Offshore outsourcing of
production – the problem of
“fabless” enterprises
“Fabless” enterprises:
• Companies engaged in development of
electronic components (but common for other
products as well), and outsourcing
production of final product to enterprises
across borders to relatively low-wages
countries.
• Final product sent directly from subcontractor to final customers, without
registered flow of imports or exports of goods
in the country of the “fabless” enterprise.
Recording “fabless” transactions
• No records in Trade in Goods statistics: No
goods are crossing borders
• Usually: There are not other records.
• First approach: Merchanting services
• Problems:
- Goods are not simply bought and sold
- R&D heavy activity
- Involvement in the whole
manufacturing process
Recording “fabless” transactions
• Second approach
– Difference between revenues from sales to final
customers and cost of goods sold
recorded as services (not yet defined)
– R&D classification
• Problems:
- Goods delivered to final customer by
subcontractor and services (not yet defined) by
compiling economy.
- R&D classification while no R&D product is in
fact delivered.
Proposed approach
• Units involved in international
transactions.
• Economic activity of each unit.
• Output of each unit.
Units involved
1.
1.
2.
R&D unit:
“Fabless” companies are engaged in heavy
R&D investment, which remains the property of
the company.
In fact, we can see R&D activity as own-account
production.
According to SNA and if possible – Separate
establishment.
Main “fabless” company, in the compiling
economy.
Foreign manufacturer abroad.
Economic activity of units
1. Linked establishment performing R&D
activities - R&D classification
2. Main company - Two possible
classifications:
Trade (under ISIC G)
Manufacturing (under ISIC D)
Trade classification is not suitable
•
Although they buy and sell products, trade
classification is not suitable, because these
companies are engaged in significant
activities, which are usually not present in
trade companies:
R&D
and
production.
management
of
joint
In fact, the large value added obtained by
“fabless” companies, can probably be
attributed mainly to those activities.
The concept of “converter”
•
According to NACE 1.1:
“Converters are units which sell goods and
services under their own name, but arrange
for their production by others. These units
are classified to Sector G (wholesale and
retail) except when they own the legal right
and the concept of the product, in which
case they are classified as if they produce
the goods themselves.”
The concept of “converter”
•
The converter should be classified in
manufacturing in the following cases :
When the converter is the owner of patent
rights on the products or is engaged in
significant R&D activity, so it has a
determining role in the conception of the
good. When it is the owner of the final
products, which are being sold under its
name, and takes commercial risks and
commercial responsibility on its products.
“Fabless” companies as
converters in manufacturing
•
•
•
Are deeply involved in the production
process, as R&D is a crucial input and
goods are not simply ordered and re-sold.
Products are sold under their name and
they are taking commercial risks and
responsibility on their products.
The sub-contractor (the foundry) can only
sell the goods to the "fabless" company that
has legal rights on them.
Output produced by units
•
•
•
Output of the R&D establishment is the
R&D (81 according to CPC 1.1).
The sub-contractor produces manufacturing
services, which are sold to the "fabless”
enterprise (could be 88 according to CPC
1.1 although R&D is not a “physical” input).
The output of the main establishment is the
final product sold – the semiconductors (452
in CPC 1.1).
Proposed registration of
transactions
•
•
Since
output
of
sub-contractor
is
“manufacturing services on inputs owned
by others” (R&D remains property of
“fabless”), then the temporary transfer of
R&D need not be registered.
Two possible treatments of final output:
(1) net trade balance in goods
(2) as the total exports in goods.
Proposed registration of transactions
•
•
•
Registering the net balance as exports of
goods could be easier, for practical
reasons.
But to be consistent with definition of the
“fabless” enterprise as a “manufacturing
converter” considered to be producing the
final goods, despite the outsourcing, we
propose to record the total value of goods
sold to final customer as exports of the
“fabless” enterprise.
The acquisition of manufacturing services
from the foundry should be recorded as
imports from the country of the foundry.
Proposed registration of transactions
•
For practical reasons and to facilitate
analysis, it would seem preferable to show
all transactions in goods and to create a
separate sub-category of goods:
Goods
under
outsourced
production.
•
This sub-category could be further divided
between:
•
•
Outsourced to affiliates
Outsourced to non-affiliated enterprises.
Conclusion
1. Treatment of “fabless’ companies as
performers of merchanting services found
unsuitable, since it does not reflect their
central role in the whole manufacturing
process and their involvement in heavy
R&D activities, which are crucial to this
process.
2. Proposed to treat “fabless” companies as
converters and classify their activity as
manufacturing, since they own the product
concept, sell the final output under their
name and take commercial risk and
responsibility of the products.
Conclusion
3. In line with the proposed classification
of the activity of “fabless” companies
as manufacturing, output should be
total value of goods exported, while
the subcontractor’s production should
be recorded as imports of the
economy, where “fabless” companies
are residents.
Duplications and asymmetries
• Let be:
US – final customer
TW – “foundry”- where outsourced
production takes place
IS – “fabless” compiling economy
Duplications and asymmetries
• The only transactions actually recorded
(in the usual case):
US
(100)
TW
(80)
IS
Duplications and asymmetries
• Proposed recording:
US
(100)
TW
(80)
(100) IS
(80)
Duplications and asymmetries
• Goods under outsourced production
in the compiling economy (to BOP):
IL
exports
imports
US +100
TW +80
Duplications and asymmetries
• Corrections in partner economies –
according to “Goods under
outsourced production” in compiling
(“fabless”)economies:
US
exports
imports
IS
+100
TW -100
Duplications and asymmetries
TW
exports
US
IS
-80
+80
imports