Factoryless Goods Producers May Be as Hypothetical as Their Domestic Factories

17 September 2014 Manufacturing Industry Advisor Blog

Recently, the Office of Management and Budget (“OMB”) has considered a controversial new federal classification: “Factoryless Goods Producers” (“FGP”). FGP recognizes that a significant portion of the American workforce is involved with the manufacturing of goods, even if the factories actually assembling the final products are overseas. But what’s the point?

“Designed by Apple in California. Assembled in China.”

Every Apple® iPhone® user knows this tagline. It’s as much about satisfying U.S. country of origin laws as reminding consumers the extent to which highly-skilled U.S. jobs are involved in the creation of their smart phones – something that sharply distinguishes Apple from nearly all of its competitors, which design, manufacture, and assemble their products overseas. Up until very recently, Apple’s practice of designing its products and manufacturing some components domestically may have been enough to classify a significant portion of its U.S. workforce as part of the domestic manufacturing sector, under the FGP classification. But in the final weeks leading up to its implementation, the Office of Management and Budget (“OMB”) has decided to postpone use of the classification by several years, meaning Apple® smart phones, and other similar products, will not be boasting “Made in America” labels anytime soon.

While Apple designers and engineers in America account for the bulk of the labor that goes into creating a new product, under current OMB rules, these highly-skilled individuals are counted among the many in the generalized services industry and not part of the American manufacturing workforce. In other words, on paper, an Apple employee designing a smart phone in California – a consumer product that will be sold to millions of Americans in addition to millions of others worldwide – looks no different than an attorney at a law firm in Chicago, because both are viewed to be service providers under the current classification scheme.

Background of the FGP Classification

In August 2011, the OMB entered a directive to create and implement the FGP classification by 2017. The new classification would be part of the North American Industry Classification System (“NAICS”), which are used to analyze different sectors of the American workforce. The aim of the FGP classification is simple: count the highly-skilled employees contributing to the design and development of consumer goods as part of the American manufacturing sector.

One trend that has been plainly obvious the past two decades is the decline of the American manufacturing sector. The implementation of the FGP classification would directly benefit U.S. manufacturing statistics overnight, as thousands of American workers involved in the designing and engineering of products would now be included in the broader definition of American manufacturing.

But “increasing” the number of American manufacturing jobs is not the only immediate impact that the FGP classification would have. Goods made by FGPs – like the Apple® iPhone® – would count as American-made on paper. Thus, goods actually assembled overseas by FGPs would be viewed as American exports. This would have an immediate and dramatic effect on the U.S. trade deficit because countless products actually assembled in countries like China would show up on the U.S.-side of the trade ledger.

Because of the perception that the FGP classification is nothing more than sleight of hand to mask a growing U.S. trade deficit, the FGP classification has met tough criticism from U.S. labor unions and companies that actually assemble their goods domestically. In fact, more than 26,000 comments have been received by the OMB since announcing the decision to implement the FGP classification.

Recent Postponement of the FGP Classification

Surprisingly, on August 8, 2014, the OMB announced plans to postpone the 2017 implementation of the FGP classification by several years. In its official statement, the OMB blamed the postponement on a need to conduct more research to ensure that the method for identifying and counting FGPs is accurate, and this research would take years to complete.

In short, counting who is or is not a FGP is not as easy as it sounds. Potential FGPs are not always easy to quantify, because certain manufacturing or assembly steps may take place domestically, and some of the designing and engineering may be carried out by contractors in other parts of the world. Add to the mix that many consumer products have numerous internal components, many of which may be designed, engineered, and/or assembled overseas. Apple perhaps is uniquely situated in that only that last manufacturing step – the final assembly – takes place in China, with nearly everything else being carried out by its more than 43,000 U.S. employees in California.

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