OEM and ODM are rarely used in the shipping industry these days as most designs are custom and proprietary.
OEM is the safest bet for a designer with sensitive information who wants to produce a product for the consumer market. They retain control over product innovation and design and license them only when necessary.
What's more, OEMs have virtually no design limits. They can be compared to the R&D departments of some large companies that identify a problem, come up with an innovative solution, and then release it to the market.
However, OEM has one significant drawback - it requires significant capital investment and resources. Innovation is a complex industry, especially since the market is saturated with similar products at similar prices. OEM projects are evaluated on two key parameters - resources and rewards.
OEM designers strive for low-cost, high-efficiency design processes, but a mistake can very well lead to low rewards. To do this, they must create large sources of income to fund their research and experiments. Finally, after development and release, there is always the threat of intellectual property theft.
Corporate espionage and hacking to gain access to secret projects have become almost commonplace in large corporations today as each seeks to dominate a highly competitive market.
ODMs, on the other hand, do not have to invest significant resources in the innovation process, since they mainly produce products based on the designs provided to them. This makes them significantly cheaper than products that carry the additional burden of research costs.
While companies working on new designs often fund this activity by increasing the cost of the product, ODMs must only charge the amount needed to cover their manufacturing costs. This makes ODM based products much cheaper.
However, ODMs face fierce competition with each other due to the market being oversaturated with similar products. Many of these products have minor technical features that often do not bother the consumer. Because they don't have to worry about the cost of innovation, these firms often cut prices significantly.
Unfortunately, when similar products are priced differently, consumers gravitate toward the cheapest product, no matter how small the difference. This forces other firms to cut prices. Eventually, the cost drops to a level where it becomes unprofitable. This is unhealthy market competition that could lead to shortages in the global economy.
There must be a large or significant difference between ODMs to justify a price increase. It also forces them to innovate to a certain extent in order to maintain a healthy profit margin.
This rapid jump between the selling price of a product and the cost of production can lead to a monopoly in the market, unhealthy competition, and a lack of incentives for innovators in the field.
Read more about Incoterms 2020. Point of Delivery and Transfer of Risk