How OEM Factories in China Are Reinventing Themselves

OEM (Original Equipment Manufacturer) refers to a model in which brand companies do not manufacture their own products. Instead, they rely on their core technologies to design and develop products, manage sales channels to earn high profits, and outsource the actual manufacturing tasks to OEM factories through partnerships.

This model first became popular in developed countries such as those in Europe and North America. It allows brand companies to leverage their advantages, reduce costs, and increase product value. Meanwhile, OEM factories can focus on specialized manufacturing to ensure product quality and timely delivery. This mutually beneficial model once became a perfect business strategy.

In China, this model is now widespread. Especially in recent years, the processing trade has flourished, with foreign trade accounting for over 50% of the total at one point.

OEM factories in China went through its initial and accumulation phases, and was formally recognized as OEM around 1994. Today, OEM manufacturing has matured significantly. Its scope has expanded from pure production to include R&D, manufacturing, material management, and marketing support—providing diversified services.

The Branding Dilemma of  Traditional OEM Factories

When discussing OEM, the Foxconn model cannot be ignored. Foxconn is a high-tech enterprise engaged in 6C industries, including computers, communications, consumer electronics, digital content, automotive components, and distribution. It is a representative symbol of China’s manufacturing history.

Over decades of development, Foxconn became a benchmark in the OEM industry, thanks to its core philosophy centered on “manufacturing capabilities,” effective business layout, and internal management. It has become one of the world’s largest electronics suppliers.

Why OEM Factories Struggle with Profit Margins

Although Foxconn has a broad business scope, it lacks core technologies—neither chips nor operating systems are developed in-house. As a result, while Foxconn has benefited financially from OEM work, it has not reaped the core profits. According to some reports, despite employing 660,000 workers, Foxconn’s annual net profit is less than Apple’s profit from a single charging cable—a possibly exaggerated claim, but reflective of a deeper truth.

Over the decades, Apple not only built its own empire but also empowered many suppliers. Foxconn, Apple’s largest supplier, had a staggering revenue of nearly $187 billion in 2021, but its net profit was disproportionately low. For a $750 high-end iPhone, Foxconn earns $25, while Apple potentially enjoys a 200% profit margin.

This highlights the OEM dilemma: massive cost investments with visible but thin profits, while brand owners gain substantial brand premiums through technology, innovation, and sales channels.

Moreover, with rising component and labor costs, the expansion of Southeast Asian and African markets, and increasing expectations from clients, traditional OEM factories’ profit margins are rapidly shrinking.

Foxconn’s predicament reflects the wider challenge faced by all traditional OEM businesses.

What Lies Ahead for OEM Factories?

Innovation and upgrading have become essential—and hotly debated—topics for OEM factories. With the rise of consumer brands and growing market demand, OEM factories now stand at a crucial juncture of opportunity. How to seize this era of transformation is a critical question for all OEM businesses.

Shift from Economies of Scale to Economies of Efficiency

Traditionally, most OEMs pursued mass production: more volume meant more profit. However, as costs also rise with volume, the profit margins are predictable but limited. Going forward, OEMs must focus on increasing profitability and maintaining healthy cash flow to ensure sustainable economic returns.

Transition from Manual Labor to Smart Manufacturing

By integrating smart technologies with manufacturing, OEM factories can enhance their level of digitization and intelligent production. The transition toward industrial smart manufacturing involves combining automated equipment with information systems, gradually achieving digital, visualized, and automated green technology R&D and production.

Move from OEM to Brand Building

OEMs are disconnected from end consumers and have little market awareness, making them passive in response to changes. During market booms, they ramp up production; during downturns, factories and labor sit idle. Years of being led by the nose and squeezed for profits have made transformation essential.

Building an independent brand is not an overnight process. For OEM factories, shifting to branding also means overcoming significant barriers in R&D, marketing, and more. Therefore, while gradually transforming into brand owners, OEMs should retain their OEM business to generate early-stage capital for brand development.

OEM enterprises are increasingly evolving from OEM to ODM (Original Design Manufacturer), and ultimately toward OBM (Original Brand Manufacturer).