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
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Task Force Global Production
May 2013
Factoryless Goods Production
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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
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FGP controls access and delivery of final outputs to customers
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Task Force Global Production
May 2013
Factoryless Goods Production
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Similar to Goods for Processing but the entire production
process is contracted out
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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 ?
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Task Force Global Production
May 2013
ISIC 4 Guidelines for Complete
Outsourcing of Processing
Provision of material inputs is the sole criterion for
classifying the FGP to manufacturing
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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
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Task Force Global Production
May 2013
Factoryless Production and Economic Ownership
– Contract Manufacturer relationship
Relationship between FGP and CME can be complex
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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
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Task Force Global Production
May 2013
Principal
FGP
Contract
Manufacturer
(CME)
Customer
Material
Inputs ? FGP
or CME
Manufacturing Services –
Contract manufacturer
IPP - FGP
Product
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Task Force Global Production
May 2013
Significance of material inputs
Goods v’s Services
MNE Manufacturing in Ireland for International
Markets in Q4 2012 - excl. Local costs
Material inputs
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Mgt, agents, adv,
Royalties
Task Force Global Production
Other services
May 2013
Aspects of FGP Production
FGP retains
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Technical know-how
Product design
FGP controls
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Outcome of production process
Access and delivery of final outputs to customers
CME supplies
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Prespecified goods at predetermined prices
Task Force Global Production
May 2013
FGP Classification Issues and Criteria
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Inconsistent classification within industry sectors
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Returns earned by FGPs exceed returns earned by distributors
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Risks assumed based on development and supply of IPP inputs
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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
Task Force Global Production
May 2013
FGP Classification Issues and Criteria
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Inconsistent classification between industry sectors
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No requirement for material inputs to be supplied by FGPs in
service industries e.g. Construction
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Inconsistent classification across countries
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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
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Task Force Global Production
May 2013
Issues Discussed by the TF
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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
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Task Force Global Production
May 2013
Issues Discussed by the TF
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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
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Task Force Global Production
May 2013
Recommendations of Task Force on
Global Production
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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
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A principal that owns and supplies no IPP inputs and no other
inputs (goods and services) should be classified to
Distribution
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Task Force Global Production
May 2013
Questions to AEG Members
In addition to developing and supplying IP services :
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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?
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Task Force Global Production
May 2013
Thank you for your attention
Any questions ?
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Task Force Global Production
May 2013