasingly contributed to innovations in modular designs for Internet of Things (IoT) devices and 5G components during the 2020s, enabling flexible, scalable hardware ecosystems. For example, module providers like Quectel supply 5G cellular modules that OEMs integrate into IoT endpoints such as smart sensors and industrial routers, supporting ultra-low latency and high-data-rate applications in smart cities and edge computing. This modular approach allows device makers to upgrade connectivity without redesigning entire systems, with shipments of 5G-enabled IoT modules projected to grow at a 22% compound annual rate through 2027, fostering broader adoption in consumer wearables and home automation.Applications in Software and Computing
Software Licensing Models
In the context of original equipment manufacturers (OEMs), software licensing models facilitate the integration of third-party software into hardware products, enabling efficient distribution and customization for end-users. These models typically involve agreements where software providers grant OEMs rights to embed, modify, or rebrand software, often tailored to high-volume production needs. Common frameworks emphasize scalability, cost predictability, and protection of intellectual property to support B2B collaborations across industries like consumer electronics and industrial devices.[43] Key licensing types include volume licensing, per-device fees, and white-label software. Volume licensing, also known as node-locked licensing, binds the software to specific hardware devices and allows OEMs to acquire licenses in large quantities at discounted rates, paying a fixed fee per unit deployed. This model is prevalent for embedded operating systems, where OEMs pre-install software on devices like routers or smart appliances to streamline manufacturing. Per-device fees operate similarly but focus on royalties or upfront costs calculated per sold unit, ensuring revenue alignment with OEM sales volumes without ongoing usage tracking. White-label software enables OEMs to rebrand and resell the product as their own, often with the original provider remaining invisible to end-users; for instance, embedded OS distributions are customized and licensed this way for IoT devices, including revenue-sharing if end-users upgrade to premium features.[43][44][45] B2B agreements in OEM software deals incorporate robust protections to mitigate risks, particularly non-disclosure agreements (NDAs) and intellectual property (IP) safeguards. NDAs ensure that proprietary code, algorithms, and development details shared during integration remain confidential, binding both parties to prevent unauthorized disclosure or competitive use. IP protections, often outlined in licensing contracts, specify ownership retention by the software provider while granting OEMs limited rights for embedding and distribution; these clauses address potential disputes over modifications or derivative works, commonly including warranties against infringement and indemnity provisions. Such frameworks are essential in cross-border deals, where varying legal jurisdictions heighten exposure to IP theft or misuse.[46][47][48] Representative examples illustrate these models in practice, such as middleware providers offering software kits to hardware OEMs. Intel, for instance, supplies RFP Ready Kits and embedded middleware solutions that include pre-validated software components for integration into OEM devices like industrial PCs and edge computing hardware; these kits often use per-device or volume licensing to enable OEMs to deploy AI and IoT functionalities without building from scratch. This approach supports rapid product development while adhering to IP protections via accompanying NDAs.[49][50] The OEM software market, encompassing embedded and licensed solutions, has exhibited substantial growth, reflecting increasing demand for integrated hardware-software ecosystems. Valued at approximately $1.6 billion in 2004, the embedded software segment—a core element of OEM licensing—expanded to $20.7 billion by 2024, driven by advancements in IoT and automation. Projections indicate continued expansion at a compound annual growth rate (CAGR) of 9.6% from 2025 to 2034, underscoring the economic significance of these licensing frameworks in scaling software distribution.[51][52]Windows OEM Ecosystem
The Windows OEM ecosystem encompasses the collaborative framework between Microsoft and hardware manufacturers who pre-install the Windows operating system on personal computers, enabling widespread distribution and integration of the software into consumer and enterprise devices. This partnership has been foundational to Microsoft's dominance in the PC market, with OEMs handling the majority of Windows deployments through bundled licensing agreements.[53] Microsoft's OEM licensing program originated in the mid-1980s, coinciding with the release of Windows 1.0 in 1985, building on earlier MS-DOS OEM agreements that allowed manufacturers to embed the software directly into hardware. Under these agreements, OEMs are required to pre-install Windows on new systems, ensuring a standardized user experience while adhering to specific configuration rules, such as including Microsoft's branding and prohibiting modifications that alter core functionality. The program utilizes tools like OEM Activation 3.0, which streamlines inventory management, licensing validation, and activation for OEMs during production.[54][55] Prominent players in the Windows OEM ecosystem include Dell Technologies, Lenovo Group, and HP Inc., which collectively dominate global PC shipments and rely on Windows pre-installation for the bulk of their consumer and commercial offerings. As of the first half of 2025, Lenovo holds approximately 24% of the worldwide PC market share, followed by HP at around 20% and Dell at 16%, with these firms certifying their hardware through Microsoft's Windows Hardware Compatibility Program to ensure compliance with OS requirements. This certification process involves registering on the Hardware Dashboard, testing with the Windows Hardware Lab Kit, and submitting results for validation, guaranteeing compatibility and security features like Secure Boot and Trusted Platform Module (TPM) support.[56][57][58] Revenue in the Windows OEM ecosystem is primarily generated through a per-unit licensing model, where OEMs pay Microsoft a fee for each copy of Windows embedded in shipped devices, contributing significantly to Microsoft's overall income despite shifts toward cloud services. For instance, this model persisted with the 2021 launch of Windows 11, which introduced stringent hardware compatibility mandates—including a 64-bit processor with at least 1 GHz clock speed and two cores, 4 GB RAM, 64 GB storage, UEFI firmware, TPM 2.0, and DirectX 12-compatible graphics—forcing OEMs to upgrade product lines and potentially delaying support for older systems. These requirements aimed to enhance security and performance but impacted OEM production costs and timelines, as manufacturers had to validate and redesign hardware to meet Microsoft's listed processor approvals.[59][60][61] The ecosystem has faced controversies, particularly antitrust scrutiny over Microsoft's bundling practices that pressured OEMs to include Windows and related software like Internet Explorer. In the late 1990s, the U.S. Department of Justice sued Microsoft for monopolistic tactics, including requiring OEMs to pre-install Internet Explorer with Windows 95 and 98 as a condition of licensing, which stifled competition from alternative browsers; the case culminated in a 2001 court ruling that initially ordered a breakup of the company, later modified to behavioral remedies. Similarly, the European Commission investigated Microsoft starting in 1998, leading to a 2004 decision fining the company €497 million for abusing its dominance by bundling Windows Media Player and withholding interoperability information from competitors, with remedies mandating unbundled versions for OEMs in Europe. These cases highlighted tensions in OEM dependencies on Microsoft, influencing licensing terms to promote greater flexibility.[62][63][64]Android OEM Ecosystem
The Android OEM ecosystem revolves around the collaboration between Google and hardware manufacturers to produce customized smartphones and devices based on the Android operating system. This model leverages the open-source nature of the Android Open Source Project (AOSP), which provides a foundational codebase that original equipment manufacturers (OEMs) can modify to create differentiated user experiences. AOSP enables OEMs to develop custom ROMs, or user interfaces, that overlay the core Android system with proprietary features, themes, and integrations tailored to their brand. For instance, Samsung's One UI emphasizes seamless integration with its ecosystem, including enhanced multitasking and S Pen support on Galaxy devices, while Xiaomi's MIUI (later evolved into HyperOS) focuses on customization options like theme stores and performance tweaks for budget and mid-range phones.[65] This flexibility fosters innovation and market variety but requires OEMs to maintain compatibility with Android's core APIs.[66] To access Google's proprietary applications and services, OEMs must obtain certification for Google Mobile Services (GMS), a suite including the Play Store, Gmail, and Maps, which is licensed through agreements like the Mobile Application Distribution Agreement (MADA). GMS certification ensures devices meet Google's compatibility standards and involves rigorous testing for security and functionality.[67] In return, Google engages in revenue-sharing deals with OEMs, providing financial incentives—up to 12% of search ad revenue—for promoting Google apps as defaults and ensuring prominent placement on home screens.[68] These arrangements have been pivotal in establishing Android's widespread adoption.[69] By 2025, Android-powered devices from OEMs command over 72% of the global smartphone market share, driven by diverse offerings from leaders like Samsung, Xiaomi, and Oppo in emerging markets.[70] This dominance underscores the ecosystem's scale, with billions of active devices supporting a vast app economy.[71] Despite its success, the Android OEM ecosystem faces challenges, including fragmentation, where varying hardware specifications and custom ROMs lead to inconsistent software updates and app compatibility across devices.[72] In the 2020s, this has been compounded by antitrust scrutiny in the European Union, where regulators initially fined Google €4.34 billion in 2018 for anti-competitive practices in Android licensing—such as requiring OEMs to pre-install Google apps—a ruling upheld in 2022 but with the fine reduced to €4.125 billion, with ongoing appeals and investigations under the Digital Markets Act targeting GMS bundling.[73] Additionally, under the EU's Digital Markets Act (DMA), implemented from March 2024, OEMs must provide users with choice screens for selecting default search engines and browsers on new Android devices in the European Economic Area (EEA), reducing mandatory pre-installation of Google apps and promoting competition.[74]Business and Economic Aspects
Economies of Scale
Economies of scale form a foundational economic advantage in the original equipment manufacturer (OEM) model, where increased production volumes lead to lower per-unit costs by distributing fixed expenses—such as machinery setup, facility maintenance, and initial tooling—across a greater number of units. This principle is mathematically expressed as the average cost (AC) equaling total cost (TC) divided by quantity produced (Q), or , demonstrating how higher Q reduces AC when TC includes substantial fixed components.[75] In OEM contexts, this enables manufacturers to produce components or assemblies at reduced costs for brand owners, who integrate them into final products without bearing the full production infrastructure.[76] OEM arrangements amplify these benefits through long-term, high-volume contracts that guarantee steady output levels, allowing specialized manufacturers to optimize operations without investing heavily in research and development (R&D), which is typically managed by the brand owner or assembler. By focusing on efficient, bulk production for multiple clients, OEMs can specialize in niche components, spreading R&D avoidance across diverse orders and achieving competitive per-unit pricing.[77] This specialization reduces overall production burdens, as OEMs leverage standardized processes and shared infrastructure to serve various end-products, further lowering variable costs like materials procurement through bulk purchasing.[78] In addition to these economies of scale and specialization benefits, the OEM model provides further cost advantages that often make OEM products or components cheaper than comparable items produced and marketed under a single company's full brand control. The main reasons include:- Absence of brand fees or premium pricing, as the OEM does not add markups for its own brand recognition or licensing.
- Little to no advertising or promotional expenses, since the OEM typically does not conduct direct-to-consumer marketing.
- Enhanced economies of scale from high-volume production for multiple brand owners or clients, reducing per-unit costs further.
- Fewer intermediary margins due to direct contractual relationships and simpler distribution channels between the OEM and the brand owner or final assembler.