How to Get a Better Deal From Foxconn
Company is a famously hard-nosed negotiator. State must be, too.
Foxconn has a reputation as a hard-nosed negotiator, a requirement in its business of contract manufacturing. It drives hard bargains with its vendors as it relentlessly drives down costs.
Contract manufacturing operates on high volumes, but with low margins of 2.5% to 3.5%. Hence, the rigor in its sourcing methods. If fights for every dollar of cost savings.
By that token, it makes sense for Gov. Walker and his team to drive a smart bargain as it fleshes out its pending deal with Foxconn to invest up to $10 billion in a display panel plant and bring 3000 to 13,000 jobs to the state.
At this point, the two parties do not have a final deal. They have an MOU, a memorandum of understanding that outlines the broad shape of the deal. There are many points to be worked out in the final contract.
Note though that this deal is yet another bet on the manufacturing sector, where the state already has a strength and an economic development emphasis. This move does not diversify the state’s business portfolio. That said, it is clearly in the realm of advanced manufacturing where many technologies will be involved in the production processes.
Some critics of the deal decry the projected use of robots in the plant, but manufacturers have no choice but to deploy robots and other forms of automation if they want to stay in business. That’s just reality. It is one way for U.S. manufacturers to compete with $1-$3 labor in the Far East.
On the other side of the coin, automation, combined with lean disciplines and out-sourcing, limit organic job growth from manufacturing. That creates a strategic need for Wisconsin to diversify way from manufacturing for the long term. We have to reinvent our economy, which is often accomplished by entrepreneurs.
That said, I prefer the economic argument that anything that improves productivity, like robots, is good in the end for the economy and for worker wages.
It is to be expected that pundits in the cheap seats will have countless suggestions for making the deal a better one. Here are mine, gleaned from smart people:
- Bargain for a Foxconn long-term commitment to bring follow-on technologies into the Wisconsin plant when LCD display panels go obsolete. They won’t be around forever in the fast-moving technology world.
- Negotiate claw-backs on the $1.35 billion in capital credits if the company pulls out of the plant before the end of the 15-year subsidy package. The company has reneged on promises in Brazil, Indonesia, Taiwan and Pennsylvania. It spent $9.5 billion companywide on capital projects over the last five years, but has kicked off projects reported at about $14 billion since 2015 in China and India. That predates the Wisconsin $10 billion over the next six years. You get the picture on Foxconn’s reliability.
- In exchange for an accelerated permitting process, require Foxconn to submit to the state its Environmental Management System (EMS) for the new plant. Every company of any size that pollutes has an EMS. Expose its EMS to public view. That would a substitute or sorts for the waiver of an environmental impact statement.
- State officials have suggested $20 million in Foxconn training funds, but the company will likely be putting in some matching dollars for education programs like apprenticeships and internships. Work that match into the contract.
For perspective on the magnitude of the state package, the recent $10 million in subsidies awarded to Generac for the addition of 400 jobs at an expanded headquarters in Waukesha County serve a benchmark. That amounts to $25,000 per job. At an estimate of $5,000 in new sales and income taxes per job per year, that bet pays off in five years.
Another benchmark is the 2012 deal to consolidate Mercury Maine’s operations in Fond du Lac. Mercury has added 1700 jobs, which means the per-job subsidy worked out to $72,000. The ROT (return of taxes) will be 14 years.
Both projects are far less costly to taxpayers.
At the far end, the payback for Foxconn could be 25 years or more. (Indirect jobs are not included in any of the cases cited.)
Every major business decision entails risks. The risks in the Foxconn deal are obvious. That’s why hard bargaining on the front end is called for as the final contract is drafted.
John Torinus is the chairman of Serigraph Inc. and a former Milwaukee Sentinel business editor who blogs regularly at johntorinus.com
More about the Foxconn Facility
- Foxconn Will Get State Subsidy For 2022 - Joe Schulz - Dec 11th, 2023
- Mount Pleasant Approves Microsoft Deal on Foxconn Land - Evan Casey - Nov 28th, 2023
- Mount Pleasant Deal With Microsoft Has No Public Subsidies - Evan Casey - Nov 14th, 2023
- Microsoft, State Announce Massive Data Center Expansion, Land Purchase - Joe Schulz - Nov 11th, 2023
- Gov. Evers Announces Microsoft Makes Major Investment in Wisconsin - Gov. Tony Evers - Nov 10th, 2023
- State Can’t Regulate We Energies $100 Million Project for Microsoft - Joe Schulz - Sep 20th, 2023
- Foxconn Selling Green Bay, Eau Claire ‘Centers’ - Joe Schulz - Aug 16th, 2023
- Murphy’s Law: Foxconn Deal Is Still Costing Taxpayers - Bruce Murphy - Jul 6th, 2023
- Microsoft Will Pay $50 Million For Mount Pleasant Data Center Site - Evan Casey - Apr 20th, 2023
- Microsoft Data Center Proposed for Foxconn Land - Evan Casey - Mar 29th, 2023
Read more about Foxconn Facility here
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Great ideas, Mr. Torinus. Wouldn’t you be more comfortable if some of them were enshrined in the legislation, rather than left to WEDC to negotiate? I have to say it gave me pause when I heard Mark Hogan use “we” referring to Foxconn in his testimony to the Assembly Jobs committee. He wasn’t talking about what WEDC AND Foxconn would do — he referred to Foxconn as if he (and WEDC) were a part of the company. Not the arm’s length negotiating stance that Wisconsin taxpayers need for their protection.