Milwaukee Biz Blog: 13 Foxconn questions to focus on beyond the price tag

Scrutiny of project likely won't fade in 2018

As we reach the end of 2017, the price tag on the public investment in Foxconn has received renewed attention from local and national media. It’s not unreasonable for the public to question how $4.5 billion is going to be spent on something that could remake the identity of southeastern Wisconsin.

Foxconn chairman Terry Gou and Gov. Scott Walker hold up the signed contract awarding the company up to $3 billion in state incentives.

The reality is most of the costs have been public for at least a couple of months. The $3 billion in tax incentives – including $1.5 billion for job creation, $1.35 billion for capital investment and a $150 million sales tax exemption – were all part of the Foxconn state legislation. The sales tax exemption is how the company would go from $2.85 billion offered in tax credits (for investing $9 billion and creating 13,000 jobs) to the full $3 billion announced by Gov. Scott Walker in July.

Also in the Foxconn legislation was the $252.4 million in bonding to expand Interstate 94, $20 million for workforce development work and $15 million in aids to local governments. That bill was signed in September. The bill required that Wisconsin receive federal funding to use the I-94 money and the state has requested $246 million from a federal Department of Transportation grant program.

In October, local officials in Racine County unveiled a $764 million package that would be funded by the company’s property taxes. That package includes a host of infrastructure investments and mechanisms for land acquisition and was finalized in December.

There are two items that have emerged in recent weeks that have added to the price tag. The first is $134 million in state spending on local roads. The local incentive package only includes about $11.5 million to be paid to the state.

The other new cost is the $140 million project American Transmission Co. is proposing to meet Foxconn’s electricity needs. Rate payers from Racine to Pleasant Prairie stand to benefit from that, but the costs will be spread across 5 million ratepayers statewide over a 40-year period, about 70 cents a year.

Local business headlines during the second half of 2017 has been dominated by Foxconn and the state and local incentives the company is being offered. Moving into 2018, there are plenty of open questions about the project that go beyond just the price tag. Here are 13 of them, one for every 1,000 jobs Foxconn says it will create:

1. Will the project actually move forward?

Critics of the deal often point to other projects where Foxconn has announced plans but not followed through. The prime example in the U.S. has been in Harrisburg, Pennsylvania. Supporters of the Wisconsin project can now point to the $60 million Foxconn has put in an escrow account for land acquisition in Mount Pleasant. On the plus side, that’s more money than Foxconn said it would invest in Pennsylvania, but it’s also just a small fraction of the $10 billion project and only a slightly larger percentage of Foxconn’s net income last year. It’s certainly not nothing, but the company isn’t exactly pot committed at this point. The company has said it plans to break ground this spring and actually seeing the first buildings come out of the ground might ease some critics’ fears.

2. Just how big will the plant actually be?

There’s two parts to this. First, there have been at least four different sizes discussed as the plant size. It started at 20 million square feet, jumped to 32 million at the state contract signing and two other sizes have been mentioned along the way, 25 million and 22 million. Local officials have been using the 22 million number and it turns out 32 million square feet is the amount of land the initial campus will cover.

Second, and more importantly, how many jobs will Foxconn actually create and how much will Foxconn invest. It’s possible, under the terms of the contract, for the company to invest $10 billion, create 6,500 jobs by 2024 drop to 5,000 in 2031 and not have to pay any credits back.

3. If things go south, what will happen with Foxconn’s guarantees?

The engineers of the state and local incentive packages point to the taxpayer protections included in the various contracts as reasons not to worry. These include a personal guarantee from Terry Gou and another from a Hon Hai subsidiary in the state contract and a guarantee for $1.4 billion in incremental property value by 2023 in the local deal. The question is, what kind of legal wrangling will there be if those guarantees are ever called on? Even Foxconn exec Louis Woo joked at the local deal signing that he didn’t know what all the various LLCs and entities were. Both deals are complex and if things end up in court there’s no telling how long it will take to resolve every potential issue.

It’s also worth noting that if Foxconn has to pay back any tax credits, the contract with WEDC allows for quarterly payments with zero percent interest. Every other enterprise zone contract the agency has issued has a 12 percent rate and doesn’t include a payback schedule.

4. Will Foxconn be able to find enough workers and will other Wisconsin companies be able to as well?

Foxconn has hit the ground running with recruiting events at local universities, posting jobs online and hiring interns from Gateway Technical College. With its ability to draw attention and use resources, it seems likely Foxconn will be able to find people to hit at least its early hiring goals. I’ve heard as much from people working in workforce development.

I’ve also heard plenty of employers who are excited about the prospect of Foxconn arriving, but worried about what it will mean in an already tight labor market. The state’s unemployment rate is 3.2 percent and its U-6 rate, which also includes those marginally attached to the workforce or working part-time for economic reasons, is 6.9 percent. Both numbers are among the 10 lowest in the country. The reality is there aren’t enough available workers and the problem is only going to get worse as baby boomers retire.

Companies, especially manufacturers, are likely going to have to turn to technology to meet some of their needs. Those involved in workforce development are going to be challenged to meet the needs of Foxconn while also meeting the needs of existing companies.

5. Will the under and unemployed residents of Milwaukee, Racine and Kenosha be able to tap into the new opportunities created by Foxconn or will new arrivals from other states crowd them out?

Even with unemployment near all-time lows, there are still plenty of people looking for work or looking for better opportunities. That prospect is what prompted some Racine and Kenosha Democrats to vote for the Foxconn legislation. It might be only a 30 mile drive from Milwaukee to Mount Pleasant, but for someone without a car in the 53206 zip code it would take roughly 2 hours by train or bus just to get to the S.C. Johnson iMet Center. Will other transit options emerge over the next few years? Possibly, but it’s a question those in workforce and local government are going to have to address.

6. How will Foxconn change the character of the I-94 corridor?

Driving by the future site of Foxconn campus at night recently, I was struck by just how dark and free of development the area is now. A year from now, it will likely be markedly different and it may be unrecognizable in just a few years. More broadly, what will the potential influx of people mean for housing development, for infrastructure, for quality of life? Will there be a sharp increase in enrollment at Racine schools? What about public safety?

7. When will the speed of the Foxconn project catch up with it?

If there has been a hallmark of the Foxconn project beyond its sheer size, it is the speed at which it has moved. It ballooned in size over the course of just a few weeks and sailed through the Legislature in a little more than a month. The company has ambitious targets for its hiring and wants to move quickly at almost every turn. Local officials seem to be thinking ahead, planning initial water main work to coincide with Department of Transportation roadwork. As the size and scope of all the projects increases – from building 22 milllion square feet of facilities to widening I-94 and local roads to making $88 million in water upgrades to a $140 million power line project – it seems likely the logistics are only going to get more complicated. Only time will tell if complexity, speed and quality will all coexist.

8. Which suppliers will follow Foxconn to Wisconsin and which local companies will find a way into the Foxconn supply chain?

A number of Foxconn suppliers are expected to eventually follow the company to Wisconsin and the company has projected it will make $1.4 billion in annual supplier purchases in the state.

Company executives have said it likely won’t be until later in the construction process that suppliers start announcing their decisions to locate near the plant. Officials have said glassmaker Corning would build a plant adjacent to Foxconn, but the company has declined to comment thus far.

Walker has said he expects the presence of Foxconn will be the primary incentive the state has to offer to suppliers, although he didn’t rule out other financial incentives. At the same time, WEDC is working to collect information from companies interested in working with Foxconn, but the company has asked potential partners to be patient.

BizTimes reported earlier this year on which kinds of suppliers would likely look to locate in close proximity to the plant. In some cases it might be more practical to import certain components. Foxconn has since applied for a foreign-trade zone designation for its assembly operations. That would allow it to avoid or delay potential import duties.

While the company’s contract with WEDC requires it to report annually on in-state buying, the contract also notes the company is not required to hit any specific target. Those reports will likely to draw attention when the company starts to produce them.

9. Will Foxconn’s vision of the 8K+5G ecosystem come true?

Initially, Foxconn’s operations are focused on the assembly of TVs. It is banking on those operations to generate $233 million in revenue next year and $3.33 billion by the end of 2020. Over the longer term, the company wants to push into the 8K+5G ecosystem. Think of it as the combination of the next generations in screen resolution and cellular data capabilities. Foxconn executives have said it could create breakthroughs in industries from entertainment to medicine to security to advanced manufacturing. They’ve also said they’ll need to partner with companies inside and outside of Wisconsin to make it happen. The ambitions sound great, although in some cases, like using facial recognition to identify everyone in a stadium in 10 minutes, they might go a little too far. Foxconn has said its Wisconsin plant will generate $7 billion in revenue annually once fully operational and reaching those goals requires the success of the 8K+5G platform.

10. What will Foxconn’s environmental impact be?

Critics of the Foxconn deal have often cited the rollback of environmental protections as cause for concern while supporters say the protections are still in place but there’s less permitting required. Foxconn, for its part, has said it wants to uphold environmental standards and that the state’s quality of life was a key part of its selection. Here’s hoping the company lives up to its end of the bargain and that environmental groups have the ability to keep a close eye on the project.

11. Just how much water will Foxconn divert from Lake Michigan?

Foxconn’s initial request for proposals said its project would require 8.7 million gallons per day of water. That total was for a smaller version of the project and some critics have suggested it could use as much as 15 million gallons per day. Local officials have said the request has been scaled way back, although they haven’t given a specific number. Racine plans to send a request to divert Lake Michigan water to the Department of Natural Resources by Feb. 1.

12. Will WEDC be able to credibly verify Foxconn’s investment and job totals?

The math behind what tax credits Foxconn will receive is simple on the surface, 15 percent of capital investment and 17 percent of wages. But it quickly becomes more complicated with set targets for each year, carryovers from year to year, accruals, clawbacks and full-time equivalents.

WEDC, which has been the subject of numerous audits that included critiques of its verification procedures, has taken the step of requiring a third-party accountant to provide a report on the company’s progress. The agency hasn’t done that for other projects and it might quell some concerns, but WEDC also has its critics and they’ll likely pounce on any opportunity to cast doubt on Foxconn’s numbers.

13. What role will politics play in Foxconn’s success and what role will Foxconn play in the success of political candidates?

If there was one thing that was surprising about Foxconn’s decision to locate in Wisconsin it was how quickly it became politically polarizing. Perhaps it shouldn’t have been given President Donald Trump’s involvement in the initial announcement and Wisconsin’s divided politics in recent years. Ordinarily, you’d think announcing the potential addition of 13,000 jobs would be a big win for an elected official, but polling has shown voters are divided on the potential benefits and motivations of the Foxconn deal. As the 2018 gubernatorial race heats up, watch to see if voters’ attitudes change and how much candidates talk about Foxconn.

Arthur Thomas is a reporter for BizTimes Milwaukee. He covers the manufacturing beat, including the Foxconn project in Mount Pleasant.

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