Original Equipment Manufacturers (OEMs)

Original Equipment Manufacturers (OEMs) are the unsung heroes of the modern economy. An OEM is a company that produces parts, components, or entire systems that are used in another company's end product. Think of the complex ecosystem behind your smartphone or car. The brand you see on the final product (like Apple or Ford) is the public-facing company, but its success relies on a network of specialized OEMs that manufacture the processors, screens, batteries, and braking systems. These OEMs sell their products directly to other businesses (a B2B model), not to the end consumer. Their brand might be invisible to you, but they are often the technological and manufacturing powerhouses that make the products you love possible. For instance, Intel is a classic OEM, making the CPUs that power laptops sold under brands like Dell and HP, who then assemble and market the final computer to you.

The term “OEM” can be a bit of a chameleon, describing a few different but related business relationships. Understanding the nuances is key to grasping the investment case for these companies.

There are generally two main ways the OEM model works:

• The Component Maker: This is the most common understanding. A company like Qualcomm designs and sells smartphone chips to Samsung, or a company like Brembo manufactures high-performance brakes for Porsche. The OEM is a specialist, providing a critical component that the final assembler integrates into their product. The OEM's brand may or may not be visible to the consumer (e.g., “Intel Inside”).
• The White-Label Manufacturer: In this scenario, an OEM manufactures an entire, complete product for another company, which then simply puts its own brand on it and sells it. This is common in electronics and home appliances. The company selling the product to you might handle the marketing and distribution, but they had little to do with the actual engineering and production. The company buying the product is often called a Value-Added Reseller (VAR).

In both cases, the OEM is the original creator. Their business is built on long-term contracts, deep technical expertise, and achieving massive economies of scale that their customers simply can't replicate in-house.

For the value investor, OEMs can be fascinating businesses—sometimes they're powerful giants hiding in plain sight, and other times they're vulnerable suppliers at the mercy of their customers. The trick is to tell the difference.

The best OEMs build powerful competitive advantages, or what we call an Economic Moat.

• Sticky Relationships & High Switching Costs: Once an OEM's component is designed into a major product line, like a specific engine for a new car model, it is incredibly expensive and time-consuming for the customer to switch suppliers. This creates a predictable, recurring revenue stream.
• Scale & Specialization: World-class OEMs are masters of one trade. Taiwan Semiconductor Manufacturing Company (TSMC), for example, focuses solely on manufacturing chips for others. This focus allows them to achieve a level of efficiency and technological prowess that very few can match, creating a huge barrier to entry for potential competitors.
• The “Hidden Champion”: Because they don't market to consumers, many excellent OEM businesses fly under the radar of the average investor. This can lead to opportunities where the market undervalues their critical role in the Supply Chain and their strong financial performance.

Investing in OEMs isn't without its dangers. A careful analysis of the risks is a core part of Risk Management.

• Customer Concentration: The biggest red flag. If an OEM relies on one or two giant customers for the majority of its revenue (e.g., a supplier to Apple), it is in a precarious position. A decision by that single customer to switch suppliers or a downturn in that customer's business can be catastrophic.
• The Margin Squeeze: Powerful customers know they have leverage. They can exert immense pressure on their OEM suppliers to cut prices, relentlessly squeezing their profit margins over time.
• Cyclical Demand: OEMs are at the mercy of the end-market. If demand for new cars plummets, demand for tires, engines, and electronics will fall right along with it. Many OEMs are classic Cyclical Stocks.

Before investing in an OEM, run it through this simple checklist:

1. Who are the customers? Look for a diversified customer base. Is the OEM a critical partner or just another replaceable supplier? How long have the relationships lasted?
2. What is the Competitive Advantage? Is it protected by patents, proprietary manufacturing processes, or immense scale? How durable is this advantage? Could a new technology disrupt it?
3. Check the Financial Health. Does the company have a strong Balance Sheet with little debt? Does it generate consistent Free Cash Flow (FCF)? Are its profit margins stable or eroding?
4. Who holds the power? In the relationship between the OEM and its customer, who has the upper hand? The answer often tells you who will capture the lion's share of the profits.