Contracts for OEM / PLM / ODM / EMS / contract manufacturing

Many paths lead to a finished IT product. In addition to the idea and the relevant new ideas for a "product design", a company does not always have its own production plant, the necessary relationships with important suppliers and the resources for sales. In practice, various types of division of labor and cooperation have therefore emerged, within which - among others - the terms OEM, PLM, ODM and EMS are often used. The terms are not regulated by German law and are used in practice with slight differences. The following uses are common:

OEM / PLM

In the context of contract manufacturing, an OEM (Original Equipment Manufacturer) is a company that manufactures an IT product according to its own specifications. Another company, a PLM (Private Label Manufacturer), can then, for example, purchase the finished products from the OEM and sell them under its own brand or name, so that the product appears as the PLM's own product. The PLM may have an interest in this, e.g. to round off its product range for end customers without having to develop a new product and worry about CE marking, for example. The OEM may have an interest in the collaboration because it does not have to organize sales and can concentrate on its core competence - manufacturing. The OEM can also work together with various PLMs and thus possibly sell larger product quantities than would be possible if the products were sold under the manufacturer's brand or name alone.

In the IT sector, the term OEM is also used in another way, namely for the initial equipment of a device with a version of an IT component - usually with a limited range of functions - known as an "OEM version". This OEM term therefore does not refer to the contractual relationships under consideration here.

Authorized dealers and sales representatives

The OEM-PLM relationship must be distinguished from contracts in which one party merely sells finished products of a manufacturer (OEM), e.g. as an authorized dealer or commercial agent - possibly under additional agreements such as territorial or temporal exclusivity or a non-competition clause.

The key difference between a PLM and an authorized dealer or commercial agent is that the PLM is usually the holder of the certificate (e.g. the CE certificate). By contrast, in the case of an authorized distributor or commercial agent, the manufacturer (OEM) is the holder of the certificate; the authorized distributor or commercial agent merely distributes the manufacturer's finished products.

Framework supply agreements for the supply of components to a manufacturer, which enable a manufacturer to produce the actual product in the first place, are also to be distinguished.

ODM

An ODM (Original Design Manufacturer) is a company that carries out numerous activities for a client. Essentially, a client can create rough specifications for a product and the ODM takes care of the rest, i.e. development, production and distribution. The product may bear the client's brand or name. However, the industrial property rights and any copyrights usually remain with the ODM, giving it a comparatively "strong" position.

EMS

EMS (Electronic Manufacturer Services) refers to the service provided by a company that is comparable to that of an ODM. One major difference, however, is that the client is or becomes the owner of the property rights. Distribution is also not usually carried out by the EMS company, but by the client.

Outsourcing

Ultimately, a certain amount of outsourcing of research and development services (R&D), manufacturing processes and also distribution takes place via various contractual constellations - some of which are typically described above in the IT sector.

Contract design

The basic contractual constellation to be used in each case is an important factor in determining the contract design. However, it also depends on the further "details" of the contract, e.g. the clauses on liability, the deposit / escrow of production documents (including software source code), warranties and, if applicable, guarantees, the duration of the contract, arbitration clauses and clauses on the applicable law and place of jurisdiction.

Example: If an OEM PLM contract stipulates that the warranty is only 12 months from delivery, there is a considerable risk. This is because if the goods are initially held in the PLM's warehouse or by intermediaries for 7 months and only then reach the end customer, the warranty period vis-à-vis the OEM is only 5 months. However, the end customer is - usually - entitled to a warranty period of 24 months vis-à-vis the PLM. Therefore, if a warranty claim only arises 6 months after the sale to the end customer, for which the OEM is ultimately responsible, the PLM alone must bear the damage, without any possibility of recourse - this applies in any case from a purely contractual perspective. In the event of damage, there may be opportunities for recourse, depending on the type of damage. In any case, the liability risk of the PLM in the example case is unnecessarily high. This can be prevented by drafting and negotiating the contract properly.

Date: 8. Nov 2017