Rethinking the Manufacturer With No Factories

I came across an interesting piece in the WSJ on the government potentially re-labeling companies that don’t actually make anything as “manufacturers.” That may seem an odd idea, but it’s not as clear-cut an issue as a lot people might think.

U.S. Manufacturing Employment (2000-2013). Image Source: Brookings Institue
U.S. Manufacturing Employment (2000-2013). Image Source: Brookings Institue

The author, Timothy Aeppel, notes the specifics of the idea, in explaining the kinds of companies the to which the reclassification would apply:

Some refer to companies like these as “factoryless goods producers”—firms that handle every part of making their products except the actual fabrication. As industries have gone global, this model has proliferated from furniture making to electronics: Think of Apple Inc. and its iPhones. Now, there is a move afoot among U.S. government agencies to count these companies as manufacturers, which is a surprisingly fraught issue.

The upshot would be an overnight increase in the apparent size of the U.S. industrial sector without adding a single assembly line. It would also change its geography, as places like Silicon Valley would suddenly look much more like a manufacturing hot spot. Backers of the change say this would give a truer picture of the nation’s productive capability, because these firms still do most other functions of manufacturing, from designing goods to overseeing their production and distribution.

Of course, the idea has its critics, as Aeppel also notes:

Miles Free, director of industry research and technology at the Precision Machined Products Association, a trade group for small U.S. producers, say the change in wording would gloss over the erosion of domestic manufacturing. “We think it would be bad for policy makers to say, ‘Look at these numbers, we have great manufacturing,’ ” he said, when the production in many cases is actually taking place on the other side of the world.

It’s an intriguing debate, and I tend to agree with Mr. Free. I think that no matter how much design or intellectually property gets added into a product, if the company in question does not actually create it, then it should not be labelled “manufacturing.” Maybe we just need a new term, “virtual manufacturer” used to be a favorite, to explain the new kind of firm that the government wants to recognize.

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Carlos Alvarenga

Founder and CEO at KatalystNet and Adjunct Professor in the Logistics, Business and Public Policy Department at the University of Maryland’s Robert E. Smith School of Business.

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