Original Equipment Manufacturing Contract and Three-Way Bargaining: Cooperation, Control, and the Opportunism Within

  • Chien-Chung Lin


This chapter discusses the original equipment manufacturer (OEM), a model of large-scale industrial production that is popular today in many sectors of industry, especially in the information technology industry. An OEM’s contractual setting usually involves a three-party negotiation, which includes a product design company/brand owner, an OEM, and a component supplier. The underlying logic of the OEM model is the delegation of manufacturing tasks to different players with different skill sets or specialties for a better allocation of resources. However, this contractual design also entails much complexity in its coordination, as modern manufacturing often has dozens or hundreds of units or steps before a final product is complete.

The author further discusses the phenomenon of the “technical service charge” contract, which is a side agreement between an OEM and a component supplier that allows the OEM to receive a payment or rebate from the component supplier even though there is no real exchange of goods or services involved. The technical service charge contract exemplifies the commercial opportunism and dynamics of adjustment at work in the multi-party supply chains of modern-day manufacturing. Examining this contractual design sheds light on how contracting parties extract benefit from the arrangement.


Original equipment manufacturer (OEM) Information technology (IT) industry Apple Three-way negotiation “Technical service charge” contract Opportunism 


  1. Alchian AA, Demsetz H (1972) Production, information costs, and economic organization. Am Econ Rev 62(5):777–795Google Scholar
  2. Australian Institute of Company Directors (2015) A case study of Apple’s supply chain. 11 Sept 2015. Accessed 23 June 2017
  3. Barboza D (2016a) An iPhone’s journey, from the factory floor to the retail store. The New York Times, 29 Dec 2016. Accessed 23 June 2017
  4. Barboza D (2016b) How China built ‘iPhone City’ with billions in perks for Apple’s partner. The New York Times, 29 Dec 2016. Accessed 23 June 2017
  5. Bibey C (2014) Apple supply chain strong as iPhone 6 closes in. SupplyChain247. 21 Aug 2014. Accessed 23 June 2017
  6. Coase R (1937) The nature of the firm. Economica 4(16):386–405CrossRefGoogle Scholar
  7. Dou E (2016) Apple squeezes parts suppliers to protect margins. The Wall Street Journal, 1 Sept 2016. Accessed 23 June 2017
  8. Duhigg C, Barboza, D (2012) In China, human costs are built into an iPad. The New York Times, 25 Jan 2012. Accessed 23 June 2017
  9. Grossman SJ, Hart OD (1986) The costs and benefits of ownership: a theory of vertical and lateral integration. J Polit Econ 94(4):691–719CrossRefGoogle Scholar
  10. Hart O (1989) An economist’s perspective on the theory of the firm. Columbia Law Rev 89(7):1757–1774CrossRefGoogle Scholar
  11. Hart O, Moore J (1990) Property rights and the nature of the firm. J Polit Econ 98(6):1119–1158CrossRefGoogle Scholar
  12. Hein B (2014) Court docs reveal how Apple treats its suppliers (badly). Cult of Mac. 7 Nov 2014. Accessed 23 June 2017
  13. Holmstrom BR, Tirole J (1989) The theory of the firm. In Schmalensee R, Willig R (eds) Handbook of industrial organization, vol 1. Handbooks in Economics 10. North-Holland, Amsterdam, pp 66–133Google Scholar
  14. Leswing K (2016) Apple is squeezing suppliers to keep its profits high, says analyst. Business Insider, 9 Aug 2016. Accessed 23 June 2017
  15. Lovejoy B (2016) Foxconn, Pegatron & other Apple suppliers reportedly under pressure as Apple squeezes margins. 9to5Mac. 5 July 2016. Accessed 23 June 2017
  16. Oliver S (2012) Under Tim Cook, Apple cracking down on supply chain management. Appleinsider, 18 June 2012. Accessed 23 June 2017
  17. Randewich N (2014) GT Advanced says fell victim to “bait-and-switch” by Apple. Reuters, 7 Nov 2014. Accessed 23 June 2017.
  18. Statista (2017) Global market share held by leading smartphone vendors from 4th quarter 2009 to 4th quarter 2016. Statista, the Statistics Portal. Accessed 23 June 2017
  19. The Economist (2010) Light and death: suicides at Foxconn. The Economist, 27 May 2010. Accessed 23 June 2017
  20. Webb A (2016) Apple forecasts second sales drop as iPhone woes deepen. Bloomberg, 27 Apr 2016.
  21. Williamson O (1975) Markets and hierarchies: analysis and antitrust implications. Free Press, New YorkGoogle Scholar
  22. Williamson O (1985) The economic institutions of capitalism: firms, markets, relational contracting. Free Press, New YorkGoogle Scholar
  23. Wingfield N, Duhigg C (2012) Apple lists its suppliers for 1st time. The New York Times, 13 Jan 2012. Accessed 23 June 2017
  24. Xu EY (2012) Defining new business models for the mobile device supply chain. Master’s thesis, Massachusetts Institute of TechnologyGoogle Scholar

Copyright information

© Springer International Publishing AG, part of Springer Nature 2018

Authors and Affiliations

  • Chien-Chung Lin
    • 1
  1. 1.National Chiao-Tung UniversityHsinchuTaiwan

Personalised recommendations