China has been largely recognised as the “factory of the world” this is due to the thirty years of high development after the Reform and Opening. With over 1/3 of OEM businesses are provided by China, however 20% of the domestic brand market uses OEM (Yang & Liu, 2009). China know that there are many advantages of ODM. Chinese companies has relied upon the world’s huge multinationals who have advanced design capabilities, technology ,brands and sales channels to carry out OEM production. The result of depending on these large multinationals is low-end processing manufacturing with low profit margins. However China’s cheap labour advantage is soon disappearing as a result of the growth of the domestic economy and the development of Southeast Asia. This therefore is making it much more difficult to rely solely upon OEM production model. Therefore, OEM is needed to upgrade to a higher level within the supply value chain.
The majority of scholar agree the enterprise upgrade path originates from OEM to ODM then finally into Original Brand Manufacturing OBM (Wang, & Mao, 2007; Hobday, 1995). Technological innovation is on of the key elements of this manufacturing transition. If enterprises have valuable, scarce, inimitable and irreplaceable resource, they will have access to potential sustainable competitive advantage (Jiang, & Sun, 2012). Following the route of technological innovation to acquire the proprietary technology for competitive advantage, then to accomplish the upgrade to ODM model, is an important way for OEM enterprises to achieve transition towards high-tech and branded mode. As a result, to recognize the opportunity and to find the paths upgrading from OEM to ODM is important.
ODM is a production mode of which the fiduciary enterprises with basic R&D and product design capabilities design, produce and machining products in accordance with the needs and authorization of the brands enterprises. It means that the ODM also undertake business like products’ depth processing and processing and designing besides assembling and simple production (Liu, 2005). Compared to the OEM, ODM enterprises have more advantages in the industrial chain.
Four Advantages of ODM
1) Higher Supply Chain Value
Firstly, ODM enterprises have equivalent core competence. From the value chain point of view, manufacturer operates value chain activities mainly by development & designing, assembling & manufacturing, brand promotion & marketing etc., the modularized division of work in value chain lays a good foundation for manufacturer choosing his business scope, as well as the division of labor between manufacturers (Sun, 2007). Under ODM, enterprises could win the dominant right of development & designing with strong manufacture advantage, thereby possessing complete product capacity. Meanwhile, ODMs’ down-stream enterprises, also called their custom-enterprises, could concentrate to expand the marketing channels and do better sales services, while they have the whole marketing capability. Therefore they have equivalent competence making for complement each other’s advantages.
2) Stable Transactional Relations
Secondly, ODM enterprises have stable transaction relationships. In the ODM operation mode, ODM manufacturers are engaged in R&D and producing activities according to ODM clienteles ‘requirements. ODM clientele enterprises in downstream will have to analyze the target market, to accomplish the works like production distribution, production service and brand promotion. From the point of enterprises resources, both sides’ transaction should centre on specific object of transaction, and distribute special investment for completing their respective business link, meeting specific market requirements. Due to the strengthening of asset specificity, the scope ODM partake in both activities will get smaller as the increasing of trade special cost, resulting in the reinforced resource capability and the more stable trading relationship.
3) Low Risk Customer Relations
Thirdly, ODM enterprises have stable and low-risk customer relations. ODM enterprises have a high position in value chain owing to their holding core resources and capability; they can choose their clienteles in a broader range. Stem from risk consideration, ODM often possesses many cooperative partners, and the client base is stable relatively, some changing of customer relation is not likely to affect the whole business of ODM.
4) Profit Distribution is Equal
Fourthly, ODM enterprises have equal status, and the profit distribution is balanced. Compared to OEM, ODM manufacturers have relative balanced cooperative relationship with ODM client under the vertical division of labour system, they have equal say so that to consult the contains and benefit distribution of related products (Deng, 2010). ODM enterprises are able to strive for the profit sharing preferably on the basis of equal contract relation.