Foxconn to build enormous complex — in China

Analysts suggest site will undercut Wisconsin in costs

Terry Gou — chairman of Foxconn Technology Group, the self-described largest electronics manufacturer in the world — envisions a sprawling factory complex that will become his “strategic base” in the global race to supply next-generation flat-panel screens with such ultra-high resolution they don’t exist yet.

The industrial campus will be the world’s most advanced and largest of its kind, the company says. Its engineers and designers “will develop innovative display screens, smart TV’s, electronic whiteboards and other cutting edge display products.”

It will boast advanced automation, create 15,000 jobs and spawn a massive halo of additional industries across the region to supply specialized glass and parts.

These ambitions, however, are not meant for southeastern Wisconsin.

Instead, they are meant for southern China — Gou’s home turf for manufacturing. It’s a region where Foxconn’s existing stable of factories already ship products like iPhones, Kindles and PlayStations to the rest of the world on behalf of his outsourcing clients such as Apple, Amazon and Sony.

Nor is Gou’s vision merely a proposal. He

already broke ground earlier this year in the industrial megacity of Guangzhou, and plans to be up and running in 2019.

That’s a year earlier than an industrial complex proposed for Wisconsin, where Gou promises to manufacture identical or near-identical screens. And that’s presuming the state’s politicians approve the terms of the nonbinding three-page “memorandum of understanding,” iron out all the details, draw up a final contract and settle on a production site.

The two sister sites would operate on opposite spheres of the globe, serving different hemispheres — at least that’s the idea. In terms of capabilities and products, the proposed Wisconsin facility, if it’s fully built out, “should be an exact copy of the GZ fab,” said Yasuo Nakane, head of global technology research at Mizuho Securities Co. in Tokyo.

However, on the day the Wisconsin facility opens its doors, the state’s competitiveness would be tested as never before. Industry analysts in Asia suggest the two sites will have jarringly dissimilar production costs and economic ecosystems. In essence, one of Gou’s production sites — the one in China — could dramatically undercut another — the one in Wisconsin — on costs, prices, wages and benefits.

From his boardroom in Taipai, Gou will know exactly what every screen and paycheck in Wisconsin cost him compared to what they cost in Guangzhou. Further, both sites come with incentives from their respective state authorities, allowing Gou to analyze whether Wisconsin’s record-setting package of $3 billion in taxpayer subsidies helps offset any potential competitive disadvantages.

In Guangzhou, wages at existing Foxconn facilities average $2.50 an hour – including benefits and social entitlements, according to New Yorkbased China Labor Watch, a politically independent nonprofit.

Breaking out Foxconn’s China wages under a different metric, Japan’s Nikkei Asian Review found that iPhone assembly workers in Zhengzhou, another industrial Chinese city, earn a monthly salary of up to $670 (4,500 yuan) plus benefits and after overtime, which comes to $8,000 a year.

In its memorandum of understanding with Wisconsin, by contrast, Gou promised to create “up to 13,000 jobs” with an estimated average salary of $53,875 over a phased-in expansion that could take six years or longer.

Wages are not the biggest cost component in highly automated flatpanel factories, analysts note.

Even so, costs to outfit the Wisconsin plant with production equipment will be higher than in China, as will ongoing costs to supply it with special glass, materials and electronic components, not least because the entire chain of panel-production supplier industries are based in Asia, Nakane said.

The construction of the Guangzhou campus underlines how geopolitical calculations — not necessarily economic logic — appear to be driving Gou’s strategy.

“The location in Wisconsin only makes sense if you are concerned about a trade war,” said Einar Tangen, a Beijingbased Chinese economic expert.

At stake is Gou’s access to the consumers of the United States amid a political climate of heightened anti-trade and Americafirst political rhetoric. President Donald Trump, a vocal critic of U.S. trade relationships, claims that Foxconn wouldn’t consider coming to the United States “if I didn’t get elected.”

Gou’s overriding motivation in considering Wisconsin is to avert and avoid protective U.S. trade tariffs and import restrictions, according to a consensus of Asian analysts contacted by the Journal Sentinel. That would keep open the torrent of Foxconn’s other electronic imports into the country. The trade stakes are not just high for Foxconn; penalties on the company’s U.S. imports would inflate what Americans pay for brands such as Apple, Amazon and Sony.

If not for the threat of trade sanctions, Gou presumably could use Guangzhou to supply American consumers with made-in-China products that are identical to anything made in Wisconsin – just as he does with all his other products.

As for future investments and expansion, Gou undoubtedly will have to weigh the costs — financial and political — before deciding whether to make them in Guangzhou or Wisconsin, or both. Gou, known as a savvy and diplomatic but hard-knuckled negotiator, effectively is in a no-lose situation in Wisconsin.

Such investment conflicts could begin early because the specialized high-precision equipment needed to produce nextgeneration panel displays, made in Asia and costly to install, already “is in extremely short supply,” possibly causing delays in outfitting the Wisconsin facility, Nakane said.

Reached for comment, Hong Kong-based Foxconn spokeswoman Ellin Choy said: “Our investment decisions are driven by the local needs of our current and future customers in the markets where we seek to operate.” The statement added that the two facilities “will serve entirely different customer groups.”

Aware of footprint

Supporters say the Foxconn deal represents a once-in-a-generation opportunity to bring a new industry to the United States and site it in Wisconsin, along with a large number of suppliers and ripple-effect jobs.

The Guangzhou industrial site has not figured prominently into Wisconsin’s deliberations over the Foxconn project’s merits and costs. Earlier this month, the state Assembly voted to approve the $3 billion package of state subsidies, which is 46 times more than the previous record subsidies offered to recruit a manufacturer to Wisconsin.

Tim Sheehy, president of the Metropolitan Milwaukee Association of Commerce, concedes he knows little about the Guangzhou site although he said he was active in the Foxconn recruitment efforts from the beginning.

“I haven’t spent the time to understand exactly the kind of plants they are building there (in China) or its specific purpose,” said Sheehy, who also is a senior planner in the seven-county Milwaukee 7 economic strategy consortium of southeastern Wisconsin.

But Sheehy isn’t surprised that Gou would have dual facilities.

“It’s hard to find a manufacturer today that doesn’t have a multi-country footprint,” Sheehy said. “The classic example here in Wisconsin is A.O. Smith. They make hot water heaters in China for the Chinese market and they also make hot water heaters here in the U.S.”

In Madison, one of the lead negotiators was Scott Neitzel, secretary of the state Department of Administration. “Since the beginning of our discussions with the company, we have been aware of Foxconn’s intention to build a facility in Asia to serve the Asian market,” Neitzel spokesman Steve Michels said in an email.

Fierce competition

All the while, the flatscreen panel industry is in flux. Screens in the future will be flatter, lighter and bigger with more than twice as many pixels and far higher resolution than current products. Like nearly all consumer electronics, however, they also become commodity products with falling prices and a continuous technology race to develop new innovations.

Even before the sister factories in Guangzhou and Wisconsin would go on line, the global market for flat-panel displays already is under fierce price pressure. A spate of rival Chinese flat-panel manufacturers with names like CSOT and BOE are crowding the field of suppliers, driving prices lower, said Charles Annis, an industry analyst in Tokyo at the IHS Markit (CQ) research firm.

Nor are Guangzhou and Wisconsin Gou’s only flat-screen factories. When Foxconn acquired Japan’s Sharp Corp. last year, it also took ownership of a modern flatpanel factory in western Japan, adding to its global capacity for flat screens.

“This is a mature industry, which is more akin to a commodity than an innovation model,” said Tangen, who was active in economic development in Milwaukee before he moved to Beijing 12 years ago to write books on China’s economic development and appear on Chinese state television as a commentator.

“Industry insiders in Taiwan are worried about whether the company can turn a profit on the planned Wisconsin facility, faced with higher labor costs, falling panel prices and the lack of a comprehensive supply chain,” according to an analysis this month by the Nikkei Asian Review.

Shareholder pressure

Gou, 66, created, grew and guides Foxconn’s $135 billion-a-year manufacturing operations. The 43year-old company is publicly listed and Gou is under shareholder pressure to contain costs.

Gou might be banking on the consumer novelty of made-in-American television sets. “As they explain to us, there are 36 million TVs sold in the U.S. and not one is made here (in the U.S.),” Sheehy said.

Japan’s Toyota and Germany’s BMW appeal to consumers with the same strategy, building

passenger cars in Georgetown, Ky., and Spartanburg, S.C., respectively. In terms of labor costs, however, pay levels in both Japan and Germany are on a par with the U.S. — all developed world economies.

“We caution that assembling TVs in the U.S. at a cost that would make them competitive with TVs assembled in China would likely require the adoption of even more advanced automation, which would seem to work against the aim of creating jobs,” Nakane wrote.

In Wisconsin, some wonder how far Gou will go in his expansion and the job creation meant to go with it. Even legislators in Gov. Scott Walker’s Republican Party this month faulted the proposal for a lack of benchmarks on job creation.

“What if later on, a year from now, nothing’s happened? Two years from now, still nothing’s happened and the jobs aren’t coming?” Senate Majority Leader Scott Fitzgerald (R-Juneau) said in a radio interview earlier this month.

Home base

There is less ambiguity in southern China, where Gou has been detailed in his ambitions to create an $8.8 billion “strategic base.”

Gou has hitched his fortunes to the region around Guangzhou, a city of 14 million people in the Pearl River Delta, the cradle of China’s manufacturing revolution over the last 40 years.

The highest echelon of Communist Party leaders in the region were on hand when construction of the industrial complex began in March. The China Post, a Taiwanese newspaper, called the new factory the “the largest industrial investment Guangzhou has seen.”

In 1988, Gou launched Foxconn’s first manufacturing base in the Pearl River Delta, which is roughly the size of the Texas panhandle. The region is already home to many of the world’s electronics components supplier industries. And of Foxconn’s 12 industrial sites scattered in China, four already are based in the delta, where Gou feels at home and speaks the local language.

“In the last 30 years, we have continuously invested in expanding our operations in the Pearl River Delta — from Shenzhen to Foshan, Zhongshan, Zhuhai, and Guangzhou today,” Gou said in the Guangzhou press release. “Our goal is to support the building of an information technology highway across the Pearl River Delta, similar to Silicon Valley’s Highway 101, and to develop an industry supply chain that generates a multiplier effect of five to seven times on GDP for every dollar of output.”

The Guangzhou site is majority owned and controlled by Gou under a subsidiary called Sakai Display Product Corp., or SDP, which calls Gou its “majority shareholder.”

What’s more, the Guangzhou development enjoys local government support and “is being built in partnership with the People’s Government of Guangzhou Municipality,” the press release said. Gou’s Guangzhou campus also has the backing of Beijing under a larger national effort, called “Made in China 2025,” meant to automate and upgrade vast segments of Chinese industry.

All of that leads back to the question of comparative costs.

Asked if Guangzhou — in the long run — can produce parts more cheaply than Wisconsin, and whether that gives Foxconn a disincentive to expand in Wisconsin, Annis replied: “Many people are wondering the same things. There are many unanswered questions about this story.”

As for the role of national politics, Annis said: “Keep in mind, both of these factory plans have highly political motivations. The logic is also difficult for us on the outside to fully understand.”

Annis grew up in Wisconsin before he earned a master’s degree in business in the Japanese city of Kyoto, and then joined the flat-panel industry as a manufacturing executive. Since 2014, he’s researched the flat-panel industry for IHS Markit in Tokyo.

“So for me this story is doubly interesting,” he said in an exchange of emails.

“Keep in mind the Wisconsin factory is, to-date, simply an announcement,” the Wisconsin native said. “We do not think it is yet 100 percent going to happen.”