Foxconn Deal Looks Dead

On December 12 the Milwaukee Journal Sentinel did a story quoting Foxconn Vice Chairman Jay Lee that the company now had more than 520 employees in Wisconsin and would therefore be eligible for job tax credits for the 2019 year.

In fact the company knew full well that the state wouldn’t be awarding any credits, because officials in the Evers administration determined the company was out of compliance with the contract signed in 2017 and had been telling Foxconn’s leaders this for nearly eight months. Indeed, Foxconn itself saw a problem with the contract and suggested renegotiations back in March, only to later back away from this.

Lee, in short, was simply using the Journal Sentinel to try to put pressure on the state to award the credits. It may also have been an attempt to spin the media in a positive direction, in anticipation of a damning story published the day after the JS story by technology industry publication The Verge, which requested and reviewed correspondence between state officials and Foxconn, and found negotiations had broken down between the two parties.

“Wisconsin officials have repeatedly — and with growing urgency — warned Foxconn that its current project has veered far from what was described in the original deal and that the contract must be amended if the company is to receive subsidies.” the story noted. “Foxconn, however, has declined to amend the contract, and it indicated that it nevertheless intends to apply for tax credits.”

The story shows a series of letters going back and forth between Foxconn and Gov. Tony Evers, the Wisconsin Economic Development Corporation and particularly Wisconsin Department of Administration Secretary Joel Brennan, which addressed the question of rewriting the contract. “The project that they have right now is outside the bounds of the contract,” Brennan told The Verge. “They were continuously encouraged” to revise it, he noted. “It’s a relatively recent development, where they have said, ‘No, we don’t want to do anything with the contract.’ Our expectation has been, and continues to be, that they should want to come back and have discussions about this.”

The deal called for Foxconn to build a Gen 10.5 plant, but the company dropped that plan at least a year ago, switching to a Gen 6 plant, violating Foxconn’s contract with the state. Moreover the factory it is now building is “unusually small for a Gen 6, and now it appears to be only partially dedicated to LCD manufacturing, causing officials to believe it’s not a Gen 6 at all, but some type of multipurpose factory, making what, nobody knows,” the story notes, suggesting the entire project is no longer in compliance with the contract. 

Foxconn has previously manufactured products only in low-wage sweatshops in countries like China, and has struggled to determine what it could manufacture competitively in the U.S. As it searched for answers, it for some reason put much of its effort in Racine County under its subsidiary, Foxconn Industrial Internet (Fii), which is not part of the original contract with the state of Wisconsin, which means anything manufactured by Fii is not eligible for subsidies.

Meanwhile, the company keeps reducing the estimated number of employees it will hire: it now says the Gen 6 LCD factory will eventually employ 1,500 people compared to the 13,000 originally promised for the Gen 10.5 plant. And it now says the plan won’t start operating until 2022. 

Both changes would make it harder for the company to collect the subsidies, even if its projects did comply with the contract, because it will fall behind on the contract’s calendar. In 2018, for instance, the company needed to hire 260 employees to collect the subsidy and failed to so so. That subsidy can be collected in future years, but only if the company catches up to the next year’s number of required jobs, as the annual audit of the deal by the Legislative Audit Bureau explained.

Thus it would have needed to create 520 jobs in 2019 to get that year’s subsidy plus the 260 required in 2018 to grab the subsidy from that year. And by 2020 it will have to have created 2,080 jobs to collect the full subsidy for all three years, the audit notes, which is more jobs than the company may ever create. 

And any subsidies for jobs created can “be awarded them for making capital investments during only the seven-year period from 2019 through 2025,” the audit noted, which leaves the company facing another kind of time constraint, even as it keeps moving back the completion date for any future facilities. 

Meanwhile, the audit noted, Foxconn is also out of compliance with the contractual requirements for auditing. “WEDC’s contract requires Foxconn to hire and pay for a certified public accounting (CPA) firm to assess this information based on procedures that WEDC approves… In 2019, the CPA firm did not assess this information according to procedures… this information did not specify whether Foxconn made its capital investments in the [Wisconsin] zone, as is statutorily and contractually required.” As a result the WEDC concluded that Foxconn was not eligible for a $14.9 million subsidy for capital investments it claimed to have made in 2018. 

The company is also required to do an audit proving the employees it hires are in Wisconsin or contiguous states. For the 2018 year, the audit noted, “WEDC ended up excluding 13 employees that Foxconn had indicated were residents of non-contiguous states, such as California, Texas, and Virginia.”

Foxconn officials have recently complained that the low unemployment rate has made it difficult to find employees to work at its Racine manufacturing campus. Alan Yeung, Foxconn’s director of United States Strategic Initiatives, said the company has traveled across the country, “from North Carolina, to Illinois, to Michigan, to Ohio and Kentucky” to attract talent to Wisconsin, but it has fallen short, as Wisconsin Public Radio reported.

Well before Foxconn broke ground at the Mount Pleasant campus, business people in the region were questioning where the company would gets its workers, given the low unemployment rate in Wisconsin. Foxconn has struggled to find engineers and researchers from Wisconsin and has wanted to bring them in from elsewhere, notably China, as the Wall Street Journal reported.

If the company is indeed recruiting as far away as North Carolina, it would have to offer enough pay to convince a potential worker to pick up stakes and move, to work for a company that has repeatedly changed its descriptions of what it plans to manufacture in Wisconsin. 

As Greg Lee, managing partner of a nation-wide manufacturing placement firm WorldBridge Partners, told WPR: “I would say there is, in general, a bit of uncertainty (about Foxconn),” Lee said. “If I was a manager, or executive, or a line employee I would wonder about that. And there are so many other opportunities… there are a lot of choices.”

For Gov. Evers, who criticized the Foxconn deal’s massive cost for taxpayers when running for office, there is no incentive to violate the terms of the contract in order to make Foxconn happy. His administration is only asking for what Foxconn requested back in March, to renegotiate the contract to fit an entirely different, far-from-certain project Foxconn now says it will build.

But for Foxconn, any re-negotiation could only mean it could get less subsidy, as the package it had was the largest ever given to a foreign company in the United States. It would also require Foxconn to honestly describe the kind of manufacturing plant it actually intends to build and then stick to that plan, something it has been unable to do for the more than two years it has been planning operations here. So there is little incentive to sit down with state officials.

Bloomberg Reporter Tim Culpan, who has written about the Foxconn deal, did a recent column concluding that by “refusing to draw up a new contract, Foxconn is leaving itself an excuse to walk away if its 6G plans don’t get tax credits. It’s as though the company is daring Wisconsin to call its bluff.”  

Foxconn could sue the state, but I’m guessing its lawyers have suggested that’s a losing option, as it is out of compliance with the contract in many different ways (and the state’s lawyers could have a field day with the many conflicting claims and promises made the company). In short, this deal looks dead, and Foxconn is probably only sticking around because walking away would leave any other state in America very suspicious of any future deals it peddles.