Well, no, encodings are not manufactured into the computer. They are software translations from one way of representing a set characters to another. In
Java, the encodings translate between Unicode and non-Unicode. Let's say you're reading a document that you know is encoded UTF-8. When you specify that encoding to your Java Reader, it knows that it will have to read from one to three bytes from the source for each character you request. It knows how many to read and how to map these one to three bytes into a two byte Unicode character. If you were an expert at UTF-8 and Unicode, you could easy code the same thing and wrap it around an InputStream. With Readers and encodings though, that work is already done for you.
ETA: ah, yes, Peter is probably right that you are thinking of code pages. According to his link, they were embedded directly in hardware at some point, but I don't think that's true anymore.