classification of factoryless goods producers - presentation to aeg luxembourg, may 2013

Classification of Factoryless Goods Producers - Presentation to AEG Luxembourg, May 2013

Michael Connolly – Task Force Global Production UNECE

Background - TF Global Production

Follow up on the Globalization Guide (2011) Reports to the CES Bureau Co-ordinates ISWGNA Consults with OECD NAWP /BOPCOM/UNECE

Group of Experts Finalisation of the Guide by the end of 2013

Main objectives: Guidance on unresolved conceptual issues

arising from 2008 SNA and BPM6 Develop practical guidance on implementation

May 2013Task Force Global Production2

Factoryless Goods Production Principal (FGP) develops and supplies intellectual

property products (IPP) FGP controls the outcome of the production process FGP engages a contract processor (CME) to transform

the material inputs FGP may or may not own the material inputs used in the

production process FGP specifies the inputs and monitors the quality of these

inputs CME manages the transformation subject to the technical

specifications provided by the principal FGP controls access and delivery of final outputs to

customers


Factoryless Goods Production Similar to Goods for Processing but the entire

production process is contracted out Guidance in BPM6 - par 10.42, par 10.62- 10.66 Guidance in SNA 2008 - pars 6.12, 14.38, 26.20, 28.15 Guidance in ISIC4 par 136- 145 and IIP par 3.2.2 pp22-24

Final export of goods produced by contractor and sold on to customers by FGP are recorded in the country of FGP

Value added for FGP is included in Manufacturing statistics of the country of FGP – if classified to manufacturing

What is the borderline between an FGP and another enterprise that is outsourcing ?


ISIC 4 Guidelines for Complete Outsourcing of Processing

Provision of material inputs is the sole criterion for classifying the FGP to manufacturing

Provision of material inputs is sole criterion for determining the industrial classification of FGP

The FGP that does not supply any material inputs is classified to distribution or trade

No consideration given to supply of IPPs or control over the outcome of the production process

Accurate and consistent classification of FGPs is important in light of growing use of factoryless arrangements


Factoryless Production and Economic Ownership – Contract Manufacturer relationship

Relationship between FGP and CME can be complex FGP retains IP ownership and rights FGP might fund working capital of CME CME might work exclusively for the FGP - captive FGP might sell components to CME

BPM6 - par 10.64 allows for fee charged by the CME to include cost of materials purchased in the production process


Significance of material inputs Goods v’s Services

MNE Manufacturing in Ireland for International Markets in Q4 2012 - excl. Local costs


Aspects of FGP Production

FGP retains Technical know-how Product design

FGP controls Outcome of production process Access and delivery of final outputs to customers

CME supplies Prespecified goods at predetermined prices


FGP Classification Issues and Criteria

Inconsistent classification within industry sectors Returns earned by FGPs exceed returns earned by

distributors Risks assumed based on development and supply of IPP inputs Risks assumed based on control over the outcome of the production

process

FGPs differ from manufacturers that play a more active role in transformation and from pure distributors that play a more passive role in production

Value-added contributed by the contractor does not reflect the full value of the final output based on limited risks assumed by the contractor


FGP Classification Issues and Criteria Inconsistent classification between industry sectors

No requirement for material inputs to be supplied by FGPs in service industries e.g. Construction

Inconsistent classification across countries

Classification Criteria Control over the outcome of the production process Ownership and provision of IPP inputs Ownership and provision of other inputs (goods and

services) Interpretation of NAICS and recommendations to

treat FGP activities


Issues Discussed by the TF

Should the definition of inputs be extended to include IPP services provided by FGP?

No requirement for material inputs to be supplied by FGPs for services

The principal can be considered to bear the risks and rewards from production – obliged to take the finished product.

Control over the outcome of the production process and a contractual obligation to acquire the output - is this more appropriate criteria


Issues Discussed by the TF

FGPs differ from manufacturers that play a more active role in transformation and from pure distributors that play a more passive role in production

A growing area of concern to economic statisticians – fragmentation of production


Recommendations of Task Force on Global Production

A principal that owns and supplies:- other inputs (goods and services)- IPP and other inputs (goods and services)- IPP inputs only (and other inputs are supplied

by CME)

should be classified to manufacturing – new subset of existing classification

A principal that owns and supplies no IPP inputs and no other inputs (goods and services) should be classified to Distribution


Questions to AEG MembersIn addition to developing and supplying IP services : Do you agree that the FGP specifies the inputs

monitors the quality and controls the outcome of the production process – carried out by CME?

Do you agree that the FGP takes the principal risks and receives the main returns from the production process?

Do you agree that there is an overemphasis on the ownership of material inputs being used, in the case of complete outsourcing of processing (manufacturing) in ISIC4?


Thank you for your attention

Any questions ?


classification of factoryless goods producers - presentation to aeg luxembourg, may 2013

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