Wisconsin’s $4.1 billion Foxconn boondoggle

Wisconsin’s $4.1 billion Foxconn boondoggle

Gov. Scott Walker promised billions to get a Foxconn factory, but now he’s running away from it

By Bruce Murphy Oct 29, 2018, 11:50am EDT

It was a veritable lovefest in Milwaukee in July 2017 when Republican Gov. Scott Walker and Foxconn chairman Terry Gou announced their plan to create a heavily subsidized manufacturing plant in southeastern Wisconsin. Walker gushed that Gou, who founded his Taiwan-based company in 1974, was “one of the most remarkable business leaders in the world.” Gou returned the favor by saying, “I’ve never seen this type of governor or leader yet in this world.” Effusive, yet ambiguous.

The details of the deal were famously written on the back of a napkin when Gou and the Republican governor first met: a $3 billion state subsidy in return for Foxconn’s $10 billion investment in a Generation 10.5 LCD manufacturing plant that would create 13,000 jobs.

Key points

• Wisconsin Gov. Scott Walker wooed Foxconn with a huge subsidy plan, which was first drawn up on the back of a napkin
• It now totals $4.1 billion, much of it in cash, and many doubt taxpayers will ever be repaid
• Now, Foxconn no longer plans to build a Generation 10.5 factory manufacturing panels for 75-inch TVs
• Instead, it plans to build a smaller factory manufacturing smaller panels and requiring far less investment
• Foxconn maintains it will still create 13,000 jobs, but they will mostly be for knowledge workers developing an ecosystem it calls “AI 8K+5G”
• Foxconn was given large exemptions from environmental regulations, raising concerns about pollution 
• The Walker administration refused to talk to The Verge for this story

The size of the subsidy was stunning. It was far and away the largest in Wisconsin history and the largest government handout to a foreign company ever given in America. Like most states, Wisconsin had given subsidies to companies in the past, but never higher than $35,000 per job. Foxconn’s subsidy was $230,000 per job.

But Walker was elected in 2010 on a promise of creating 250,000 new jobs in the state in his first term as governor. Six years into his tenure, he still was far short. Running for a third term in 2018, he badly needed a big win.

And the Foxconn deal was beyond big. Some predicted that bringing the company that manufactures devices for Apple and many other tech giants to the state would create the “Silicon Valley of Wisconsin,” which is no small claim in a state that’s far from a high-tech hotbed. Conservatives predicted Walker’s re-election would be a slam dunk on the back of the deal.

But what seemed so simple on a napkin has turned out to be far more complicated and messy in real life. As the size of the subsidy has steadily increased to a jaw-dropping $4.1 billion, Foxconn has repeatedly changed what it plans to do, raising doubts about the number of jobs it will create. Instead of the promised Generation 10.5 plant, Foxconn now says it will build a much smaller Gen 6 plant, which would require one-third of the promised investment, although the company insists it will eventually hit the $10 billion investment target. And instead of a factory of workers building panels for 75-inch TVs, Foxconn executives now say the goal is to build “ecosystem” of buzzwords called “AI 8K+5G” with most of the manufacturing done by robots.

Polls now show most Wisconsin voters don’t believe the subsidy will pay off for taxpayers, and Walker didn’t even mention the deal in a November 2017 speech announcing his run for re-election. He now trails in that re-election bid against a less-than-electric Democratic candidate, the bland state superintendent of public instruction Tony Evers.

It all seemed so promising. So how did

When Walker signed the Foxconn deal in November 2017, the details matched those jotted on the napkin: the state promised a $3 billion state subsidy if the company invested $10 billion in a plant that created 13,000 jobs.

The size of Wisconsin’s subsidy quickly began to grow, as spelled out in state legislation passed about six weeks later and implemented by the Walker administration. By December 2017, the public cost had grown to include $764 million in new tax incentives from local governments in Racine County, which is just 40 minutes south of Milwaukee where the plant was to be located. Other additions included $164 million for road and highway connections built to service the plant, plus $140 million for a new electric transmission line to Foxconn that would be paid for by all 5 million ratepayers of the public utility We Energies. With other small costs added, the total Foxconn subsidy hit $4.1 billion — a stunning $1,774 per household in Wisconsin.

The total Foxconn subsidy hit $4.1 billion, a stunning $1,774 per household in Wisconsin

Back when the subsidy was $3 billion, Wisconsin’s non-partisan Legislative Fiscal Bureau estimated that it would take until 2043 for taxpayers to recoup the subsidy. This long payback period was due to Walker and Republicans effectively cutting the state’s corporate income tax for manufacturers to zero in 2011. This meant the subsidies to Foxconn would not be a tax write-off, but billions in cash that would be paid back by state income taxes paid by Foxconn workers. At $4.1 billion, the payback date for the state was likely 2050 or later.

Some doubt the subsidy will ever actually be recouped. “Realistically, the payback period for a $100,000 per job deal is not 20 years, not 42 years, but somewhere between hundreds of years and never,” wrote Jeffrey Dorfman, an economics professor at the University of Georgia, in a story for Forbes. “At $230,000 [or more] per job, there is no hope of recapturing the state funds spent.” And this was before the subsidy had risen to $4.1 billion, or about $315,000 per job.

In retrospect, it’s clear that Walker had a strong hand to play in negotiations with Foxconn. The company had to locate in a Great Lakes state because of the huge amount of water needed to clean the glass used in manufacturing LCD screens. And no other Great Lakes state came close to offering the $4.1 billion Foxconn is getting. Michigan came the closest, offering $2.3 billion, but it was partly a tax subsidy rather than cash. As for Ohio, fellow Republican Gov. John Kasich condemned the Wisconsin deal. “I’ll tell you one thing,” he said, “it’s not going to take us 40 years to make back the investment we make. We don’t buy deals.”

Over the summer, Walker’s response to such criticism was pointed. ”There’s a whole lot of people out there scrambling to try and come up with a reason not to like this,” he said in July of last year. “They can go suck lemons. The rest of us are going to cheer and figure out how we are going to get this thing going forward.” Several weeks later, he called the deal a “once-in-a-lifetime opportunity” that will be “transformational” for the state. “These LCD displays will be made in America for the very first time, right here in the state of Wisconsin.”

”They can go suck lemons.”

The Walker administration did not return repeated requests for comment about when taxpayers would recoup the Foxconn subsidies.

In May, the Nikkei Asian Review reported that Foxconn was greatly scaling back its plans for the plant. Foxconn released a statement “categorically” denying this, but by late June, company officials conceded they would not be building the kind of plant Gou had originally promised Walker.

Instead of a Generation 10.5 plant, which produces 10-foot by 11-foot panels for 75-inch TV screens, Foxconn would be building a Generation 6 plant that only produces 5-foot by 6-foot glass panels. A Gen 6 plant would require about a $2.5 billion investment, according to Bob O’Brien, a partner at Display Supply Chain Consultants, rather than the $10 billion Foxconn initially promised.

They would not be building the kind of plant Gou had originally promised Walker

Foxconn had hoped to have New York-based Corning build a factory nearby, as the large glass panels required for a Generation 10 plant cannot be transported long distances. But Corning officials made it clear they’d need a subsidy for as much as two-thirds of the cost of this facility, and officials within the Walker administration, suffering continuing criticism about the Foxconn subsidy, ruled out any more handouts. The Walker administration, it seems, had not checked to see if Foxconn could deliver on its promises without help.

Foxconn spokesperson Louis Woo told BizTimes that a co-located glass plant “would no longer be a necessity” with a Gen 6 plant. “We can just ship [glass] from somewhere else… because the pieces of glass that would be required would be a lot smaller.”

But Foxconn officials also said that the company was still committed to a $10 billion investment and 13,000 jobs, adding it might eventually add a Gen 10.5 plant, but it would get there in “phases.” The phases were not spelled out.

Just seven weeks later, in late August, the company announced the plans had changed yet again — far more radically. Woo told the Racine Journal Times that Foxconn would never add a Gen 10.5 plant to its Racine campus, despite past statements, because by the time it was built, the market would be glutted by other manufacturers in China.

And even the Gen 6 panels might not be manufactured in Racine for long. “We are not really interested in television,” Woo told the newspaper, though he said the company wants to build America’s first thin-film transistor (TFT) fabrication, which can be used in LCD products. Rather, Woo said, workers at the Wisconsin plant will be focused on figuring out new ways to use Foxconn’s display, cellular, and AI technology, building out an “ecosystem” Woo calls “AI 8K+5G.”

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All this means Foxconn needs far fewer assembly line workers. “If, six months ago, you asked me, what would be the mix of labor? I would pull out the experience that we have in China and say, ‘Well, 75 percent assembly line workers, 25 percent engineers and managers,’” Woo said. But “now it looks like about 10 percent assembly line workers, 90 percent knowledge workers.”

Almost all the actual assembly line work, he added, will be done by robots.

That’s an astonishing change to the company’s plans. For starters, it ends the hope of local politicians that lower-skilled, mostly minority workers from Racine and Milwaukee might be able to get a job.

Almost all the actual assembly line work will be done by robots

Wisconsin would not be the first government Foxconn has shifted its promises to. Foxconn had promised to invest $5 billion and create 50,000 jobs in India, only to cut it to a fraction of that. “Similar results were seen in Vietnam, where Foxconn committed to a $5 billion investment in 2007, and in Brazil, where Foxconn spoke of a $10 billion plan in 2011,” and the plans were never realized, The Washington Post reported. And then there is Harrisburg, Pennsylvania, where Foxconn’s promise to invest $30 million and hire 500 workers never happened.

In a statement to The Verge, Foxconn said it remains “committed to creating 13,000 high-value jobs and investing US$10 billion.” The company also said its “plans have always been associated with a phased approach to the development of the Wisconn Valley Science and Technology Park,” with the first phase consisting of the Generation 6 Thin-Film-Transistor facility and the next phase consisting of “future-generation research and development and manufacturing facilities.”

The Walker administration did not return requests for comment about how it evaluated the feasibility of Foxconn’s initial plan, the change in factory types, or the change in types of workers needed.

Meanwhile, concerns about Foxconn’s impact on the environment have started to grow.

The LCD screens being made by Foxconn require benzene, chromium, cadmium, mercury, zinc, and copper, according to Peter Adriaens, a professor of environmental engineering at the University of Michigan. These materials are hazardous if improperly discharged. A report by the City of Milwaukee’s Legislative Reference Bureau on Foxconn’s history noted that “as of 2013, 25 to 60 million acres of China’s arable land were polluted with heavy metals due to electronics factories,” and Foxconn was a significant contributor. Foxconn told The Verge that it will build a Zero Liquid Discharge system, “which will go beyond any local, state and federal requirements relating to industrial water discharge.”

The Walker administration had also exempted Foxconn from the state’s usual environmental rules, allowing it to discharge materials into wetlands and reroute streams during construction and operation. The state also exempted the company from doing an Environmental Impact Statement. At stake was a huge swath of land: the plan calls for Foxconn to eventually own 4.5 square miles of what had been mostly farmland. Adriaens says these exemptions and the fact that Wisconsin is allowing Foxconn to operate unusually close to Lake Michigan are “red flags.”

The environmental exemptions and the fact that Foxconn will operate unusually close to Lake Michigan are “red flags”

The Walker administration also agreed to allow Foxconn to draw massive amounts of water from Lake Michigan. Foxconn would use as much as 7 million gallons per day from the lake, of which 39 percent will be lost through evaporation. Environmentalists charged that the plan violates the provisions of the Great Lake Compact signed by the Great Lakes states and Canadian provinces to protect the lakes, and they filed a legal action to stop this.

Documents filed with the Wisconsin Department of Natural Resources by Foxconn also show the company will cause significant air pollution, including hundreds of tons of carbon monoxide, particulates, sulfur dioxide, nitrogen oxide, and volatile organic compounds per year. According to the Milwaukee Journal Sentinel, the plant will emit enough volatile organic compounds and nitrogen oxides to make it one of the worst such polluters in southeastern Wisconsin.

Documents show that the company will cause significant air pollution

The federal Environmental Protection Agency might have stood in the way, but its former director, Scott Pruitt, made a ruling to override pollution standards established under the Obama administration, giving Foxconn more leeway. As a result, the Racine plant could eventually emit 229 tons of nitrogen oxides, 240 tons of carbon monoxide, 52 tons of particulate matter, four tons of sulfur dioxide, and 276 tons of volatile organic compounds per year, Milwaukee’s BizTimes reported. In a statement to The Verge, Foxconn said it will make great efforts to reduce pollution, adding it will “invest in world-class control technology to minimize air emissions from the plant.”

The Walker administration did not return requests for comment about what environmental protection measures were being taken.

While all of this was going on, Foxconn was buying real estate for “innovation centers” to spread investment around the state.

In February 2018, Foxconn announced it would be buying a seven-story building in downtown Milwaukee for its new North American headquarters and the “Wisconn Valley Innovation Center.” In June, news came that it would buy a six-story building in Green Bay to create another “innovation center,” employing more than 200 engineers. In mid-July, Foxconn was back to announce yet another “innovation center,” this time in Eau Claire, to begin operations in early 2019, with 150 employees.

In both cities, the company said it wanted to attract top talent from area universities. But Milwaukee, Green Bay, and Eau Claire are homes to some of the state’s lesser universities, and it was unclear why these graduates couldn’t simply drive down to the Racine plant to apply for jobs.

Foxconn has been buying real estate for “innovation centers”

Equally unclear was the economic advantage for Foxconn to have three different small innovation centers spread around the state. Using virtually the same language in both Green Bay and Eau Claire, Foxconn officials declared the goal was to “inspire innovative ideas and catalyze cutting-edge solutions from companies and entrepreneurs” in the area. But critics suggested these small satellites were being added to help Walker make his case that the Foxconn deal would help the entire state.

By late August, less than three months before the election, Foxconn announced more bells and whistles: it would contribute $100 million to create a new research facility at the University of Wisconsin-Madison and use $25 million for a new state venture capital fund. That $125 million total represented just 3 percent of the $4.1 billion subsidy the company stood to collect.

Shortly after the Wisconsin deal was signed, Walker was touting the Foxconn deal in campaign-style speeches across the state. But by October 2017, just a month after the legislature passed the Foxconn deal, a poll showed only 38 percent of the people in southeastern Wisconsin, where the plant would be located, thought the plant would be a net positive for the state. This was followed by March 2018 poll, which showed that 66 percent of people in the state believed their local businesses wouldn’t benefit from the Foxconn deal, and only 25 percent thought it would be beneficial.

Even after seven months of announcing new innovation centers and contributions, Foxconn hadn’t moved the needle much in the election: polls still showed the majority of people in the state didn’t believe the Foxconn deal would help them.

This was dreadful news for Walker, who suddenly stopped talking about Foxconn. He didn’t even mention the deal in a November 2017 speech announcing his run for re-election. It was also bad news for Foxconn, as every Democrat running for governor proceeded to condemn the deal. Both Walker and Foxconn now needed to sell this deal to the voters.

Polls showed the majority of people in the state didn’t believe the Foxconn deal would help them

As Marquette Law School pollster Charles Franklin put it, if the company “really wants all the benefits that they were promised… they have to prefer the incumbent who negotiated the deal over the unknown of a Democratic governor.”

Foxconn still insists that it will create 13,000 jobs by 2023. That rapid scale-up might have been possible with the kind of manufacturing plants and labor force the company has in China, but for Foxconn to hire that many top-flight “knowledge workers” in Wisconsin as it transforms its approach to create new technology seems incredibly ambitious.

In reality, there is little pushing Foxconn to invest as much money or create as many jobs as promised because Walker squandered his leverage over the company. Yes, the full subsidy promised comes in increments, as the capital investments are made and jobs created by Foxconn. But all the other subsidies, worth more than $1 billion, will be paid regardless of money invested or jobs created. A smaller plant with fewer workers could lower the total tax bill considerably, but it would actually cost the state more on a per-job basis.

Walker squandered his leverage over the company

The deal, says Matthew Rothschild, executive director of the good government group Wisconsin Democracy Campaign, “is a ridiculous way to do economic development. It exposes a lie we’ve been told over and over that the cupboard is bare, that we don’t have enough money for our schools or our roads or our health care. But then when a company from Taiwan comes knocking, all of a sudden there’s $4 billion of taxpayer money to shell out. We could have helped a whole lot of small businesses for that kind of money.”

But local governments have already begun using eminent domain to buy up homes and push out residents in Racine County, where Foxconn is now building its plant. And state and local governments have already spent heavily on building the infrastructure Foxconn requires. Should Walker lose, a Democratic governor will have a hard time undoing this deal.

Whatever the impact of Foxconn on Wisconsin’s economy, there is no doubt about the bill to be paid. For the taxpayers of Wisconsin, their children, and perhaps their grandchildren, the Foxconn deal will be added to their annual cost of living for decades, if not generations, to come.

Above is from:  https://www.theverge.com/2018/10/29/18027032/foxconn-wisconsin-plant-jobs-deal-subsidy-governor-scott-walker