China became the world’s manufacturing leader in 2011. According to data published by the United Nations Statistics Division, China accounted for 28.7 percent of global manufacturing output in 2019. This makes China the number one choice for product manufacturing in various industries.

From startups to large enterprises, international businesses choose to manufacture their products in China for a wide variety of reasons: a well-built infrastructure that allows them to manufacture any product quickly and without any difficulty; a constantly improving standard of quality for products with a Made in China label; competitive prices, which allow businesses to receive a return on investment, back in their own countries, starting from 20%, 100%, 300% and up. In other words, the sky is the limit.

The first step in sourcing products from China is finding the right manufacturer who can manufacture the product. At this point, you must determine what type of manufacturer best suits your sourcing needs and product requirements. This is where you first become familiar with what is OEM and ODM.

What does OEM and ODM stand for?

OEM stands for Original Equipment Manufacturers. It is a company that manufactures highly customized products designed to suit clients’ requirements and specifications. Sometimes also referred to as contract manufacturing.

Basically, you as a client have to come up with the product idea and the design, and pass on your intellectual property (IP) to your manufacturer, so that they can manufacture the product according to your requirements and standards.

What is the OEM client’s responsibility:

• Product idea
• Product design
• Market research
• Marketing
• Product testing
• Product distribution and sales

What is the OEM’s responsibility:

• Manufacture the product according to the client’s requirements and specifications.

ODM stands for Original Design Manufacturers. It is a company that produces its products and sells them to clients on a private label or white label basis. By doing this, the ODM does not have to invest in building their consumer portfolio.

As a client, you don’t need to worry about the technical side of product development, because most likely ODM’s already have a solution.

When you manufacture your product with ODM, of course, you can slightly adjust or change the specs of their already developed product, and most likely you will ask the manufacturer to package the product under your brand, but the hard pain of product idea, product development, product engineering is well-taken care of by the manufacturer.

What is the ODM client’s responsibility:

• Product ideation
• Spots a new market opportunity for their brand
• Product distribution and sales

What is the ODM’s responsibility:

• Research and Development
• Product testing
• Product manufacturing
• White or private label offerings

What’s the difference between white label and private label in ODM?

White label:

An ODM that offers white label manufacturing, designs and produces the product from A to Z.

ODM is in control of the intellectual property (IP) (i.e. product design, molds, product idea)

The white-label product produced by the ODM is available for purchase and re-sell to vide variety of clients, retailers, buyers, and traders.

Customization of white label products is quite limited. Usually, clients re-sell such products under the ODM’s brand. Of course, sometimes, you as a client can request the ODM to produce the white label product under your brand name. However, they would only change the name, not the whole design. In case the ODM agrees to make such changes, your minimum order quantity (MOQ) must meet their requirements.

Private label: An ODM that offers a private label is very similar to the white label, except it is considered more exclusive. The ODM private label would agree to make greater customization to the product, and also agree to minimize the client range that they sell this product to.

ODMs do not only offer white label or a private label product. Some offer a custom production service for clients who have great product ideas but lack the resources to design and develop such products. It is important to know that such client idea development would still result in ODM controlling the intellectual property. It won’t stop them from putting your idea into mass production and distributing this product as their own to other clients.

MOQ for such inquiries is much higher than the MOQ for private label that we mentioned above.

What’s the difference between OEM and ODM?

The biggest difference between OEM and ODM is that with OEM, you as a client is responsible for the product market research, design, and engineering. The biggest advantage of OEM is that you as a client is fully in control of your intellectual property (IP). Since you have done all of the R&D, all IP rights belong to you. Just make sure to protect yourself legally before sharing any sensitive information with your chosen OEM manufacturer.

You might be interested in reading our article “5 tips on how to protect your IP in China?” in which we discuss this topic in detail.

No matter what type of OEM product you consider producing; OEM automotive, OEM auto parts, OEM shoes, etc. The basic cooperation terms would be that you do the R&D and the Chinese OEM does the production.

American Apple company relationship with Foxconn is one of the most well-known examples of the OEM cooperation model. Apple is a multinational corporation with huge R&D resources, but it lacks a manufacturing component. Instead, Apple outsources its manufacturing to the Chinese company Foxconn, which builds products such as the iPhone or iPad. Apple retains its IP and receives a high-quality manufactured product.

In addition, Apple also frequently engages other OEMs to produce sub-components that are then sent to Foxconn.

ODMs, on the other hand, have total control over the intellectual property (IP). As a manufacturer, ODMs have a lot of control over the products they develop. They can select and build equipment and processes to maximize the efficiency of producing products. As they become more experienced and, perhaps, specialized, they will most likely be able to continue to improve this efficiency with further upgrades such as automation and specially designed manufacturing software. You, however, as a client will be in a vulnerable position in such a scenario. One of the reasons is that you do not own the IP, so your market may be invaded at any time by competition.

Another unfortunate possibility is that the ODM could discontinue producing this particular model. This could be crucially damaging to your business in some cases.

Let’s say you have developed this particular product recognition on Amazon. Sales are increasing rapidly, your clients’ reviews are positive, and your business model with this particular product seems to be profitable and prosperous at this point. Since we know that on Amazon the more sales and positive reviews a product gets, the higher in ranking it gets and the more sales it generates for you.

However, then you receive shocking news from your ODM that they have terminated production of this product or decided to make significant changes to it.

Of course, you might develop a similar mold with a newly found OEM manufacturer this time. Though the quality won’t be the same, which might result in customers` negative reviews on amazon.com, and completely throw you out of the first page ranking race while you have been developing and testing your workflow with this new OEM manufacture.

OEM vs ODM which is right for your business?

Your circumstances determine which path to take when manufacturing in China.

On the one hand, cooperation with OEM enables you to switch manufacturers at any time without losing your IP. The only thing you would need to do is transfer your currently developed molds to the new OEM.

On the other hand, some businesses, especially those in the early stages, find investment in R&D too costly. In such cases, collaboration with an ODM may be the best course of action.

We @chinalookgroup suggest you speak to a specialist in this field so you can determine the proper path for your future business cooperation with China, based on your specific business objectives and circumstances.

Thank you for sticking with us till the end. We encourage you to take bold but smartly calculated actions in your China business. Keep learning constantly and achieve new business heights every day!