Offshore outsourcing of production

1
Offshore outsourcing of production the problem
of fabless enterprises
2
Fabless enterprises

• Companies engaged in development of electronic
  components (but common for other products as
  well), and outsourcing production of final
  product to enterprises across borders to
  relatively low-wages countries.
• Final product sent directly from sub-contractor
  to final customers, without registered flow of
  imports or exports of goods in the country of the
  fabless enterprise.

3
Recording fabless transactions

• No records in Trade in Goods statistics No goods
  are crossing borders
• Usually There are not other records.
• First approach Merchanting services
• Problems
• - Goods are not simply bought and sold
• - RD heavy activity
• - Involvement in the whole
• manufacturing process

4
Recording fabless transactions

• Second approach
• Difference between revenues from sales to
  final customers and cost of goods sold
• recorded as services (not yet defined)
• RD classification
• Problems
• - Goods delivered to final customer by
  subcontractor and services (not yet defined) by
  compiling economy.
• - RD classification while no RD product is in
  fact delivered.

5
Proposed approach

• Units involved in international transactions.
• Economic activity of each unit.
• Output of each unit.

6
Units involved

• RD unit
• Fabless companies are engaged in heavy RD
  investment, which remains the property of the
  company.
• In fact, we can see RD activity as own-account
  production.
• According to SNA and if possible Separate
  establishment.
• Main fabless company, in the compiling economy.
• Foreign manufacturer abroad.

7
Economic activity of units

• Linked establishment performing RD activities -
  RD classification
• Main company - Two possible classifications
• Trade (under ISIC G)
•   Manufacturing (under ISIC D)

8
Trade classification is not suitable

• Although they buy and sell products, trade
  classification is not suitable, because these
  companies are engaged in significant activities,
  which are usually not present in trade companies
• RD and management of joint production.
• In fact, the large value added obtained by
  fabless companies, can probably be attributed
  mainly to those activities.  

9
The concept of converter

• According to NACE 1.1
• Converters are units which sell goods and
  services under their own name, but arrange for
  their production by others. These units are
  classified to Sector G (wholesale and retail)
  except when they own the legal right and the
  concept of the product, in which case they are
  classified as if they produce the goods
  themselves.
•  

10
The concept of converter

• The converter should be classified in
  manufacturing in the following cases
• When the converter is the owner of patent rights
  on the products or is engaged in significant RD
  activity, so it has a determining role in the
  conception of the good. When it is the owner of
  the final products, which are being sold under
  its name, and takes commercial risks and
  commercial responsibility on its products.

11
Fabless companies as converters in manufacturing

• Are deeply involved in the production process, as
  RD is a crucial input and goods are not simply
  ordered and re-sold.
• Products are sold under their name and they are
  taking commercial risks and responsibility on
  their products.
• The sub-contractor (the foundry) can only sell
  the goods to the "fabless" company that has legal
  rights on them.

12
Output produced by units

• Output of the RD establishment is the RD (81
  according to CPC 1.1).
• The sub-contractor produces manufacturing
  services, which are sold to the "fabless
  enterprise (could be 88 according to CPC 1.1
  although RD is not a physical input).
• The output of the main establishment is the final
  product sold the semiconductors (452 in CPC
  1.1).

13
Proposed registration of transactions

• Since output of sub-contractor is manufacturing
  services on inputs owned by others (RD remains
  property of fabless), then the temporary
  transfer of RD need not be registered.
• Two possible treatments of final output
• (1) net trade balance in goods
• (2) as the total exports in goods.

14
Proposed registration of transactions

• Registering the net balance as exports of goods
  could be easier, for practical reasons.
• But to be consistent with definition of the
  fabless enterprise as a manufacturing
  converter considered to be producing the final
  goods, despite the outsourcing, we propose to
  record the total value of goods sold to final
  customer as exports of the fabless enterprise.
• The acquisition of manufacturing services from
  the foundry should be recorded as imports from
  the country of the foundry.

15
Proposed registration of transactions

• For practical reasons and to facilitate analysis,
  it would seem preferable to show all
  transactions in goods and to create a separate
  sub-category of goods
• Goods under outsourced production.
• This sub-category could be further divided
  between
• Outsourced to affiliates 
• Outsourced to non-affiliated enterprises.
•  

16
Conclusion

• Treatment of fabless companies as performers of
  merchanting services found unsuitable, since it
  does not reflect their central role in the whole
  manufacturing process and their involvement in
  heavy RD activities, which are crucial to this
  process.
• Proposed to treat fabless companies as
  converters and classify their activity as
  manufacturing, since they own the product
  concept, sell the final output under their name
  and take commercial risk and responsibility of
  the products.
•  

17
Conclusion

• 3. In line with the proposed classification of
  the activity of fabless companies as
  manufacturing, output should be total value of
  goods exported, while the subcontractors
  production should be recorded as imports of the
  economy, where fabless companies are residents.
•  

18
Duplications and asymmetries

• Let be
• US final customer
• TW foundry- where outsourced production
  takes place
• IS fabless compiling economy

19
Duplications and asymmetries

• The only transactions actually recorded (in the
  usual case)
• US
  TW
• (100)
  (80)
• IS

20
Duplications and asymmetries

• Proposed recording
• US
  TW
• (100)
  (80)
• (100) IS (80)

21
Duplications and asymmetries

• Goods under outsourced production in the
  compiling economy (to BOP)
• IL
• exports imports
• US 100 TW 80

22
Duplications and asymmetries

• Corrections in partner economies according to
  Goods under outsourced production in compiling
  (fabless)economies
• US
• exports imports
• IS
  100
• TW
  -100

23
Duplications and asymmetries

• TW
• exports imports
• US -80
• IS 80