Moving up in production mode

Most small and medium enterprises (SMEs) in Hong Kong are experienced in Original Equipment Manufacturing (OEM), which was a successful business mode and prevailing production scene in 1980s. Then, it came the fierce competition from the Chinese manufacturers and other Asian countries who are able to produce goods at comparatively lower costs than Hong Kong.

In a bid to face up the increasingly tough competition and business environment, Hong Kong manufacturers have in recent years started switching from the OEM operation to Original Design Manufacturing (ODM) or even develop their own brands by engaging in Original Brand Manufacturing (OBM).

Almost all Hong Kong manufacturers were engaged in OEM production mode in those early days, because once the rapport with OEM customers was established, their business would become stable. By just following the requirements laid out by customers, the manufacturers’ tasks are accomplished. However, OEM is such a free-entry business type that new manufacturers from Mainland China and Taiwan can produce similar goods and enter the market easily. To survive in today’s highly competitive market with just OEM production seems to be unviable and unsustainable. A staggering number of companies have been transforming themselves to move up into ODM and OBM productions.

From OEM to ODM

Shifting from OEM to ODM is already by no means an easy task. Starting from product design to marketing, the manufacturers need to play well with myriads of factors to ensure a successful launch of the new product. The R&D costs for new products could be immense. The manufacturers also need sound market intuitions to develop niche products that make a right market hit.

Producers will encounter problems when implementing their ODM operation. Their first challenge is on how to safeguard its own product rights against rivals from copying their designs. Securing trademarks for the newly designed products might help. But still, it cannot smooth all problems out as copyright issues are far more complicated and tedious.

Moreover, for ODM, usually high costs are required for research and development. Some companies just cannot afford such large investment, so they would rather remain in the “safer” OEM production.

Nevertheless, many companies have taken bold steps to move into ODM production. The reason is obvious- once the ODM products get a successful launch and become popular in the market, they will bring forth a much higher return on investment. To lower and spread the risk of market failure, many companies are taking up both OEM and ODM instead of just doing any one of them.

Going OBM

ODM can be seen as a stepping stone for companies to progress into Original Brand Manufacturing (OBM). Most companies move on to establish their brands after maturing from ODM operation.

However, there are also OEM companies jumping the step of ODM to get into OBM. The Korean brand Samsung, the Chinese firm AOC, the world’s second largest display manufacturers, the Thai firm Pranda Jewelry and Saha Union are examples.

Meanwhile, spates of companies take OBM as a highly viable mode to diversify their product lines. One OBM company can have a number of different product lines. For example, Esprit, which is an international youth style brand providing customers with smart, affordable luxury, has 12 product lines. Even if one product line falls short, gains from other product lines can supplement that loss of revenue. Therefore, with more product lines, the risk of market failure would be reduced.

Furthermore, while the product designs can be swiftly imitated or copied, brands cannot. This is particularly true for the renowned ones. Once customers could recognise the brands which they perceive as the one representing high quality, the effects of branding take place and the brand becomes invaluable asset to the company. In time, customers would develop a sense of loyalty.

On branding success

Building a brand takes time. It is advisable for the OEM or ODM companies to make an early start as the “first-mover” to stay well ahead of their rivals. As an important starting point for the branding process, a newly established OBM company needs to have a sound understanding of the market they aim at, their target consumers and the upcoming trends. Comprehensive market studies and researches are the must to gauge consumers’ genuine needs and their buying psychology.

Establishing a strong and well-positioned brand identity is the ultimate goal for all OBM business. Brand identity is about the company’s strategic intention for the brand to be positioned in the market. The identity can help guide the strategic decisions on marketing communication and branding program to boost the company and its products. It also projects a full and coherent picture to the customers on what the brand stands for. A strong brand image fosters the customers’ understanding, feeling and emotion for and about the brand. A successful brand must be able to deliver the unique value, image and experience the customers expect.

Even though with their brands already established in the market, it is vital for OBM companies to keep on thinking of creative ways to differentiate its brands from the competitors’. They have to devise rigorous brand communication programs to strengthen their brands. The functions of brand communication are three-fold: First, it provides information about the brand of the OBM company. Second, it should enhance customers’ awareness of and familiarisation with the brand. Third, brand communication should be able to create special associated meanings in customers’ minds. For example, whenever seeing the logo of Swarovski featuring a swan together with the words, the customer will immediately associate it with its exquisite crystal production.

Lastly, OBM companies should never do any less on brand management: brand protection and maintenance. Obtaining trademarks or patents is to safeguard their highly valuable designs and property rights and prevent infringement from copycats. Then, investment in long-term marketing and sound R&D are essential to maintain market positioning of the brand. If the product or brand has reached decline stage of its life cycle, the OBM company needs to step up or switch to other marketing strategies to refresh and revive the brand.

OBM challenge for SMEs

OBM is lucrative business and has lots of appealing merits to most local SMEs. However, going OBM is a real challenge for the SMEs when they are trying to go beyond their present state of production to a higher mode for yielding greater and more stable business returns. Brand development can be very time consuming as usually it takes around four to five years. For most SMEs with limited resources and capital, the brand building processes might take even longer time. Moreover, there is no guaranteed success of the new brand.

For those manufacturers with sufficient design expertise, resources and capital for OBM operation, all levels of their staff should stay highly adaptive and flexible throughout the brand-building processes in response to the rapid market changes and external business situation.