United Nations Statistics Division EGM, May 2015 Issues affecting ISIC Rev.4

Background  The Expert Group at its meeting in 2013 reviewed the need for an update or revision to ISIC Rev.4. At that time no sufficient input had been received that prompted immediate action on this.  Since then, a few issues have been raised that will require the attention of the Expert Group.

Background  Some issues have been raised in other papers for this meeting and will be presented separately.  The main issue so far has been the treatment of Factoryless Goods Producers (FGPs), which has been also discussed by the Technical Subgroup. The issue was initially raised by the Task Force on Global Production

Action needed  Considering all issues presented, the EG needs to decide what the required way forward is: Do we need an update/revision of ISIC?  Would that be advisable at this point? Can the issues be addressed through an update of interpretation rules or similar forms? Is any other action necessary?

Factoryless Goods Producers (FGPs)  Since this is the main issue for now, here is a brief recap of the situation: Factoryless Goods Production  Principal develops and supplies intellectual property products (IPPs)  Principal controls the outcome of the production process  Principal hires a contract processor to transform material inputs Principal may not supply any material inputs but does exercise control over the supply of the inputs by identifying the inputs and monitoring the quality of the inputs Contractor manages transformation subject to technical specifications provided by principal  Principal controls access and delivery of final output to customers Contractor can only sell the output to the principal Contractor is captive based on conditional transactions

FGPs  ISIC Guidelines for Complete Outsourcing of Processing Paragraphs 142 – 145 Ownership of material inputs is sole criterion for classifying to manufacturing Ownership of IPPs or control over the outcome of the production process is not part of the decision tree  Accurate and consistent classification of FGPs is important in light of the growing use of factoryless arrangements

FGPs  Discussed by the TSG in October 2014  The TSG-ISIC proposes that: no structural changes be made to ISIC for now status quo remain for the existing guidelines on outsourcing additional research is required to:  (a) fully understand: the nature, composition, and importance of the activity of outsourcing of the production of goods in national economies, its impact on statistics classified by economic activity the consequences of any potential changes to their current ISIC treatment, in all relevant statistical domains  (b) make sure the required data on outsourcing and in particular FGPs can be collected;

FGPs additional research is required before making any potential changes to the ISIC structure or to the existing guidelines on outsourcing or affirming the current treatment  to ensure that the ultimate recommendation can be practically implemented by ISIC users; a typology be developed of the different arrangements for the production of goods (including integrated manufacturers, manufacture contractors and FGPs) by December 2014 a research plan be created by the TSG-ISIC to identify questions, operations and approaches that NSOs may use to inform a consistent treatment of outsourcing of goods production at the international level; national statistical offices flag integrated manufacturers, manufacture contractors and FGPs in their survey programs or business registers to facilitate data analysis and future resolution on their placement within ISIC.

FGPs  From a classification point of view, we need to ensure: That the proposed treatment is practically feasible That concepts of the classification remain in place or be changed consistently across industries, e.g.  If we change the definition of manufacturing, how does it affect other industries  What criteria do we use for defining activities  If we consider assets in our classification decisions, what other impact does that have  Do we need an explicit treatment for captive units?

The way forward  The EG needs to discuss what next steps should be taken  Can we continue with the proposed tasks by the TSG? Consider time frame  Are there other issues that will affect ISIC? Note: At last TSG meeting, no sufficient indication for the need of an ISIC update was found  Do the new issues change that? Distinguish between changes we would do if a revision took place and changes that require a revision