“Deterioration” of Foxconn’s plans for a $10 billion plant in the U.S.

In July 2017, Foxconn announced a $10 billion “superfactory” in Wisconsin, a project that U.S. President Donald Trump called “the eighth wonder of the world,”media reported. But more than two years later, Foxconn’s super factory is still missing. Its original plans to build a plant have become so bad that what exactly does Foxconn build there and will it get a record $4.5bn in tax subsidies?

Foxconn initially promised to build a 10.5-year LCD plant in Wisconsin that covers an area of more than 2 million square meters. But in the past two years, the company’s plans to build a factory have changed several times. Initially, Foxconn said it would build a smaller sixth-generation LCD plant, but then said it would not build at all. Recently, the company said it would build a multi-function factory that will produce products in a wide range of categories, from automotive screens to server racks to robotic coffee kiosks.

In the course of these changes, a question has surfaced: Given that Foxconn is building a facility that is completely different from the 10.5-generation LCD plant it signed with Wisconsin, will it receive a $4.5 billion tax subsidy? New documents show that Wisconsin officials have warned Foxconn several times, according to the latest documents. Its current project is far from the original agreement and the terms of the contract must be revised if the company wants to receive subsidies. However, Foxconn refused to change the contract and said it still intended to apply for tax credits.

The tug-of-war to modify the contract

Joel Brennan, Wisconsin’s executive director, said Foxconn “refused to do anything” to amend the agreement. But in fact, they may be willing to return to the negotiating table to continue discussing the issue. Foxconn first proposed a contract change at a meeting on March 11, 2019, the documents show.

In the months that followed, officials at the Wisconsin Economic Development Corporation (WEDC) and the administration of Governor Tony Evers called on Foxconn to formally submit an application to modify the contract to reflect the projects it is actually building, a process that involves describing Foxconn’s current plans and expected costs. employment goals, and other basic details.

Foxconn, however, did not act, sending a brief letter asking the then-WEDC chief executive to say that its current plant was eligible for tax subsidies under the original contract. The company later claimed that it was entitled to a subsidy no matter what it built in Wisconsin.

In late November, the talks appeared to have completely broken down. Earlier, Alan Yeung, Foxconn’s head of strategic operations in the US, accused the Government of being unfriendly to companies, saying that “discussions about non-material issues have taken up our collective time and energy.” “

Although negotiations appear to be deadlocked, Jay Lee, Foxconn’s vice-chairman, said recently that the company had employed more than 520 workers and could receive the 2019 subsidies stipulated in the contract. That’s a surprising shift, because Foxconn had only 156 employees in Wisconsin at the end of last year and hasn’t made anything there yet.

If Foxconn’s subsidy application is approved, Wisconsin may need to pay the company more than $50 million in cash next year. But unless there are significant changes in the coming weeks, Foxconn’s application is more likely to lead to a legal showdown with the Wisconsin and Evers governments. To modify the agreement, Foxconn would have to spell out what it plans to produce in Wisconsin, which the company refused to do.

“It’s time to find out, and the people of Wisconsin should learn more,” said Representative Gordon Hintz of Wisconsin. Asked what would happen if Foxconn applied for tax credits now, Brennan responded that the subsidies would be withheld. “Their current project is beyond the scope of the original contract,” he said. “

The original contract was controversial.

Foxconn’s deal was controversial from the start. The contract, backed by President Trump and approved by former Republican Gov. Scott Walker, agreed to provide Foxconn with up to $4.5 billion in tax subsidies, the largest U.S. subsidy to foreign companies to date. These tax credits are “refundable,” meaning Wisconsin would have to pay cash directly to Foxconn if it did not owe the tax.

According to a study commissioned by the Evers government this year, if Foxconn did hire the 13,000 people it had promised, the subsidy for each job would be $172,000. By contrast, the same study estimates that Virginia pays between $10,000 and $13,000 per job created at Amazon’s second headquarters.

But things soon became clear that Foxconn was unlikely to hire that many people, at least on the contracted timetable. Even before Mr. Trump, Mr. Walker and Terry Gou, the founder of Foxconn, laid the foundation for the project, Foxconn’s plans began to shrink. First, it moved from a 10.5-generation LCD plant to a much smaller sixth-generation plant. Foxconn then told the media that it decided not to build a plant at all, and it didn’t restart the project until two days after receiving a call from Mr. Trump.

Since then, more changes have taken place, with Foxconn’s latest promise that it will build a smaller sixth-generation LCD plant, eventually employing 1,500 people, as well as a “smart manufacturing plant” and a data center for automated coffee kiosks. Overall, the new buildings cover an area of about 90,000 square meters, about one-twentieth of the original factory.

And even if the plan doesn’t seem like a final plan: experts note that the current plant doesn’t have the kind of infrastructure needed to make LCD, and although Foxconn has said it will start production in 2020, it says LCD production won’t start until 2022. The plant is too small for sixth-generation technology, and it now seems to be focused on only part of LCD production, leading local officials to believe that it is not a sixth-generation plant at all, but some kind of multi-functional plant, and no one knows what to produce.

“We know they’re not building a 10.5-generation plant, we’re not going to build a sixth-generation plant, what are they building?” asked MR. Hintz, a weDC board member. What are the needs? What is the long-term outlook?”

The shrinking factory size is bad news for Wisconsin. Because of the incentives set out in the contract, if Foxconn builds expensive factories and hires few people, Wisconsin could end up paying $290,000 per job, which in some cases could exceed $500,000.

However, the government also has its own leverage, as the contract explicitly defines the project as a 10.5-generation LCD plant. So if anything else is built, Foxconn risks losing its subsidies. This fall, Foxconn’s subsidiary, Foxconn Industrial Internet, led a Wisconsin project and submitted plans to build buildings and data centers, a further departure from the contract. Fii is not included in the Foxconn entity covered by the contract at all.

Foxconn proposed to revise the contract first?

Both sides seem to have reason to modify the contract: Wisconsin wants to make sure taxpayers aren’t tied up with high subsidies, and Foxconn to make sure it gets subsidies. Indeed, it was Foxconn that first raised the possibility of amending the contract, although the company now insists that it is not necessary to do so.

On March 11, 2019, Louis Woo, a special assistant to Foxconn founder Terry Gou, visited Wisconsin and met with Evers and other government officials. At that meeting, Mr. Hu confirmed that Foxconn would not build the promised 10.5-plant plant, according to the memo. Instead, the company will build smaller sixth-generation plants to produce LCD products for the automotive and medical industries, as well as server-plate manufacturing plants, possibly including data centers and medical facilities. Mr Hu said in a memo that the new plan was much smaller, employing only 1,500 people and requiring $2bn in investment.

Mr. Hu also said Foxconn was interested in revising the contract to reflect the new plan and include more Foxconn subsidiaries. Mark Hogan, weDC’s chief executive at the time, said such changes were possible and that WEDC had a formal application process to support such changes. WEDC says it processes more than 100 such change requests each year, especially when the project’s budget or scope changes, but the application must be reviewed and approved.

But when Evers said at a news conference in April that the contract would have to be modified, the Republican lawmakers pushing the agreement criticized Evers for violating the contract. Foxconn issued only a vague statement saying it would remain committed to the contract but open to “new ideas”. In response, Evers sent a letter saying that Mr. Hu first proposed the contract changes, and he understood that Foxconn would submit the necessary documents to WEDC in the coming weeks. Mr Evers said the state was also determining parts of the contract it wanted to change “to provide greater flexibility and transparency as the project continues to grow.”

This may seem like a prelude to negotiations, but it is not. On July 8th Mr Evers wrote to Mr Hogan reiterating his position that Foxconn would only be eligible for subsidies if it built a superfactory and would now need to review the contract. Hogan, who was appointed by Walker and one of foxconn’s original designers, often claimed that the flexibility of the contract was sufficient to cover Foxconn’s ever-changing plans.

“Under the original contract, Foxconn was given an unprecedented incentive program, which is reasonable because it promised to create new manufacturing jobs in Racine County and to build a massive 10.5-plant plant,” Evers wrote. However, since the project has changed significantly from the initial proposals, assessments and contracts, it is necessary to review the modification of the project and to assess how it can be made in order to benefit the company and us in the most equitable terms. Proposals for changes to the terms of the Foxconn agreement or the new agreement should be reviewed and evaluated fully and carefully by my administration and WEDC. “

However, foxconn has never offered to change the contract since the summer passed. Instead, on July 25th Mr Hu wrote to Mr Hogan touting “incredible progress” made by Foxconn, saying it was pouring infrastructure with a large amount of cement trucks and pointing out that Foxconn intended to use the advances to apply for tax credits.

Hogan forwarded Mr. Hu’s letter to Mr. Brennan, the executive branch, who responded that the administration was “very concerned” about Foxconn’s request and that the company needed to submit detailed revision plans that would need to be voted on. Hogan wrote a letter to both Hu and Brennan, responding that he felt that changing the contract was the best solution and that Hu knew about the WEDC application process.

But by the end of August, Foxconn had not proposed any changes to the contract, even though it had begun building concrete walls on its sixth-generation plant. On August 23rd Brennan wrote another letter to Foxconn outlining three goals the government wants Foxconn to cover: the Foxconn project should be successful, Foxconn recognizes that the current plan is not covered by the terms of the 2017 contract, and the government wants to work with Foxconn to modify the contract to help Foxconn succeed and receive subsidies.

Brennan wrote that the next step should be taken by Foxconn, which should submit a detailed project application similar to that of the 2017 deal, including a detailed description of the project, expected costs, when to complete, the type and number of jobs created, and what will be generated. Eventually, Hogan resigned and his contract was still pending, and Evers appointed Missy Hughes to replace Hogan as WEDC’s chief executive. Foxconn’s Hu Guohui also retired from his position as Wisconsin’s project manager due to injury, replacing him with Fii director Li Jie.

The two sides are scheduled to meet in Madison in October 2019 after Brennan sent a letter outlining the state’s contract objectives. Fii is also beginning to play a bigger role in the project, although it is not a party to the original contract. Ahead of the October meeting, Fii announced that it would add an “intelligent manufacturing center” to the sixth-generation plant, as well as a giant glass-ball-covered data center.

Foxconn insists on subsidies

The October meeting will prove highly controversial. In a letter summarizing the October meeting, Brennan said Foxconn acknowledged that the current project was different from the definition in the contract, would not apply for subsidies and did not intend to apply to WEDC for a new contract or an old contract. The summary was clearly a shock to Foxconn. A few days later, Fii’s chief commercial officer, Richard Vincent, wrote back to Brennan, accusing him of distorting the nature of the meeting. In fact, Vincent wrote, Foxconn believes that the sixth-generation plant, the “smart manufacturing center” or the data center will fulfill Foxconn’s contractual commitments, and that Foxconn “reserves the right to apply for subsidies.”

Brennan responded on November 4th, saying he stood by the accuracy of his previous letters and said Foxconn’s current project “does not meet the tax deductions required by Wisconsin law” because it was scaled down and because Fii was not part of the original contract. “WEDC has appointed a new leadership, and we hope Foxconn will reflect on the revised contracts that are consistent with your current actual project work,” Brennan wrote. “

Later that month, two Fii executives and Yang met with Brennan and Hughes at madison’s WEDC office. In a letter dated November 13, Hughes thanked the Foxconn team for its efforts on 5G, automation and 8K images, but added that the meeting included “a frank discussion about the challenges facing Foxconn’s incentive contracts with WEDC and Wisconsin.” Foxconn’s plan is not consistent with the definition in the contract, she wrote, and Fii is not a party to the contract.

Mr Hughes also warned that recruitment and investment subsidies could not be obtained because Fii was not eligible by the WEDC. A few days later, Hughes visited Foxconn’s plant and said in the letter, “As previous letters from Governor Evers, Secretary Hogan and Secretary Brennan indicate, the state government wants to continue to support Foxconn’s investment in Wisconsin.” To help you be as successful as possible on new projects, I hope we can meet as soon as possible to discuss how best to combine Foxconn’s needs and expectations with those of state, WEDC, and Wisconsin citizens. “

But on the same day, Foxconn’s Yang Zhaolun sent a letter to Brennan in a very different tone. “Since 2018, Foxconn has been in communication with Wisconsin, particularly Governor Evers, the Executive Branch (DOA) and WEDC, and Foxconn’s intention is to build a sixth-generation plant,” he wrote. Therefore, we are very surprised and disappointed that the DOA and now WEDC have reiterated to us, both verbally and in writing, that the sixth generation plant is not certified and therefore ineligible for tax credits. “

Mr. Yang also said Foxconn has been hiring heavily near Wisconsin and touring the country to attract workers, but low unemployment makes hiring difficult. “While Foxconn invests millions of dollars in Wisconsin and hires job seekers, these efforts are being misled by the current administration on the substantive terms of the contract, particularly in terms of overall capital investment and long-term job growth,” he wrote. “

“In the coming decades, as we strive to generate significant investment and job creation, discussions about non-material issues take up our collective time and energy,” Yang said. Interferences like this have made job creators and job seekers wonder whether doing business in Wisconsin is popular with Gov. Jeff Bezos’s administration. He concluded by saying that Foxconn “will evaluate all options related to the WEDC contract.” “

Four days later, Brennan replied to a strongly worded letter, saying Yang’s letter was inaccurate. Mr. Brennan wrote that Mr. Evers would not take office until 2019, and that Foxconn’s plans for 2018 were not transparent. Wisconsin has spent hundreds of millions of dollars on infrastructure, vocational training and other resources to support Foxconn’s projects. The letter also encouraged Foxconn to start revising its contract, which the company should see as a “positive path”.

Foxconn said it believed the original contract was still valid and said vaguely that its efforts in Wisconsin would not continue if a settlement could not be reached. “We can confirm that we are in discussions with the state about our commitment stake to have a material impact on Wisconsin’s economy, labor and educational institutions,” the company said in a statement. Foxconn abides by the terms of the agreement with WEDC and we will continue to cooperate in good faith with the state. Foxconn hopes that we can reach a mutually acceptable solution so that we can continue to advance a project that is important to both the company and Wisconsin’s technology development. “

Hughes said she continues to meet with Foxconn representatives, but she has not received any proposals to modify the contract. “I also stress that transparency and accountability are core values of WEDC and Wisconsin,” Hughes said in an interview. We ask Foxconn representatives to return to the negotiating table so that we can fully understand their plans and how to help them. “

But while Wisconsin awaits Foxconn’s proposal to amend the contract, the exact type of plant under construction remains a mystery. “I’ve been asking people, who knows what this plant will do when it goes into operation?” he said. But I don’t get an answer. “

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