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Foxconn Under-Delivers On Big Promises

Foxconn sign on a building exterior.
Foxconn North American headquarters, Milwaukee. Photo by Robert Geiger.

The news out of Mount Pleasant, Wisconsin, has not lived up to the town’s name so far this year.

Mount Pleasant is the site of the much-touted American Foxconn Technology Group factory, which President Donald Trump called “the Eighth Wonder of the World” at a press event in June. Today the main wonder involved is wondering what future, if any, the plant still has.

In late January, Louis Woo, special assistant to Foxconn Chief Executive Terry Gou, told Reuters that the company had found manufacturing LCD screens prohibitively expensive in the United States, largely due to labor costs. Instead, the company was considering changing course, and making its Wisconsin location into a research and development facility – hardly the source of well-paying blue-collar jobs the deal’s boosters promised. After a phone call between Gou and Trump, Foxconn subsequently issued a new statement that the Wisconsin site will function as an “advanced manufacturing facility as well as a hub of high technology innovation,” but did not specify the mix of jobs the facility would create.

At a minimum, it has become clear that job creation has been slower than anticipated. The Milwaukee Journal Sentinel reported that Foxconn ended 2018 with 178 full-time employees in Wisconsin – a small enough number that it cannot claim job creation tax credits for the year. (The company could retroactively claim the credit if it eventually makes up the shortfall.) In contrast, the project’s promised job creation target was 13,000 new jobs overall. According to Bloomberg, thus far Foxconn has leaned heavily on temporary and part-time workers, supplemented with automation. And even prior to Woo’s comments to Reuters, Foxconn had downgraded the proposed factory from a “Generation 10.5” plant, capable of producing large displays, to a smaller “Generation 6” plant, which would mean significantly reduced operations.

Achieving the full promised number of jobs seems increasingly unlikely regardless of the type of job in question, though Foxconn has remained publicly committed to the initial plan, at least in pure numbers. The original promised split was 75 percent factory jobs to 25 percent engineering positions. In an August interview with Racine County’s Journal Times, however, Woo said that 90-10 in favor of knowledge workers was more likely.

This change would be frustrating for Wisconsin residents regardless, but it is made worse by just how much was offered for those jobs in the form of subsidies. The entire incentives package, which is mostly contingent on the number of jobs created, came to $4.5 billion, the largest subsidy package to a foreign-based company in U.S. history. At least $130 million of that package has already been spent on direct costs, such as buying out private property owners in order to clear the building site. If residents are skeptical at this point that the Foxconn plan is going to prove a net benefit, it is hard to blame them.

Though Foxconn has continued to pay lip service to the idea of creating thousands of jobs in Wisconsin, the original deal projected those jobs would arrive as early as 2022. It does not seem implausible to think Foxconn leaders might instead hold off until the results of the 2020 election arrive. Other companies have made similarly major promises about creating new jobs in the United States only to later change course. For instance, the major Chinese e-commerce company Alibaba announced plans in January 2017 to create 1 million jobs in the United States; company founder Jack Ma told Chinese news outlet Xinhua in September 2018 that the trade tensions between the U.S. and China made that promise impossible. While Alibaba did not receive tax incentives similar to Foxconn’s, its change of course reflects increased global uncertainty about the advantages of doing business here. Foxconn itself has overpromised and under-delivered job creation in both Brazil and India, Bloomberg reported.

Two years into Trump’s presidency, many of the people who supported him because they wanted manufacturing jobs to come back remain upset and angry that such jobs haven’t reappeared in their communities. American manufacturing output in the big picture is still strong, but that’s because we make big, expensive, complicated products like aircraft, not mass-produced widgets. And many manufacturing jobs today require engineering or other skills that involve higher levels of education than traditional work on a factory floor.

Considerable debate still centers on whether companies are moving jobs “back” to the United States from abroad, and how to measure the trend to the extent it exists. Some of the Trump administration’s actions have helped, but others have backfired. In 2018, Microsoft President Brad Smith warned that the administration’s harsh stance on immigration could mean the company might send knowledge-based jobs abroad that it otherwise would have kept in the United States. Despite the president’s famous disdain for the trade deficit, the major tax cut Congress passed at the end of 2017 boosted spending; overall imports have since increased to meet demand, widening, rather than shrinking, the trade deficit. The collective effect of Trump’s Chinese tariffs on job creation is likely to be a mixed bag.

Even if outsourcing jobs to other countries has slowed, it certainly has not stopped, as recently illustrated by General Motors’ decision to lay off 15 percent of its salaried workforce in North America, a move that promptly became a political football for lawmakers. Nor can the administration take full credit or blame for job creation or loss. Certain factors, such as the rise of cheap energy, predate Trump’s administration entirely. It is worth noting, too, that not all manufacturing jobs were lost to outsourcing. Many workers were eliminated by increasingly sophisticated automation, a problem that making the U.S. more competitive as a place to operate a factory relative to other countries will not solve.

I wonder about how voters will react if efforts to restore America’s manufacturing industry falter. As I have written before, markets move in cycles, and another recession will arrive eventually. The people who are angry about the state of American manufacturing now are going to be even angrier when the unemployment rate rises or the country’s economic growth rate declines.

The 2020 election may serve effectively as a referendum, not on the Foxconn deal, but on the entire concept that restoring American manufacturing in a major way is desirable, or even possible. In the meantime, we’ve lost two years in which we could have discussed a variety of other solutions that will let Americans who formerly relied on factory jobs get back to work.

Vice President and Chief Investment Officer Paul Jacobs, of our Atlanta office, contributed several chapters to our firm’s book, Looking Ahead: Life, Family, Wealth and Business After 55, including Chapter 12, “Retirement Plans;” Chapter 15, “Investment Approaches and Philosophy;” and Chapter 19, “A Second Act: Starting a New Venture.”

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