How do you define manufacturing?
What’s in a name? That which we call a rose, by any other name, would smell as sweet.” So says Juliet in Shakespeare’s Romeo and Juliet. Juliet is telling Romeo that their names are an artificial and meaningless convention.
That may be true in romantic tragedies, but perhaps not in manufacturing. In August, the federal Office of Management and Budget (OMB) opted to delay implementation of a new “factoryless goods producer” classification in the latest revision of the North American Industry Classification System (NAICS).
NAICS is a system for classifying businesses. Its purposes are to facilitate the collection and analysis of business data, and to promote uniformity and comparability in statistics describing the North American economy. NAICS is widely used by state and federal agencies, trade associations and private businesses, including ASSEMBLY.
OMB revises NAICS every five years to reflect changes in technology and the economy. The latest edition was published in 2012, and a new version is to be issued in 2017. Earlier this year, controversy erupted when OMB proposed changing how it classifies “factoryless goods producers” (FPGs).
FPGs design the goods they sell, but hire other companies to make them. For the purposes of government statistics, FPGs have historically been classified as wholesalers rather than manufacturers, even though they are heavily involved in activities related to the production of manufactured goods.
Apple Inc. is a prime example. Apple designs its popular electronic products in Cupertino, CA. However, for the most part, actual production of those items is conducted by other companies, such as Foxconn, in China and elsewhere.
Does that make Apple a manufacturer, a wholesaler or a retailer? The answer could have important implications for economic analysis and policy. That’s because FGPs, traditional manufacturers and wholesalers likely have very different wage, employment, productivity and investment dynamics.
Like a meeting between Montagues and the Capulets, the OMB’s proposal did not come without argument. When the agency issued a call for comments on its proposal earlier this year, it received some 22,000 individual statements. Not least among them was a letter from Sen. Sherrod Brown, D-OH, who expressed concern that the proposed reclassification could inflate U.S. manufacturing statistics and undermine data that measures trade imbalances and job growth. He also fears the change could encourage companies to outsource jobs overseas since they would still be categorized as domestic manufacturers.
Certainly, the employment numbers for manufacturing would grow. A 2013 study by the National Bureau of Economic Research found that reclassifying FGPs would have shifted between 431,000 and 1,934,000 workers from wholesale to manufacturing in 2007.
What do you think? Do companies actually have to make stuff to be called manufacturers? Or is it enough simply to design them? How do you define “manufacturing”? Share your thoughts below.