Return to NTA Home | Return to NAICS Page

North American Industry Classification System

News and Updates

  • On January 7, 2009 the Office of Management and Budget, publshed (74 FR 764) Notice of Solicitation for Proposals to Revise Portions of NAICS for 2012. Comments must be in writing and received no later than April 7, 2009

    Abridged Version of Jan. 7, 2009 Notice with Emphasis on Issues of Possible Interest to American Textile Manufacturers

    DATES: To ensure consideration of your comments or proposals related to the potential revision of NAICS for 2012 detailed in this notice, comments must be in writing and received no later than April 7, 2009. Please be aware of delays in mail processing at Federal facilities due to tightened security. Respondents are encouraged to send both a hard copy and a second copy via fax or e-mail.

    ADDRESSES: Correspondence concerning the ECPC intent to review and possibly revise NAICS for 2012, comments on the business organization clarifications, and all proposals for new industries in NAICS for 2012 should be sent to John Murphy, Chair, Economic Classification Policy Committee, Bureau of the Census, Room 8K157, Washington, DC 20233–6500. Responses may also be submitted by e-mail to John.Burns.Murphy@census.gov or by fax at (301) 763-8636. Mr. Murphy can be reached at (301) 763–5172. Comments may also be sent via http:// www.regulations.gov—a Federal EGovernment Web site that allows the public to find, review, and submit comments on documents that agencies have published in the Federal Register and that are open for comment. Simply type ‘‘NAICS for 2012’’ (in quotes) in the Comment or Submission search box, click Go, and follow the instructions for submitting comments.

    FOR FURTHER INFORMATION CONTACT: John Murphy, Chair, Economic Classification Policy Committee, Bureau of the Census, Room 8K157, Washington, DC 20233–6500. Mr. Murphy can be reached at (301) 763–5172, by fax at (301)763–8636, or by e-mail at John.Burns.Murphy@census.gov.

    SUPPLEMENTARY INFORMATION:

    Part I: Background of NAICS 2007 NAICS is a system for classifying establishments (individual business locations) by type of economic activity. Its purposes are: (1) To facilitate the collection, tabulation, presentation, and analysis of data relating to establishments; and (2) to promote uniformity and comparability in the presentation and analysis of statistical data describing the North American economy. NAICS is used by Federal statistical agencies that collect or publish data by industry. It is also widely used by State agencies, trade associations, private businesses, and other organizations. Mexico’s Instituto Nacional de Estadistica, Geografiia Informatica (INEGI), Statistics Canada, and the United States Office of Management and Budget (OMB), through its Economic Classification Policy Committee (ECPC), collaborated on NAICS to make the industry statistics produced by the three countries comparable...

    Part II. Detail in the Manufacturing Sector of NAICS United States 2007 NAICS is the Federal standard used to produce government economic statistics. Its structure and detail must be appropriate for large-scale programs, such as economic censuses or censuses of employment and wages as well as for sample survey programs of smaller size or more frequent periodicity. The greater the number of industries included in these surveys, the greater their costs in terms of reporting burden imposed on respondents and in terms of the resources used to collect, collate, and disseminate the individual industry data. The manufacturing sector of NAICS United States 2007 contains 472 six-digit industries. Of these, 407 are national level detail that is used only in the United States. In 2003, to reduce both respondent burden and production costs, the Annual Survey of Manufactures (ASM) produced by the U.S. Census Bureau collapsed separate industry data for 239 six-digit industries into higher level aggregates. (The details are available at http://www.census.gov/ mcd/asmind/.) While the ECPC recognizes that the loss of some level of detail in manufacturing will affect a wide range of data users in government, business, and academia, the ECPC is soliciting comments on the advisability and desirability of making similar changes to the structure of NAICS for 2012. Specifically, the ECPC is soliciting comments on the desirability of reducing the number of detailed national (six-digit) U.S. manufacturing industries while adhering to the structure of the 184 NAICS five-digit industries.

    Part III. New and Emerging Industries NAICS was developed to be a dynamic industry classification. Every five years, the classification is reviewed to determine the need to identify new and emerging industries. The ECPC is soliciting public comments on the advisability of revising NAICS for new and emerging industries in 2012 and soliciting proposals for these new industries...

    Part IV. Changes to Account for Errors and Omissions in NAICS 2007 No significant errors or omissions have been identified in NAICS. Any errors or omissions that are identified in the future will be corrected and posted on the official NAICS Web site at http://www.census.gov/naics.

    Part V. Clarification of Distribution Centers, Publishers’ Sales Offices, and Logistics Service Providers in NAICS United States

    Clarification on the classification of distribution centers is relatively straightforward. Options might include wholesale trade because of the function of breaking bulk, storage and warehousing because of the characteristics of the facilities, or even trucking terminals as cross-docking practices develop and improve. Sales offices of publishers could be classified either to publishing or to wholesale trade. Classification of logistics services may hinge on the treatment of outsourcing or the separate identification of logistics products. Clarification of the classification of these units is intended to improve the consistency of classification and the comparability of data from various producers using the NAICS classification. The ECPC is soliciting comments or proposals related to the classification of distribution centers, publishers’ sales offices, and logistics service providers for the 2012 revision.

    Part VI—Clarification of the Treatment of Manufacturing Units That Outsource Transformation

    The structure and organization of many businesses engaged in the production of goods continues to change as they attempt to increase efficiency and reduce costs by employing new and improved processes. One very noticeable and rapidly growing activity is and has been the outsourcing of part or all of the manufacturing production process of goods. The growth in outsourcing of the manufacturing transformation of goods to specialized providers is now quite commonplace as firms continue to explore new paths to increase revenues and reduce costs of production. The expansion of competition globally and the formation of highly specialized business activities create unique problems for an industrial classification system such as NAICS. When producers subcontract portions of the production process to separate affiliated or unaffiliated units, the production function changes at the establishment level. As described in Parts I and III, above, the production functions define the industries in NAICS to the extent possible. In this particular case, NAICS United States 2007 does not provide clear or adequate guidance on the classification of units that perform only part of the complete production process for goods. Further, because there is no clear guidance for NAICS to provide a consistent and transparent classification framework for the development of comparable statistics across programs and agencies, differences in classification practices across programs may lead to erroneous signals on the direction of the economy that could potentially result in faulty policy decisions. For example, if employment is classified in manufacturing in one program while the associated output is classified by another program in wholesale trade, estimates of productivity and GDP may potentially provide erroneous signals if the differences are not well understood and accounted for when developing the relevant statistics. Because of this concern, the Economic Classification Policy Committee (ECPC) chartered a Manufacturing Transformation Outsourcing Subcommittee to review options for the consistent classification of establishments that outsource manufacturing transformation. The ECPC is soliciting public input to assist the subcommittee in its work. As noted earlier in this document, NAICS is based on a productionoriented or production function conceptual framework. A production function describes any economic activity in which inputs, such as the services of types of labor and capital equipment, raw and intermediate materials, and, in many cases, intangible inputs such as intellectual property are used to manufacture a material good or to render a service. /1/ In describing the production process, the preliminary work of the subcommittee has identified three general types of units involved in the production of goods: (a) Traditional or integrated manufacturers, (b) manufacturing service providers, and (c) ‘‘factoryless’’ goods producers. /2/ Below we broadly define and list the characteristics of these units:

    A. Traditional or Integrated Manufacturers

    The traditional or integrated manufacturer utilizes inputs such as capital, labor, and energy to transform material inputs into a new product to be sold. Characteristics of integrated manufacturers include:

  • Performs transformation activities;

  • Owns rights to the intellectual property or design (whether independently developed or otherwise acquired) of the final manufactured product;

  • Owns the product they manufacture;

  • Controls and facilitates the production process; and

  • Sells the final product. An integrated manufacturer can provide a full accounting of input costs and output values.

    B. Manufacturing Service Providers

    The manufacturing service provider provides contract manufacturing services—defined tasks specified by a contract—that utilize inputs such as capital, labor, and energy to transform material inputs according to the contract specifications. Characteristics of manufacturing service providers include:

  • Performs transformation activities;

  • Receives contract to perform transformation activities;

  • Does not own rights to the intellectual property or the design of the new product;

  • Does not own the manufactured products contracted to produce;

  • Controls the facility but does not control the production process (i.e., the manufactured product is made to the contract’s specifications); and

  • Does not sell the final product. The manufacturing service provider can provide information on the value of the contract work, the types of transformation activities it performed, and the value of the labor and the plant and equipment utilized in the transformation activities. However, this type of provider cannot report the market value of the final product.

    C. Factoryless Goods Producers

    The factoryless goods producer outsources all of the transformation steps that traditionally have been considered manufacturing, but

  • undertakes all of the entrepreneurial steps and arranges for all required capital, labor, and material inputs required to make a good. Characteristics of factoryless goods producers include:

  • Does not perform transformation activities;

  • Contracts with manufacturing service provider to perform transformation activities to its specifications;

  • Owns rights to the intellectual property or design (whether independently developed or otherwise acquired) of the final manufactured product;

  • Owns the manufactured product it contracted another establishment to produce;

  • Controls and facilitates the production process; and

  • Sells the final product. A factoryless goods provider can provide information on the purchase of the manufacturing service, that is, the cost of the contract, but would not necessarily have production worker payroll or capital expenditures on plant and equipment. However, this type of provider can provide data on the number of units that were arranged to be produced and the market value of the final product.

    In reality, businesses producing goods use a variety of strategies that can involve outsourcing some or all of the transformation steps to one or more manufacturing service providers. Substitution of one input for another is inherently part of many production processes within the manufacturing sector. Sector classification does not change if raw materials are produced within a unit or purchased from independent companies. Regardless of whether a manufacturer leases the factory where the transformation occurs or uses its own, it remains classified within manufacturing. If a manufacturer hires independent contractors or uses the services of a professional employer association rather than hiring and managing employees directly, it would remain classified in the manufacturing sector. Input substitution decisions affect the establishment production function but not the overall process of producing goods. A producing unit could be considered as changing the payment method of acquiring the inputs of capital, labor, and materials used in production.

    As noted in NAICS United States 2007, units that perform chemical, physical, or mechanical transformation of inputs into new outputs are usually classified in manufacturing. This includes integrated manufacturers and manufacturing service providers that operate factories, plants, or mills, even if they outsource or subcontract some transformation to others. The growth of manufacturing service providers domestically and overseas is the result of traditional integrated manufacturers substituting away from direct expenditures on capital and labor (that is, factories and production workers) to purchases of capital services and labor services and new producers choosing this input mix from the beginning. With the exception of the apparel industries, NAICS classifies integrated manufacturers and manufacturing service providers together by industry. One classification option to consider is whether integrated manufacturers and manufacturing service providers should be separately identified in the structure of NAICS.

    As noted above, the classification of units that do not operate factories, plants, or mills, yet are a driving force behind goods being available in the market, is not clearly defined in NAICS. A preliminary review of classification choices for factoryless goods producers, that is, units that perform all of the entrepreneurial functions of a manufacturer but outsource the actual transformation to one or more partners or manufacturing service providers, was narrowed down to two possibilities by the ECPC. First, these units could be classified within the manufacturing sector because without these units, the goods would not be produced and brought to market. Alternatively, these units could be classified within the wholesale trade sector, because they purchase critical input transformation services from others and are more like a traditional wholesaler who buys and sells goods. In addition, the ECPC considered classification in Sector 54, Professional, Scientific, and Technical Services, because factoryless goods producers could produce their own designs or intellectual property. However, unless the designs or intellectual property are sold or licensed to others, the production would not be measurable as manufactured output. Further, factoryless goods producers could acquire designs or intellectual property developed by others, thus bearing no resemblance to research and development units. The ECPC also considered classification to Industry 551114, Corporate, Subsidiary, and Regional Managing Offices. In this case, a single establishment arranging for and overseeing the production of goods (i.e., an operating unit) would be classified to the industry defined by enterprise support units or auxiliaries, e.g., central administrative offices in the former Standard Industrial Classification. A single operating unit cannot be a domestic support or auxiliary unit by definition.

    Classification of factoryless goods producers to the manufacturing sector would result in the full value of goods, including returns to intellectual property and entrepreneurial risk, being included in manufacturing. Classification to wholesale trade would result in margins that include the returns to intellectual property and entrepreneurial activities, but limit manufacturing to units that are undertaking physical transformation. When the domestic production boundary is crossed, the ability to properly identify transactions for goods and transactions for services will be difficult, yet critical. Once a sector classification for factoryless goods producers is chosen, they could be merged into the existing NAICS industries or separately identified at the industry level.

    Classification of factoryless goods producers to either manufacturing or wholesale trade will affect current statistical programs and the estimates that they produce. All of the agencies represented on the ECPC share a concern about the ability to identify and consistently classify factoryless goods producers regardless of the ultimate classification. Beyond that common concern, specific impacts on statistical programs addressing input/output analysis, industry gross domestic product, trade in goods, trade in services, producer prices, productivity, and balance of payments must be considered.

    Additionally, the impact on international standards such as the 2008 revision to the System of National Accounts and the Balance of Payments Manual must be considered. In summary, the ECPC is soliciting public comments regarding the classification of units that outsource all transformation activities within the NAICS system, taking into consideration the framework of existing statistical programs and the interrelationships and interdependencies of economic data produced in the United States.

    Notes

    /1/ For more information see The Economic Classification Policy Committee ‘‘Issue Paper No. 1’’ http://www.census.gov/eos/www/naics/history/docs/issue_paper_1.pdf.

    /2/ This terminology appeared in a 2004 discussion paper ‘‘Outsourcing Manufacturing Activities—Measurement and Classification Implications’’ by John Murphy, Assistant Division Chief for Classification Activities at the United States Bureau of the Census.