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

1. Classification of Factoryless Goods Producers - Presentation to AEG Luxembourg, May 2013 Michael Connolly – Task Force Global Production UNECE

2. 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 Task Force Global Production

3. 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 Task Force Global Production

4. 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 ? Task Force Global Production

5. 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 Task Force Global Production

6. 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 Task Force Global Production

7. Task Force Global Production

8. Significance of material inputs Goods v’s Services MNE Manufacturing in Ireland for International Markets in Q4 2012 - excl. Local costs Task Force Global Production

9. 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 Task Force Global Production

10. 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 Task Force Global Production

11. 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 Task Force Global Production

12. 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 Task Force Global Production

13. 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 Task Force Global Production

14. 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 Task Force Global Production

15. Questions to AEG Members In 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? Task Force Global Production

16. Thank you for your attention Any questions ? Task Force Global Production