Inside Wisconsin’s Disastrous $4.5 Billion Deal With Foxconn

A huge tax break was supposed to create a manufacturing paradise, but interviews with 49 people familiar with the project depict a chaotic operation unlikely to ever employ 13,000 workers.

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“This is the Eighth Wonder of the World.”

So declared President Donald Trump onstage last June at a press event at Foxconn’s new factory in Mount Pleasant, Wis. He was there to herald the potential of the Taiwanese manufacturing giant’s expansion into cheesehead country. He’d joined Foxconn Chairman Terry Gou and then-Wisconsin Governor Scott Walker to celebrate a partnership he’d helped broker—“one of the great deals ever,” Trump said. In exchange for more than $4.5 billion in government incentives, Foxconn had agreed to build a high-tech manufacturing hub on 3,000 acres of farmland south of Milwaukee and create as many as 13,000 good-paying jobs for “amazing Wisconsin workers” as early as 2022.

In front of national media and an audience of several hundred, Trump talked up the larger meaning. For too long, he said, bad trade deals sent factory jobs to places like China, and that era was over. Yes, this Foxconn deal represented the largest public subsidy package to a foreign company in U.S. history, but it also marked a turning point for “restoring America’s industrial might.” Blue-collar jobs were coming home, starting with the Mount Pleasant facility and its LCD TV production. And what better bellwether for the success of his trade war than Foxconn Technology Group, a leading iPhone maker in China long synonymous with overseas manufacturing? “As Foxconn has discovered, there is no better place to build, hire, and grow than right here in the U.S.,” Trump said. “Made in the USA. It’s all happening.”

For some Foxconn workers watching who’d labored at the LCD TV factory for months, the president’s rhetoric didn’t match reality. The LCD components weren’t made in the USA, according to sources familiar with the operation. They were shipped from a Foxconn factory in Tijuana. The Wisconsin plant was only handling the last steps of assembly, and some TV displays were still labeled “Made in Mexico.” Pay at the factory started at about $14 an hour with no benefits, much less than the $23 average Foxconn promised. Many people weren’t hired full time—the company filled positions with temps and interns from a local technical college. And five workers present for Trump’s speech say some colleagues from Asia were conspicuously absent from the press event. (Foxconn says it encouraged all employees to attend, and the Mexican TV parts were for testing, not indicative of future production.)

Shortly after Trump’s visit, things got worse. A Foxconn manager at the factory, which then had only about 60 people working there, abruptly called about 15 of them—all interns —into a room to say they should seek other jobs because there wasn’t enough work to hire them full time, according to multiple people present. Two sources recall the manager telling the group, cryptically, that there were forces outside the company’s control affecting the Wisconsin project. A number of the interns, who’d received praise from Trump and shaken Gou’s hand just weeks earlier, were stunned. “It was upsetting for people,” says James Pitman, one of the former interns. “They had hyped a lot of shit up. We were used as a publicity stunt.” Foxconn says that’s insulting and that the internships ended as scheduled.

Time seems to be bearing out the doubters. In a Jan. 30 interview with Reuters, Gou’s special assistant, Louis Woo, said the company was reconsidering its plans for an LCD factory in Mount Pleasant. It will use its campus in Wisconsin to house research and development teams, he suggested, with a much smaller emphasis on manufacturing.

Interviews with 49 people familiar with Foxconn’s Wisconsin project, including more than a dozen current and former employees close to its efforts there, show how hollow the boosters’ assurances have been all along. While Foxconn for months declined requests to interview executives, insiders describe a chaotic environment with ever-changing goals far different from what Trump and others promised. Walker and the White House declined to comment for this story, although a Trump administration official says the White House would be “disappointed” by any reduced investment. The only consistency, many of these people say, lay in how obvious it was that Wisconsin struck a weak deal. Under the terms Walker negotiated, each job at the Mount Pleasant factory is projected to cost the state at least $219,000 in tax breaks and other incentives. The good or extra-bad news, depending on your perspective, is that there probably won’t be 13,000 of them.

From the outset, Foxconn’s plans for U.S. expansion have been nakedly political. The first call to the Wisconsin Economic Development Corp., the state jobs agency that oversaw the deal, came in April 2017 from Jared Kushner’s Office of American Innovation at the White House. “It was from a blocked caller, and the lady on the other end mentioned a $10 billion investment,” says Coleman Peiffer, former WEDC director of business attraction. “It sounded like a wild goose chase.”

Still, when the White House dangles $10 billion, you take the meeting. Days later, Walker talked with Gou in the office of Reince Priebus, then Trump’s chief of staff. Foxconn had told the White House it wanted to create thousands of jobs somewhere in North America, and based on a recent trip he’d taken with Priebus, who’d grown up in the state, Trump suggested Wisconsin.

Gou’s interests are self-evident. “The biggest challenge facing Foxconn is a U.S.-China trade war,” he later said at an annual shareholders’ meeting. Although Foxconn is based in Taiwan, the bulk of its factory operations are in mainland China, and the company remains a powerful symbol of China’s manufacturing might. (Critics say the infamous suicide-prevention nets strung around some Foxconn facilities are a powerful symbol of its labor standards.) Generating goodwill with Trump and top Republican leaders such as Priebus and then-Speaker of the House Paul Ryan, whose district included Mount Pleasant, seemed like a hedge that might insulate Foxconn from tariffs or other unpleasantness between Trump and Beijing.

A hasty courtship followed. Along with the LCD plant, Foxconn pitched Walker’s team on a Bay Area-style tech campus that it later tried to brand “Wisconn Valley.” (The company isn’t known for its consumer marketing.) Walker, who was heading into a tough reelection year, flew to Japan to present Gou with a Milwaukee Bucks jersey and to take a factory tour. Likewise, Gou made a trip to Wisconsin, visiting rural factory sites and joining Walker at the governor’s mansion for a barbecue.

Gou, a demanding leader notorious for punishing underperforming managers by making them stand for long periods during meetings, is an aggressive negotiator who in an interview once described Genghis Khan as a personal hero. Over four decades, he transformed Foxconn into the world’s largest contract manufacturer of electronics partly by scrupulously securing tax breaks and subsidies. “In meetings, it’s Terry’s way or no way,” says a former company executive who, like many sources for this story, spoke on condition of anonymity out of fear of retribution from Foxconn. “If you get local officials in a room with him, I can tell you Terry is going to win.”

Foxconn has a history of overpromising and underdelivering on major deals. In Brazil in 2011 and India in 2015, it pledged to invest billions of dollars and create tens of thousands of jobs after Gou courted each country’s leaders, but each project fell far short. In 2013, Foxconn said it would invest $30 million and employ as many as 500 people at a Pennsylvania factory that also never fully materialized. Multiple former executives say Gou makes big promises to secure favorable terms and is unsentimental about reneging on or abandoning them as costs dictate.

Wisconsin officials apparently didn’t consider Gou’s track record problematic. Instead, they describe the billionaire, who charmed them with stories of his early days selling TV parts in the Midwest, as almost philanthropic. “My impression of him was, what a nice person,” says Scott Neitzel, who led negotiations for the Walker administration. “An extremely genuine, down-to-earth tycoon.” When asked if the state looked at Foxconn’s history, WEDC Chief Executive Officer Mark Hogan says, “We didn’t spend a lot of time on that because, in the end, we got to know these people so well.

Gou deputized his special assistant, Woo, and another lieutenant, Alan Yeung, Foxconn’s director of U.S. strategic initiatives, to handle the details. They aggressively pursued cash subsidies, calling and texting at all hours. At one point, according to state records released to the public, Woo texted Neitzel at 1:17 a.m., “Give us 200m upfront then it is a done deal.” (Neitzel declined.)

As a bidding war heated up among a handful of states, including Michigan and Ohio, Wisconsin upped its offer. Foxconn demanded subsidies that would make U.S. operations as cheap as in China, and Hogan says Foxconn estimated a 30 percent cost difference. He acknowledges the subsidy numbers grew “staggering” but says Foxconn won’t get those incentives without delivering the promised numbers of jobs.

Wisconsin’s final bid, written on a single piece of paper, offered as much as $150 million in sales tax exemptions and $2.9 billion in refundable tax credits on the condition that Foxconn meet certain hiring and capital investment thresholds. Other public costs, including $764 million in local incentives from Mount Pleasant and its home county of Racine, made up the other third of the package. When the team slid the paper to Woo in July, Hogan recalls, he folded it up and said, “Terry wants to do business with Governor Walker.”

Even before Foxconn signed the contract in November 2017, Walker’s win began to morph into a political liability. As details of the mostly closed-door negotiations came to light, the narrative soured. At a time when Trump was stoking economic nationalism and ripping on companies that shipped jobs to China, many saw the subsidies as a desperate giveaway to a foreign company with close ties to Beijing.

A report from the Wisconsin Legislative Fiscal Bureau, a nonpartisan government agency, estimated the state would be in the red on the deal until at least 2042, and even that projection didn’t account for the kinds of increased public-services costs associated with population growth. It also based income tax revenue projections on the implausible assumption that every employee would live in Wisconsin, whereas some would almost certainly commute from nearby Illinois. “There’s no way this will ever pay itself off,” says Tim Bartik, a senior economist at the W.E. Upjohn Institute for Employment Research. He says Foxconn’s incentives are more than 10 times greater than typical government aid packages of its stripe.

By May 2018, when Priebus was long gone from the White House and Ryan had announced his retirement from Congress, reports surfaced that Foxconn was already considering scaling down its factory plans. The company had originally agreed to build a Generation 10.5 plant capable of producing large glass displays. Instead, as it later confirmed, it would build only a Generation 6 factory, a significantly reduced operation that would make smaller panels. Foxconn said this was necessary to compete with manufacturers in China.

hen, in an August interview with Racine County’s Journal Times, Woo said that because of strides in automation, the makeup of the 13,000 employees would involve dramatically less factory labor than promised. Rather than a 75-25 split between factory and engineering jobs, “now it looks like about 10 percent assembly line workers, 90 percent knowledge workers,” he said. Noah Williams, an economics professor from the University of Wisconsin at Madison whose fiscal analysis supported the Walker administration’s case for the project, says the state ought to redo the math.

Foxconn’s changes surprised public officials tasked with monitoring the project, whose contact with the company had become strained, according to a source close to the WEDC. This source says agency head Hogan has at times seemed out of the loop on the company’s plans, that “Foxconn doesn’t tell us anything” has become a refrain within the office, and that state staffers informally discussed whether the switch to a Gen 6 plant constituted a breach of contract, because the agreement specifically required a Gen 10.5. “What was originally proposed and signed into contract is a project that no longer exists by Foxconn’s own admission,” says state representative Gordon Hintz, the Democratic minority leader and a vocal critic of the deal. The WEDC says its communication with Foxconn has been excellent.

As Wisconsin’s gubernatorial election neared, Walker remained resolute in his defense of the project while his opponent, the state schools superintendent, Tony Evers, called the Foxconn investment “horrible” and vowed to disband the WEDC for its oversight failures. On the eve of the election, the Wall Street Journal reported that Foxconn was considering bringing engineers to Wisconsin from China instead of hiring locals. Foxconn denied the story, but state officials realized there was nothing in the contract to stop that.

On Nov. 6, Evers narrowly defeated Walker in the governor’s race, partly because of the unpopularity of the Foxconn deal. According to internal messages viewed by Bloomberg Businessweek, Foxconn managers in Wisconsin stayed up late into the night rooting for Walker to catch up. When Evers won, they joked to each other that they’d have to find new jobs.

Three weeks after Election Day, Yeung, Gou’s lieutenant, took the stage at the Future Wisconsin Summit in a packed Madison convention center. He got his chemical engineering degree from the University of Wisconsin decades ago and often talks up his Badger bona fides. Holding a mini traffic cone to symbolize construction on I-94 near Foxconn’s planned campus, plus a TV remote as a nod to the LCDs, he told the audience of local business leaders he’d break from the company’s “quite quiet” tendencies to discuss its goals more plainly.

What followed were 39 minutes of buzzwords. Among the projects he said Foxconn might pursue in Wisconsin were 8K video streaming, cloud computing, 3D printing, 5G wireless networks, smart cities, the sharing economy, artificial intelligence, facial recognition, the internet of things, renewable energy, autonomous vehicles, and digital microsurgery. The audience could have been forgiven for thinking they’d somehow stumbled into a dozen TED Talks at once.

Foxconn’s plans, code-named Flying Eagle, haven’t been much clearer to people within the company. Soon after signing its contract with the state, Foxconn brought in local staff and began testing initial manufacturing in the leased, 155,000-square-foot building Trump would later visit, slightly north of the campus. The Experimental Training Center, as it’s called, was designed to prep workers and pilot LCD assembly.

Insiders say Foxconn moved fast—it set up machinery at the empty building immediately and had production going by early 2018—but the day-to-day operations and WeChat communication felt slapdash. Although Foxconn is one of the largest makers of laptops and smartphones, some full-time technical employees had to use their personal computers and phones. Multiple sources say Foxconn higher-ups kept to themselves, production goals were in constant flux, and equipment seemed dated. Foxconn says its facilities are state-of-the-art and production changes occur because of the experimental nature of the center.

The test facility assembles displays for Sharp, the TV brand Foxconn acquired in 2016. During 2018 the company tried and failed to produce its own LCD materials at scale in Wisconsin so it wouldn’t have to import them from Mexico, according to several sources. These sources say Foxconn has been seeking new contract customers for its Wisconsin operations, including Google and Vizio Inc. It’s unclear whether any deals have come from these discussions. (Vizio didn’t dispute having discussed a deal. Foxconn and Google declined to comment.)

On the test floor, a few dozen people work at various stations to deliver about 60 TVs an hour. Current and former Foxconn workers say they’ve found it exhilarating to interact with the company’s robots and other technology, but several felt the pay was too low and the environment had insufficient training protocols. In one case, a worker almost got his finger sliced off on the production line, splattering blood on equipment. Foxconn confirms the incident but says it’s confident in its safety standards.

Foxconn and Sharp engineers regularly tweaked the assembly line and faced malfunctions that derailed production. The robots the company kept adding made many production positions seem likely to become obsolete. Former workers say they felt expendable, and that Foxconn lured in temps with the vague promise of future full-time positions that often didn’t materialize.

Following a similar playbook as it did in India and Brazil, the company in August announced a $100 million joint venture fund and said it’s building R&D centers around Wisconsin, including in Eau Claire and Green Bay. Nobody has cogently explained what these centers will do. One person familiar with the plans calls them glorified think tanks. Foxconn says they’ll “cultivate a new class of vertical solution providers.”

Last fall, the company’s hiring targets began dropping internally, three sources say, and executives could offer little guidance as to their long-term needs in Wisconsin. Even at Foxconn’s downtown Milwaukee office, its U.S. headquarters, recruiters were slow to extend formal offers, rarely offered competitive pay, and requested that some candidates train in Taiwan for as long as a year. The company also appeared to be bringing in foreign staff to fill certain roles. While Foxconn says it’s only used workers with H-1B visas in Wisconsin on a short-term basis, a Foxconn H-1B filing viewed by Bloomberg Businessweek lists a manufacturing engineer hired to work at the Wisconsin facility through September 2021.

Given slowing iPhone growth, Foxconn, which depends on Apple Inc. for roughly half its revenue, is purportedly seeking to cut $2.9 billion in worldwide costs this year. In late 2018 the Nikkei Asian Review reported the company was considering slashing as many as 100,000 jobs. As market conditions worsened at the end of the year, a Foxconn executive said in an interview at the time that some company leaders were losing faith in Flying Eagle, which they saw as an expensive drain on resources needed elsewhere. “There was initially a good plan, although lots of us were still questioning it,” this source said. “Then as things changed, a lot of the internal perception became, ‘This is a nightmare. This is going to be horrible for Foxconn’s brand.’ ”

On Jan. 18, Foxconn announced that at the end of 2018 it had 178 full-time employees in Wisconsin, missing its maximum first-year hiring target by 82 percent and costing it that year’s tax credits. Less than two weeks later came the Reuters interview in which Woo said Foxconn was reconsidering building an LCD factory there because (brace for surprise) its costs in the U.S. were higher than in China and Mexico. “In terms of TV, we have no place in the U.S.,” Woo said. “We can’t compete.” On Feb. 1, after Trump called Gou, Foxconn flip-flopped again and said its LCD factory plans were back on and that it also planned to build a series of other production and R&D facilities in the next 18 months.

Foxconn has dismissed a number of Wisconsin employees in the past several months, and managers there have discussed significant budget cuts, says a source familiar with the situation. Foxconn acknowledges turnover, but says its retention rate since November for full-time employees is 95 percent.

Even with Walker gone, Wisconsin is unlikely to get better terms. Shortly before Evers was sworn in, the Republican-controlled legislature passed a series of rules that make it difficult for the new governor to tear up the Foxconn deal. Mount Pleasant and surrounding Racine County have invested at least $130 million in Foxconn-related expenses such as land acquisition, and the state has committed an estimated $120 million to related road improvements. In an interview, Evers says he’ll push for more transparency and to hold the company to its word, but admits his powers are “significantly constrained.” To some extent, Gou is trapped, too. Tying the Wisconsin factory so closely to Trump means he can’t just ditch the project and risk hampering Foxconn’s U.S. business.

Almost every current and former Foxconn employee interviewed for this story predicted there will never be anywhere near 13,000 workers in Wisconn Valley. As of press time, there were only 122 job listings on the company’s website, many at least five months old. Still, in some ways, Foxconn is keeping up appearances. On a recent visit to the Mount Pleasant plot, an array of trucks, cranes, and construction workers were digging up dirt on an expanse of snow-blanketed farmland.

Gou toured the site when Foxconn was first devising its plans for Wisconsin, recalls Jim Paetsch, a vice president at the Milwaukee 7, a regional economic development group that assisted Walker’s team with early negotiations. Gou had ostensibly wanted to see what the future of his U.S. operations looked like. Unfortunately, days of rain had left the area sodden. “He was walking through the field, out on this farm, and I could see him sinking, the mud just coming up all around him,” Paetsch says. “But he’s a visionary.”

Taken From: https://www.bloomberg.com/news/features/2019-02-06/inside-wisconsin-s-disastrous-4-5-billion-deal-with-foxconn

 

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