Original design manufacturers (ODM) and contract manufacturers

An ODM manufactures products from its own designs, which are then sold under an OEM’s brand name. Typically, the ODM determines what products to build and the OEM simply purchases the items as finished goods inventory. The ODM usually owns the rights to the intellectual property that goes into making the product. Whereas a contract manufacturer can engage in product assembly, engineering services, order fulfillment, product distribution, and aftermarket services usually on behalf of an OEM customer and may not likely own a part of the intellectual property used to develop the products it manufacturers.

ODMs have yet to position themselves securely among the contract manufacturers who serve a majority (50 percent, or more) of OEMs in multiple industries, including telecommunications, networking, industrial, aerospace/defense, medical or semiconductor capital equipment end-markets -- all with high-complexity products and with higher margins in most cases.

Although location is not a prerequisite for performing ODM work, it does matter in some instances. An ODM model can be set up and run from other regions of the globe, including other low-cost places like India. However, ODMs have typically been concentrated in Taiwan and, unlike global contract manufacturers, some of these ODMs have little ability to source product globally in Europe or North America. Certainly, there are some 'regional' advantages to a pure ODM model, however, direct labor and overhead costs are similar for everyone located in Asia.

Many contract manufacturers are pursuing ODM business because it offers better profit margins in most cases. Meanwhile, ODMs are pursuing contract manufacturing business to get a piece of the pie given there is still a considerable amount of product still being manufactured in-house by many OEMs.

In many instances, it is somewhat easier for a contract manufacturer to offer ODM services and do so, profitably, than it is for an ODM to offer contract manufacturing services - given the added difficulties of managing a high capex contract manufacturing model.

VentureOutsource.com, November 2004