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China makers start de-emphasizing OEM

Contract manufacturing remains China's export backbone, but an increasing number of suppliers are now taking more serious steps toward an OBM shift.

China's efforts to boost design capability and international brand building are gaining steam.

China makers start de-emphasizing OEM
Wenzhou Shengli distributes its iRest line of massagers to retail stores in Asia and the Middle East.

Transitioning from a contract manufacturing business model to one that emphasizes ODM and OBM has increasingly become a popular strategy during the past two years. Suppliers have realized how focusing on OEM can depress their bottom line and overall development. Not only are such companies often at a disadvantage in price negotiations, but many of their products are also slapped with anti-dumping and anti-subsidy duties by importing countries.

As with most developments in China's export manufacturing industry, it is the large enterprises that have taken the first step toward reducing OEM's share of their business. But even they cannot stop receiving contract manufacturing orders completely as doing so could prove disastrous.

For one thing, China brands are not likely to gain wide acceptance in traditional markets in a short span of time. Suppliers are instead easing out OEM transactions in emerging economies such as South America, Southeast Asia and Africa. They believe it is easier to promote OBM lines there as consumers in those markets are more conscious about price than established brands.

One of the country's major manufacturers of massagers, Wenzhou Shengli Healthcare Equipment Co. Ltd distributes its iRest line to retail stores in the Philippines, India, Iran, Saudi Arabia and the UAE. The company has since stopped accepting OEM orders from these countries. OBM sales now contribute roughly one-third to total turnover.

While refusing OEM orders could affect relationships with long-term clients and may reduce market share, Guangdong Galanz Enterprise Group Co. Ltd believes product choice is key. As long as the company can offer a range of innovative products at competitive price points, the brand can gain gradual market acceptance.

Branding strategies

One of the most common ways suppliers are taking to promote their brands is to work with reputable distribution agents or franchisers in their target markets. This is the strategy employed by Wenzhou Shengli and TCL Lighting Electrical Appliances Co. Ltd. After penetrating the Middle East and Southeast Asia, TCL is now focusing on cultivating brand recognition in the US, which currently accounts for less than 3 percent of TCL's OBM exports.

"It is not easy to promote our brand in the US," export manager Wan Jun said. "But if our OBM expansion to the US is a success, we plan to continue marketing our brand to other countries." TCL's branded lighting products that are being sold in the US are usually priced 20 percent higher than other China-made items.

Some large suppliers, on the other hand, have opted to purchase an internationally established brand to promote their own. This is not a new strategy, and was employed by Lenovo when it bought IBM's PC arm in December 2004. Now, it is the big garment and footwear companies in Zhejiang and Fujian provinces that are looking to acquire European brands. These labels come from small and midsize businesses, but are said to be well-known, especially among the upscale set.

Refrigerator manufacturer Homa Appliances Co. Ltd is considering both strategies. Branded lines will be developed and promoted in emerging economies such as Africa and South America. But for mature markets such as Europe, the company intends to study established brands it can take over.

The downside of OEM

Due to rising costs and price-sensitive buyers, many OEM-oriented companies in China have seen their profits dwindle in recent years. In most cases, margins are just enough to keep their businesses afloat. A TV maker in Shenzhen, Guangdong province, even said the markup for an LCD TV may sometimes be less than what a porter at electronics market Hua Qiang Bei receives, which is between 50 and 250 yuan.

Household appliance companies in Shunde, Guangdong, said they sometimes carry out OEM orders at cost just to maintain the capital flow. But they only do so for long-term clients that place large-volume orders.

But while suppliers have very little sway over OEM price negotiations, they have the upper hand when it comes to OBM. The microwave ovens, air conditioners, refrigerators and washing machines Guangdong Galanz exports to the Middle East and South America with its own brand earn 8 to 10 percent more profit than OEM models.


Note: This article "China makers start de-emphasizing OEM" was originally published by Global Sources, a leading business-to-business media company and a primary facilitator of trade with China manufacturers and India suppliers, providing essential sourcing information to volume buyers through our e-magazines, trade shows and industry research.

All price quotes in this report are in US dollars unless otherwise specified. FOB prices were provided by the companies interviewed only as reference prices at the time of interview and may have changed.

Disclaimer: All product images are provided by the companies interviewed and are for reference purposes only. Those product images featuring products with trademarks, brand names or logos are not intended for sale. We, our affiliates, and our affiliates' respective directors, officers, employees, representatives, agents or contractors, do not accept and will not have any responsibility or liability for product images (or any part thereof) which infringe on any intellectual property or other rights of a third party.

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