1. www.bea.gov Classifying Factoryless Goods Producers Brian C. Moyer U.S. Bureau of Economic Analysis Meeting of the Expert Group on International Statistical Classifications New York May 13-15, 2013

2. www.bea.gov 2 Introduction to the TFGP ▪ Created in November 2011 by the Conference of European Statisticians at the UN to support implementation of the 2008 SNA and BPM6 ▪ Objectives  Identify global production arrangements that impose measurement challenges  Develop practical guidance on implementation of new standards  Publish a Guide to assist recording of global production activities  Preliminary draft presented to the Group of Experts on National Accounts in April 2013  Final draft tentatively scheduled for April 2014 ▪ In addition to measurement challenges related to factoryless arrangements, the TFGP considered conceptual issues linked to the current ISIC guidelines  Issue paper on classifying FGPs to be presented to the Advisory Expert Group on National Accounts in May 2013 ▪ TFGP Web address: http://www.unece.org/stats/groups/tfgp.html

3. www.bea.gov 3 FGPs and ISIC ▪ 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 ▪ ISIC Guidelines for Complete Outsourcing of Processing  Paragraphs 142 - 145  Provision of material inputs is sole criterion for classifying to manufacturing  Provision of material inputs is sole criterion for ownership of material inputs and final output  Principal that does not supply any material inputs is classified to 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 the growing use of factoryless arrangements

4. www.bea.gov 4 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 processing 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  Economic ownership of final output is not as simple as provision of material inputs ▪ 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) ▪ The TFGP seeks clarification related to classifying FGPs

5. www.bea.gov 5 Recommendations for Classification ▪ Separate and New Subset of Existing Manufacturing Classifications  FGPs differ from traditional manufacturers and from traditional distributors ▪ Principal  Three cases in which to classify a principal to manufacturing as a separate and new subset of existing classifications that highlights the factoryless characteristics  The principal owns and supplies other inputs (goods and services) to a contractor  The principal owns and supplies IPP inputs and other inputs (goods and services) to a contractor  The principal owns and supplies IPP inputs but no other inputs(goods and services) to a contractor  Classify a principal to trade if the principal owns and supplies no IPP inputs and no other inputs (goods and services) ▪ Contract Processor  Classify to manufacturing (paragraph 139 of ISIC)