Explained: Acronyms in Automobile Industry*
To say that the automobile industry has its fair share of acronyms and abbreviations denoting some fundamental concepts is to state the obvious. What is a bit puzzling, however, is the fact that a few of these fundamental terms used in the industry do not seem to have a common definition or meaning. For example, what or who are Original Equipment Manufacturers, how are they different from Original Equipment Suppliers? Can one entity be called as an OEM in one context but as an OES in another? If yes, when, and why? What are Tier I, Tier II and Tier III suppliers? How do they interact with the OEMs? Such questions have frequently plagued newcomers to the industry.
The objective of this article is to shed some light on this confounding topic, with examples. While learned dissertations can be written on this topic, this article, however, has more modest ambitions. The intent is to draw some high-level differences between these terms, along with examples, as also throw light on their complex interplay of relationships, the power struggles between the different entities, how they compete in the aftermarket, etc.
“Original Equipment Manufacturers — Who are they?”
Tata Motors is an OEM. Maruti Suzuki is another. Honda is yet another. So, you get the drift? An Original Equipment Manufacturers of the auto industry (there are OEMs in other industries too) are organizations that sell an automobile(personal or commercial )to an end consumer. That is, to you or me. Now, how do they make these cars prior to selling it to us? Do they make all the parts themselves — the engine, the gear box, the wheels, the AC, and even the music system, and the thousands of other components that go into an automobile? Or, do they get these from other companies? If you have ever wondered about this, then you have thought about the relationship between an OEM and its suppliers.
The answer to the above question is — no, Tata Motors does not manufacture the music system (to take just one example) that is put in their trucks or cars. They buy it from a supplier. The term Original Equipment Manufacturer is vested on them not because they create the product from scratch but because they conceived and designed every ‘part’ of the vehicle. However, they depend on a network of other companies (Tier I, Tier II, Tier III ) to supply them with materials and parts. The automobile OEMs thereafter assemble these components together under their own brand name and warranty. There are also some OEMs who get the complete finished product from the supplier ready for distribution, marketing and whatever else is needed to get the product to the end user.
“Tier I, Tier II, Tier III — What are these?”
So, here is one crucial difference:
· An OEM is a B2C company, while
· A Tier I, II, II Suppliers are usually B2B
But there is more to this.
Tier I suppliers are those that make components for the OEM. For instance, a Tier I company that produces a particular type of car seat, say, for an automobile OEM, might be doing so by complying to the specifications mandated by the OEM. These products may not have any application outside of the OEM’s automobile, and/or the Tier I supplier is obligated under terms and conditions of their agreement with the OEM to sell it only to them. The product is made available in the aftermarket as replacement parts also by the OEM. The contract with the automobile OEM of Tier I companies usually determines the quantity that will be demanded from them according to a schedule. As long as the automobile OEM is doing good business, the Tier I suppliers also generally thrive.
Similarly, there are Tier II suppliers who sell parts (e.g. frame for the car seat) or raw material (fabric) to Tier I suppliers. In some supply chains here maybe Tier III suppliers who sell molds, parts, or raw material (steel to fabricate the frame) to Tier II suppliers. The reason for adhering to this kind of supply chain structure is to ensure cost effectiveness. OEMS can focus on the crucial technological elements of their vehicle rather than all the other parts that go into the finished product. For example, for an automobile OEM to focus on researching and manufacturing computer chips will be a highly wasteful enterprise. Leave that to the experts, and instead collaborate with them for this particular need.
“That is all fine; but what are these Original Equipment Suppliers? Who are these guys?”
Hold on. Let’s shift gears gently.
An Audi might boast of a Bose audio system that the company sourced from Bose (a Tier I supplier). However, everyone knows that Bose does not sell their products only to automobile companies. So, what is the difference here?
The difference is that in some cases, the patent or the proprietary design for the product is with the supplier. Such companies which own the proprietary designs of their products is called an Original Equipment Supplier. Some of these “supplier” companies might actually be as big or bigger brands as the automobile OEMs. They get into a collaboration with OEMs as both companies see mutual benefit. The OEM merely integrates the OES’s product into their automobiles. Sometimes, it adds to their brand value. The OES too may feel that by being associated with the OEM, their brand value goes up and they get assured business. So, win-win for both. By the way, these are not always visible parts of the vehicle- the OES may be supplying something as simple as a filter to the OEM.
These companies may also supply similar or other products (not related to any OEM) directly to the customers. These may be manufactured by assembling part sourced from their own suppliers. In this context the company (who may be an OES to another company) can now called an OEM.
These OES (barring some cases of non-compete agreements) often sell their products directly in the after-market space as well. There are multiple reasons for this.
1. There is an opportunity to sell their products to customers directly as replacement parts- especially since many vehicles once they are out of warranty leave the OEMs service network. These vehicles continue to need parts and represents a huge market. The OESs with established brands stand to gain especially when the OEM spare parts are stocked out in the aftermarket.
2. Time to time the OEMs may not lift committed material from the OES and the supplier will be forced to liquidate stock in whichever way he can
3. Some supplier companies do not want to depend on only their OEM for their business. If demand for their automobiles go down, the OEM will reduce offtake, or there might be an extended credit period, both of which can spell disaster for the supplier.
“You mentioned something about an aftermarket. What exactly is that?”
We buy our cars from an authorized dealer. Thereafter, we have to service the car at frequent intervals or get them repaired at times (perhaps, owing to an accident). While the product is in warranty, these activities are done in the authorized service network of the OEM for which OEM supplies required parts. But after the vehicle leaves warranty, many vehicles may no longer use the authorized service centers. They may approach a local workshop. However, this workshop mechanic will also need to source parts that its customers need. These repair shops get these parts from a local auto part retailer. The network comprising of these auto part shops, their customers and the distributors or dealers that service the retail stores is known as the ‘aftermarket’. This is a crowded space too, where OEMs, OESs and spurious products compete for business.
As mentioned earlier, OEMs are keen to promote their own components, but cannot always prevent OESs from selling their products directly here (they may be contractually obliged to sell their products at the same price or at higher price as sold through the OEMs network). Spurious (or, ‘local’) products also compete here. Since they did not have to spend anything on research, they can offer cost-effective products to the end users. Quality may or may not be up to acceptations, but that is a different story. They are able to make their presence felt here because of the huge demand for spare parts (across the country, and also because some spare parts may not even be manufactured by the OEMs and OESs anymore as the demand for them would have dwindled considerably).
In conclusion, there is a lot of jargon and a lot more definitions for them in the automobile industry. Opinion is divided as to what some of these terms mean; but the objective of this article is to provide some clarity on these basic jargons, along with some examples. It is hoped that this article will be a good starting point for those who wish to understand or study this industry in detail. Please leave a comment if you want to add or rectify any of the point stated in the article.
For more of such informative articles on automotive sector please visit : https://www.vectorconsulting.in/industry-solution/auto-auto-components/
*Only some commonly used are explained in this article. The objective is to bring out a basis starting point for beginner’s understanding of the domain.
