Saturday, May 16, 2015

Factoryless Goods Producing Firms

Andrew B. Bernard and Teresa C. Fort sketch what is known about the "Factoryless Goods Producing Firm" in the May 2015 issue of the American Economic Review: Papers and Proceedings (vol. 105:5, pp. 518-523). The AER is not freely available on-line, but many readers will have access through a library subscription. Succumbing to acronyms, Bernard and Fort write: "We define a FGPF as a firm that has no manufacturing establishments in the United States, but performs pre-production
activities such as design and engineering itself and is involved in production activities, either directly or through purchases of contract manufacturing services (CMS)."

Want examples? Here are three:
Perhaps the canonical example of a factoryless goods producer is the British appliance firm, Dyson, best known for its innovative vacuum cleaners. The firm initially designed, engineered, and produced vacuum cleaners in Wiltshire, England but subsequently chose to offshore and outsource all the production to Malaysia while leaving several hundred research and other employees in the United Kingdom. Dyson’s more recent innovations in product lines such as hand dryers and fans have never been produced in the United Kingdom or by Dyson itself.
The best-known example of a factoryless goods producer is Apple Inc. Apple designs, engineers, develops, and sells consumer electronics, software, and computers. For the vast majority of its products, including iPhones, iPads, and MacBooks, Apple does none of the production and the actual manufacturing is performed by other firms in China and elsewhere. While Apple is known for its goods and services and closely controls all aspects of a product, almost none of Apple’s US establishments would be in the manufacturing sector.
The semiconductor industry is well-known to have factoryless goods producers in the form of “fabless” firms. Mindspeed Technologies, a fabless semiconductor manufacturer in Newport Beach, CA “designs, develops, and sells semiconductor solutions for communications applications in wireline and wireless network infrastructure equipment.” Mindspeed outsources all semiconductor manufacturing to other merchant foundries, such as TSMC, Samsung, and others. Mindspeed’s establishments would not be in the manufacturing sector.
How prominent are factoryless goods producing firms in the US economy, and how much have they expanded over time? By definition, you don't find these firms in the manufacturing sector of the economy. Bernard and Fort look at stastistics on the wholesale trade sector of the economy. As background, wholesale trade is about 6% of the US GDP when measured in value-added terms. which is about half the size of the manufacturing sector, or half the size of the professional and business services sector. Here are a few facts from Barnard and Fort ahout factoryless goods producing firms:

  • In 2007, the total number of factoryless good producing firms was 13,500, and these firms employed 672,000 workers. "
  • Industries where factoryless goods producing firms tend to focus include electrical machinery and equipment, machine and mechanical appliances and computers, pharmaceuticals, and apparel. 
  • Compared to other firms in the wholesale industry, the factoryless goods producing firms tend to be larger and to pay higher wages. 
  • If you go back to 1992, and look at the factoryless goods producing firms of that time, you find that many of them begin manufacturing in the US at some poitn. Indeed, "it is likely that the current set of FGPFs are a mix of different types of firms including former manufacturing firms, new firms created as FGPFs from their inception, and other firms that have made the transition to the design and manufacture of products. More work is needed to understand the evolution of FGPFs over time."
  • The imports of factoryless goods producing firms are equal to about 38% of their total sales. Thus, a majority of money spent at such firms ends up flowing to non-manufacturing inputs from the US economy.

The growth of factoryless goods producing firms may have effects on wages, employment, and productivity. It's a phenomenon worth understanding.

Full disclosure: The  AER is published by the American Economic Association, which also publishes the Journal of Economic Perspectives, where I work as Managing Editor.