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A New Path to Globalization for Chinese Manufacturing Enterprises: From OEM Manufacturing to Supply Chain Partners

This article analyzes the value, capabilities, charging methods, responsibility boundaries, and gradual transformation methods of the three stages.

A New Path to Globalization for Chinese Manufacturing Enterprises: From OEM Manufacturing to Supply Chain Partners

OEM manufacturing won't disappear, but manufacturers relying solely on production margins will continue to face price pressure.

A more sustainable upgrade path typically involves three stages:

  1. OEM Product Manufacturer: Maintaining stable production and delivery as required;

  2. Solution Provider: Involved in design, materials, testing, and mass production optimization;

  3. Supply Chain Partner: Managing Tier 2 suppliers, inventory, regional delivery, and after-sales outcomes.

The essence of upgrading is not adding more free services, but rather taking on a higher value responsibility that customers are willing to pay for and that the company can consistently deliver.

Deloitte's analysis of servitization in manufacturing (https://www.deloitte.com/ch/en/Industries/industrial-construction/perspectives/servitization-an-increasing-trend-driving-manufacturing-sales-in-switzerland.html) points out that manufacturers are shifting from simply selling products to providing services, subscriptions, or pay-as-you-go models. However, servitization also requires companies to redesign their business cases, ecosystem partners, and risk allocation.

Phase One: OEM Product Manufacturer

OEM companies are primarily responsible for:

  • Receiving drawings or product requirements;

  • Quoting and prototyping;

  • Raw material procurement;

  • Production and inspection;

  • Delivery according to contracts and trade terms.

Core competitive indicators are:

  • Product price;

  • Quality stability;

  • MOQ;

  • Production cycle;

  • Production capacity and basic export capabilities.

Major Risks

  • Continued price pressure due to product homogenization;

  • Customers possess design, channel, and end-user data;

  • Lower supplier replacement costs;

  • Sales growth relies on more orders, rather than higher customer value.

The OEM model remains suitable for standardized products and projects with complete customer capabilities. The issue is not "doing OEM," but whether the company only has OEM capabilities.

Phase Two: Solutions Provider

Solution providers will be involved earlier:

  • Manufacturability analysis;

  • Material selection and substitution;

  • Structural, tolerance, and component optimization;

  • Mold and tooling design;

  • Sample and reliability testing;

  • Certification cooperation;

  • Packaging and transportation optimization;

  • Production ramp-up and annual cost reduction.

The core value is reducing the time and risk for customers from design to stable mass production.

Why are customers willing to pay?

  • Reduced mold modifications and rework;

  • Shorter product launch cycle;

  • Reduced material and assembly costs;

  • Improved mass production consistency;

  • Reduced coordination among multiple technology suppliers.

Clearly Defined Boundaries of Responsibility

  • Who approves design and engineering changes;

  • Who owns the molds, drawings, and improvement plans;

Does alternative material require retesting or certification?

  • How are costs shared in the event of development failure?

  • Who bears the risks arising from supplier recommendations?

Phase Three: Global Supply Chain Partners

Supply chain partners may further assume the following responsibilities:

  • Key Tier 2 supplier selection and management;

  • Multi-factory coordination and final assembly;

  • Safety stock and demand forecasting;

  • Overseas warehousing and regional distribution;

  • Spare parts, repair, and returns/exchanges;

  • Compliance documentation and version maintenance;

  • Product lifecycle and discontinuation management.

This phase is more suitable for:

  • Complex product structure;

Numerous SKUs;

Requires continuous replenishment;

Small customer supply chain teams;

Sales in multiple countries;

After-sales service and spare parts are critical;

High supplier switching costs.

Capability Differences Among the Three Models

| Capabilities | OEM Manufacturer | Solution Provider | Supply Chain Partner |

|---|---|---|---|

| Production & Quality | Core | Core | Core |

| Product Engineering | Limited | Core | Core |

| Project Management | Basic | Important | Core |

| Tier 2 Supplier Management | Primarily Procurement-Based | Partial Integration | System Management |

| Digitalization & Data | Orders & Production | Engineering, Quality & Projects | Orders, Inventory, Logistics & After-Sales |

| Overseas Services | Optional | Project Requirement | Important |

| Pricing Methods | Product Price Difference | Product Price Difference + Development Fee | Product + Management & Service Fee |

Five Questions Your Enterprise Must Answer Before Upgrading

1. Does the customer truly need it?

Don't build overseas warehouses or after-sales teams just because it's popular in the industry. First, confirm the customer's problems, the value they are willing to pay, and the sustainability of their needs.

2. Does the company possess data capabilities?

Supply chain services require connecting orders, BOM, quality, inventory, logistics, and after-sales service. If this data still relies on individuals, service commitments are difficult to consistently deliver.

3. How are new services charged?

Common methods include:

  • Product development fees;

  • Engineering and mold fees;

  • Project management fees;

  • Supply chain management fees;

  • Warehousing and logistics fees;

  • After-sales service fees;

  • Annual service contracts;

  • Performance fees linked to KPIs.

4. Is the capital and risk manageable?

Overseas inventory, payment terms, spare parts, and after-sales service increase capital tied up. Companies should calculate worst-case scenarios, not just look at new revenue.

5. Are liability boundaries written into the contract?

Inventory ownership, certification responsibilities, returns, recalls, data, intellectual property, and transparency with second-tier suppliers must be clearly defined.

Progressive Upgrade Approach

Step 1: Select a Key Client

Prioritize clients with stable partnerships, clearly defined issues, and a willingness to collaborate on improvements.

Step 2: Add a Paid Service

Examples:

  • DFM engineering assessment;

  • Supplier integration;

  • Spare parts planning;

  • Regional safety stock;

  • Quality data reporting.

Step 3: Set KPIs

Can be used:

  • Product development cycle;

  • First-pass yield;

  • On-time delivery rate;

  • Stockout rate;

  • Inventory turnover days;

  • After-sales response time;

  • Disruption recovery time.

Step 4: Validate Business Results

Simultaneously validate client revenue, company gross profit, capital tied up, and operational risks. Once results are reproducible, expand to other clients and markets.

Frequently Asked Questions

Should all manufacturing companies upgrade to supply chain service providers?

No. Standardized products, low after-sales needs, or transactional clients may be better suited to a high-efficiency OEM model.

Can small and medium-sized factories upgrade?

Yes. SMEs are better suited to starting with single engineering, quality, spare parts, or inventory services, rather than covering the entire supply chain at once.

Is building overseas warehouses a necessary condition for upgrading?

No. Overseas warehouses are just one of the regional delivery tools. When demand is unstable or there are too many SKUs, overseas warehouses may increase inventory buildup and tax risks.

Is service revenue always higher than product profit?

Not necessarily. Without standardized processes, pricing, and clear boundaries of responsibility, services may increase workload but reduce profits.

Conclusion

The essence of upgrading from OEM is not changing the company name or promising "full-chain service," but rather gradually shifting from completing production tasks to taking on a portion of the client's development, delivery, or operational outcomes.

The most prudent path is: first solve a real problem, establish a chargeable service, demonstrate value with KPIs, and then gradually expand the scope of responsibility.

References