John Schmid

Milwaukee Journal Sentinel

Back in 2017, there was no ambiguity over what Foxconn Technology Group would build in Wisconsin. It was spelled out in a 29-page contract signed by then-Gov. Scott Walker and Foxconn's top executives.

The world's biggest manufacturer of made-in-China consumer electronics agreed to a sprawling "Generation 10.5" manufacturing campus — industry-speak for a monumental industrial facility capable of producing outsized flat-screen monitors used in the biggest TVs and liquid-crystal displays.

And now?

Veteran analysts of the flat-panel industry, which is based entirely in Asia, are openly skeptical that even the smaller cousin of that massive plant — what’s known as "Generation 6" — will be built in Wisconsin.

Foxconn and the state's economic development agency still pledge that the Gen-6 facility will create "up to 13,000 new full-time jobs," as enshrined in the contract. But a blur of mixed signals and shifting pronouncements over the past year has turned Wisconsin’s signature job-creation project into a nonstop guessing game — one that involves the most expensive package of corporate subsidies from a U.S. state and the largest-ever in Wisconsin by a factor of 50.

What are the chances that Foxconn eventually will operate even the smaller Gen-6 plant on the farm fields of southeastern Wisconsin?

"I think it will be less than 10 percent," Yasuo Nakane, head of global technology research in Tokyo at Mizuho Securities Co., wrote in an email. "You can forget about Gen-10.5 in the U.S."

Another career-long expert, Bob O’Brien, puts it at no better than 50/50. O'Brien is president of U.S.-based Display Supply Chain Consultants LLC and tracks the global flat-panel industry.

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Mark Hogan, chief executive of the Wisconsin Economic Development Corp., which negotiated the contract in 2017, says the Taiwan-based company has assured the state it will follow through on its promises.

"Our position is based on two things," Hogan said, "the strength of the contracts that require pay-for-performance, and two, the company committed to building a Gen-6 facility in the state of Wisconsin."

Hogan added: "Whether it is a generation 10.5 or a 6 TFT facility, the key is that it is a manufacturing facility, and either would use a similar multiplier when determining the economic impact of the project.”

FULL COVERAGE: Foxconn in Wisconsin

In Asia, the perspectives are different. From China to Korea to Taiwan, too many factories are producing too many touch screens, notebooks and television monitors. In its home manufacturing base in China, Foxconn itself recently cut 50,000 seasonal workers from its biggest Chinese smartphone production center in the Henan Province.

With soft demand and falling prices, Asian flat-panel manufacturers are expected to idle existing flat-screen capacity or convert them to produce other products, Nakane said.

And even as Wisconsin was negotiating the Foxconn deal, seasoned industry analysts were forecasting a glut, O’Brien said.

"They knew it was coming; you knew all this capacity was coming."

“There is a huge amount of new capacity coming online, and that is the heart of the problem,” said Charles Annis, senior analyst in Kyoto, Japan, for the IHS Markit research group. Annis is a Wisconsin native who spent his career in the Asian flat-panel industry.

New scrutiny for big-ticket projects

To be sure, Foxconn says it will follow through on its promise to invest billions of dollars and create thousands of jobs. And global market conditions could well change again before the plant is fully up and running.

But whether the screens are large or small, Wisconsin placed its bet on a volatile consumer electronics sector in which products often have short life cycles.

Will Racine County get a facility that produces smaller screens for smartphones, tablets, smaller TVs and screens for the dashboards of cars — products already mass-produced in Asia? A TV factory that does final assembly with parts shipped from Asia? New research-and-development teams to explore technologies but not necessarily manufacture them?

The uncertainty coincides with renewed scrutiny of other big-ticket industrial attraction projects around the nation.

Three weeks ago, Amazon abruptly abandoned plans to build a new headquarters in the New York borough of Queens. General Electric this year reneged on its plan to build a glassy, 12-story headquarters on Boston’s waterfront.

Those deals raised basic questions of economic management. Critics say the escalating scope and scale of subsidy packages distort natural market economics and the payback to taxpayers is often uncertain.

No one even talks any longer about a Gen-10.5 facility. But its sheer enormity, at least on paper, is what justified all the grand expectations that have accompanied the Foxconn project: 13,000 jobs with an average annual salary of $53,875 plus benefits. The state also predicted an additional 22,000 indirect positions involving suppliers and other employers.

In 2017, the WEDC hailed Foxconn as “the largest corporate attraction project in U.S. history as measured by jobs.”

When the project was scaled back, WEDC argued that Foxconn deserves the option to change its plans as market conditions change. “We would not be surprised if the company’s plans for its advanced manufacturing campus change as the facility is being constructed because technology keeps changing,” the WEDC said in June.

The state has also emphasized from that start that its incentives are structured on a pay-for-performance basis; Foxconn receives subsidies after hitting job and investment targets. Because Foxconn missed its job-creation objectives last year, the state hasn’t yet committed any tax breaks or incentives.

“The taxpayers have the right to get their questions answered," Hogan said. "It's a large, complex and intimidating deal. But as long as it's a manufacturing facility, the economic impact is largely determined by the scale of the project, both from an investment and jobs created standpoint."

As recently as January, Foxconn itself raised the prospect that it might suspend or reconsider its plans.

The Taiwan-based company stunned the state by complaining that costs of labor and manufacturing in the U.S. are too high to be competitive — a statement that seemed to undermine the basic business logic of the investment. “In terms of TV, we have no place in the U.S.,” said Foxconn's second-in-command, Louis Woo. "We can’t compete.”

President Donald Trump quickly arranged a phone conversation with Foxconn's chief executive Terry Gou. Afterward, Foxconn issued a statement Feb. 1 affirming it was "moving forward" with its current plan, which calls for a "Generation 6 fabrication facility."

A market glut

But Gen-6 is less precisely defined than Gen-10.5, which adds to the uncertainty. Gen-6 screens can mean smartphones, mobile devices, small TVs or dashboard screens in cars. Gen-6 plants are smaller and require less investment. They can use smaller cuts of glass that are shipped from Asia or elsewhere in the U.S.

Display panel prices have fallen more than 50 percent in the last two years, said O’Brien. And he has seen no evidence that Foxconn has placed orders for the specialized high-precision Asian-built manufacturing equipment necessary to outfit a Wisconsin factory. Work is underway at the site, visible from Interstate 94 in Mt. Pleasant.

O'Brien also noticed that the language of Foxconn's recent statements no longer repeats a reference to the size of the overall investment ("up to $10 billion," in the 2017 contract).

Nakane, who's more skeptical than O'Brien, said if new trade restrictions are imposed, his thinking might change.

Washington and Beijing are in a new round of trade talks. So far, none of the tariffs slapped on products as part of Trump's trade policy apply to smartphones or other made-in-China consumer electronics. But new Trump tariffs on made-in-China smartphones and notebooks would cause an abrupt increase in the price of phones and tablets imported into the U.S., Nakane said. In that case, a Gen-6 plant in Wisconsin might make sense.

Struggling to explain the business case for the Foxconn investment in Wisconsin, some analysts have concluded that the company's main interest is political.

All the while, the industry in Asia remains in flux. It's been less than two years since Wisconsin's 2017 announcement, and flat-screen suppliers already are moving onto next-new-thing panels that don't even involve glass. They include flexible screens for "foldable phones" and "rollable televisions."

The Corning decision

Uncertainty about Foxconn's intentions burst into view last year when the company said it no longer would build the once-promised Gen-10.5 plant. That pivotal moment may have had its roots in an earlier decision made in Madison — not in Beijing or Taipei.

The heart of any Gen-10.5 facility is the ability to cut panels from thin sheets of glass that are so delicate, expensive, scientifically precise and massive (each the size of a garage door) that the glass supplier must be located adjacent to the facility. Otherwise, it's impossible to transport the "mother glass."

That leads to one other cardinal rule in the Asian-style industrial attraction business: Asian governments without exception offer hundreds of millions of dollars in tax breaks and subsidies to lure an onsite glass supplier. Those sums come on top of lavish enticements routinely offered to reel in the flagship manufacturer.

But the Walker administration, under fire for a record-shattering $4 billion package of incentives to Foxconn, said in May that the state would not subsidize a glass-maker. Walker was in the middle of a tough reelection fight at the time, which he ultimately lost in November.

With their decision not to extend subsidies to a glass-maker, Wisconsin lawmakers discovered that the problem wasn't too many subsidies. The problem — at least if they wanted to attract the larger Gen-10.5 plant — was that Wisconsin didn't offer enough, analysts say.

On this point, the WEDC said it was Foxconn's responsibility to subsidize a glass-maker. The Milwaukee Journal Sentinel emailed questions to Foxconn last week but did not get a response.

With near certainty, that glass-maker would have been Corning Inc. A multinational manufacturer based in New York state, Corning already has built two glass plants in China that are adjacent to the flagship manufacturers as well as two in Japan; one in Korea and two in Taiwan — all next door to the manufacturer, said O'Brien, a former Corning executive.

"Glass is a complicated product," O'Brien said. "You cannot have a single imperfection on the surface."

“In China, when they invite Foxconn in, they also invite Corning," said Einar Tangen, a Beijing-based Chinese economic expert. "They invite everyone that’s part of a complete supply chain. They cluster them together.”

Added Harvard Business School economist Willy Shih: "If you are going to play the game, you have to put the whole team on the field."

Shih, a former Asian business consultant who has visited flat-panel manufacturing facilities in multiple Asian nations, wonders how Wisconsin can manufacture panels at prices that are competitive with Asia.

"If you end up in a facility that's not competitive, it does no one any good — the facility won't survive and the employees lose out."

Shih, who grew up in Wisconsin, said he'd have lured industries that already are known to be competitive in Wisconsin, such as industrial automation or medical technologies.

"With $4 billion," Shih said, "you could have done a lot."

John Schmid reports on how Wisconsin’s people and communities are confronting the impact of globalization and economic disruption for the Journal Sentinel's Ideas Lab. Email: john.schmid@jrn.com. Twitter: @GlobalMilwaukee