Government Proposes Classifying Outsourcers as Manufacturers

On May 22, 2014, the Executive Office of the President, Office of Management and Budget ("OMB") published in the Federal Registger (79 FR 29625) 2012 North American Industry Classification System ("NAICS")—Updates for 2017; Notice of Solicitation for Proposals To Revise Portions of NAICS for 2017.

One of the proposed changes, which if accepted would go into effect in 2017, relates to the classification of entities that arrange for and bring together all of the factors of production necessary to produce a good, accept the entrepreneurial risk of producing and bringing goods to market, and yet outsource these processes. In the proposal they are referred to as factoryless goods producers ("FGPs") Recent years have witnessed rapid and widespread specialization in goods manufacturing as global competition has motivated producers to seek more efficient production methods. This has resulted in outsourcing manufacturing transformation activities (i.e., the actual physical, chemical or mechanical transformation of inputs into new outputs) to specialized establishments, both foreign and domestic. NAICS 2007 did not provide clear guidance on classification of units that control the entire process but subcontract out all manufacturing transformation activities. The recommendation to OMB is classification of establishments that bear the overall responsibility and risk for bringing together all processes necessary for the production of a good in the manufacturing sector, even if the actual transformation is 100 percent outsourced.

Classifying FGPs as "manufacturers" will affect several government statistical programs such as:

1. Bureau of Labor Statistics ("BLS")
   • Quarterly Census of Employment and Wages ("QCEW"),
   • Current Employment Statistics ("CES"),
   • Job Openings and Labor Turnover Survey ("JOLTS"),
   • Producer Price Index Program ("PPI)",
   • Major Sector Productivity, Industry Productivity, Occupational Employment Statistics ("OES"), and
   • other BLS programs that produce estimates using the NAICS classification system.

2. Bureau of Economic Analysis ("BEA")
• Industry Accounts (including Input-Output tables),
• International Area, National Income and Product Accounts, Regional Accounts, and
• other BEA programs that produce estimates using the NAICS classification system.
3. Census Bureau
• Industry statistics from the Economic Census;
• Annual and Monthly Wholesale Trade Surveys;
• the Annual Survey of Manufacturers;
• Monthly Manufacturers' Inventories, Shipments, and Orders ("M3");
• Manufacturing and Energy Consumption Survey ("MECS");
• County Business Patterns ("CBP");
• Quarterly Survey of Plant Capacity Utilization ("QPC");
• Annual Capital Expenditures Survey ("ACES");
• Business R&D and Innovation Survey ("BRDIS");
• Business Expense Survey ("BES");
• Quarterly Financial Report ("QFR"); and
• other series that are published using NAICS.