“In Wisconsin we’re not building a factory. You can’t use a factory to view our Wisconsin investment.”
Foxconn executive Louis Woo’s words in a late January Reuters report set off alarm bells in Wisconsin. Was Foxconn pulling out of its $10 billion LCD manufacturing project in the state? Would the company no longer bring any manufacturing to Mount Pleasant?
Making LCD panels, not just assembling televisions, was at the center of the $10 billion, 13,000-job project Foxconn originally announced in July 2017. The company initially planned to make the largest screens in the world but later said it would change to a different technology aimed at making smaller screens, providing additional flexibility.
State incentives for the Foxconn project could total $3 billion, with local incentives and infrastructure investment worth more than $1 billion. With such a large investment from taxpayers, changes to the project raise major concerns about the company’s ability to live up to its promises.
After the Reuters report, Foxconn acknowledged it was again reconsidering what kind of thin-film-transistor technology it would deploy in Wisconsin, raising the possibility that a factory that actually makes LCD panels may not be in the cards.
But the company also laid out a number of construction projects it is planning in the next 18 months, including assembly and packaging facilities, data, rapid prototyping and research and development centers, and a precision molding factory.
The next day, Nikkei Asian Review reported Foxconn was suspending work on the Wisconsin project, setting off another round of questioning in Wisconsin.
The tumultuous week concluded with Foxconn issuing a statement recommitting to building a Gen 6 LCD fabrication facility in Wisconsin. The statement came after talks with the White House and a conversation between President Donald Trump and Foxconn chairman Terry Gou.
Throughout the three days of questioning about the Foxconn project’s fate, the emphasis was primarily on the first part of Woo’s statement to Reuters: Would a factory actually be built?
Take Woo’s words literally and there are many reasons to be concerned. More than 4 million cubic yards of dirt have already been moved at the company’s Mount Pleasant site. Millions of dollars have been spent on real estate and infrastructure. Families have uprooted their lives without much of a choice to get out of the way of the mega project. If Foxconn were pulling out of the project, all that effort would seem to be a waste.
AN ECOSYSTEM FOCUS
Even if Foxconn stays but does not follow through with its plans for a TFT-LCD factory in Wisconsin, there would still be major implications for the project. The plant is a centerpiece in making the deal work for the company and for the state.
“Without manufacturing here in Wisconsin, there will not be sufficient critical mass to create a cluster of firmware, hardware and software engineers, designers, programmers, digital innovators – folks who could jointly create, test and commercialize their products, applications and solutions – all locally,” Woo told BizTimes in response to a written question about the importance of including a fabrication facility.
Understanding the importance requires putting the emphasis on the second part of Woo’s quote to Reuters, the part about not viewing it as a factory. Since the first project announcement, Foxconn executives have said the Wisconsin campus would be part of an AI 8K+5G ecosystem and be about more than just a single factory.
The problem is it has never been abundantly clear what an 8K+5G ecosystem actually is. The phrase includes references to the next generations of screen resolution and cellular data connections. It also includes the kind of business buzzword the average Wisconsinite might struggle to define.
BizTimes requested an interview with Foxconn executives to discuss the company’s vision for the Wisconn Valley Science and Technology Park, the name given to the developing campus in Mount Pleasant. Woo ultimately responded to written questions through a company representative.
“The positive impact we envision far surpasses that which can be achieved by building a factory or a manufacturing site alone,” Woo wrote.
Todd McLees, founder and managing partner of Milwaukee-based management consulting firm Pendio Group, said experts predict digital ecosystems could create tens of trillions of dollars of new economic value in the coming years. McLees has worked with Foxconn to develop a program to find suppliers in the state.
The idea of a business ecosystem is not a new one. A 1993 Harvard Business Review article by James F. Moore is often cited as the place where the term got its definition. Moore suggested in an ecosystem, companies “work cooperatively and competitively to support new products, satisfy customer needs, and eventually incorporate the next round of innovations.”
McLees has his own definition that emphasizes the dynamic nature of today’s ecosystems. The companies involved and their particular role can change depending on the project. The idea is that each partner brings its expertise to the table, cutting into the learning curve for everyone involved, shortening the time and cost of getting to market.
“It turns months into days,” he said of what an ecosystem does for innovation
Wisconsin has its own experience with similar concepts. Based in Milwaukee, The Water Council has sought to capitalize on the region’s cluster of water technology companies by creating programs to foster startups and spur innovative thinking. Similar efforts are also underway around the energy, power and controls, and food and beverage industries.
Had the term been applied to business more than 100 years ago, the Milwaukee region would have been known for its small engine ecosystem, with the likes of Ole Evinrude helping Harley-Davidson Inc.’s founders get their start. The region developed iconic small engine brands, in part, because people in the area knew how to make things like cylinders, pistons and carburetors and improve on them.
Those clusters developed over time and without the scrutiny applied to Foxconn. The company is essentially trying to transform its business and launch an industry in a new country with the world watching.
Woo said the company is recruiting for teams in the state that could create breakthroughs in the industrial, automotive and health care internet sectors and working with public sector, academic, social and corporate partners.
He pointed to the company’s $100 million Foxconn Institute for Research in Science and Technology partnership with the University of Wisconsin-Madison; planned innovation centers in Eau Claire, Green Bay and Racine; a $1 million Smart Cities competition; and a $100 million venture fund with Advocate Aurora Health, Johnson Controls International plc and Northwestern Mutual Life Insurance Co. as examples of how the ecosystem is developing.
The vision includes 8K camera and display technology, which has a resolution with four times the number of pixels as 4K televisions. Greater resolution means more data, but that is where 5G technology enters. The next generation of cellular networks will be capable of handling more data at faster speeds. Things that took minutes to download would take seconds. It is also about more than moving large amounts of data, however. At 1 to 4 milliseconds, 5G comes with less latency than the typical 60 milliseconds of 4G networks, according to a report from private market intelligence firm CB Insights. Finally, 5G networks are more flexible than 4G or WiFi networks, meaning more types of sensors and devices can be used.
The combination of those technologies and artificial intelligence would allow for improvements in applications like remote medical consults in health care, fault detection and quality improvement in manufacturing, personalized video streaming in entertainment, and traffic pattern and object recognition in security. The company has also talked about how 8K technology leads to more precise surgeries and a reduction in blood loss.
“Imagine a patient in critical condition and unable to be transported who could undergo surgery performed by a leading medical professional remotely through the combined application of 8K visuals and a lag-free, real-time 5G connection,” Woo said. “These are the types of advancements that we are cultivating and partnering with the developer community to work towards.”
He also said having the only TFT-LCD factory outside of Japan, Korea, Taiwan and mainland China is significant on its own, but it will also drive innovation locally.
“The proximity factor for an innovation cluster cannot be underestimated,” Woo said. “With Wisconn Valley, they will not have to rely on foundries or (fabrication facilities) many thousands of miles away and a 12 or 13 hour difference in time zone.”
But to Willy Shih, a business management professor at Harvard Business School with experience in the display industry, all the talk about an 8K+5G ecosystem is just a smokescreen for what Foxconn is actually planning to do – although, he added, what exactly Foxconn is doing isn’t clear.
“I think what’s happening is Foxconn is trying to figure out what they can put there, having made this commitment,” Shih said. “I don’t think Foxconn knows exactly what they want to put there.”
He also questioned what role Trump’s rhetoric and actions on trade might have played in Foxconn committing to build in the U.S. Shih doubted there was an explicit quid pro quo, but said it could have helped keep the consumer electronics products Foxconn makes in China off initial tariff lists.
“That’s why you want to be on good relations with people who start trade wars,” he said.
Shih also described the project in a piece for Forbes as a “state visit project,” an ambitious deal announced during a visit by important politicians or government officials, with the details worked out later.
“A lot of these things end up not happening or they morph into something else,” Shih said of similar announcements in China.
CHANGING DETAILS
It is common for critics of the Foxconn deal to criticize the lack of detail surrounding the Foxconn project. When Gou and then-Gov. Scott Walker reached an agreement, they sketched it out on the governor’s letterhead in very basic terms. Those terms eventually became a memorandum of understanding and finally a contract, but that has not stopped critics from equating the deal to having been struck on the back of a napkin.
Records released by the Wisconsin Economic Development Corp. last year, however, show Foxconn had given detailed thought to project specifics before the company announced the selection of Wisconsin. One presentation, based on one of the company’s plants in Japan, included a projected capacity of 6 million 65- or 75-inch LCD panels per year, a breakdown of the number and types of machinery required, expectations for liquid and solid waste, and a timeline for construction. The timeline, however, did not include any construction interruption for winter weather.
Foxconn’s stated timelines were aggressive from the start, and while the likelihood of Wisconsin winters delaying construction is real, the bigger problem has been a shift in global LCD markets. Around the time Foxconn was searching for a U.S. location, competitors and the company itself were developing their own Gen 10.5 plants in Asia.
“It’s just like any factory where it takes you a while to build it,” Shih said. “When times are good, everybody says ‘I’ve got to go build another factory’ but by the time the factory comes on stream, everybody else’s factory comes on stream and there’s way too much capacity and the prices collapse … that was completely predictable at the time they announced it.”
The price of a 65-inch LCD panel coming out of a factory has fallen from $408 in June 2017 to around $223 currently, according to Bob O’Brien, a partner at Display Supply Chain Consultants, which tracks the display industry.
“The supply and demand balance has shifted pretty dramatically since early 2016,” O’Brien said, although he added that a number of other Gen 10.5 projects had already been announced before Foxconn. “This was pretty well predictable in 2016 and 2017.”
A changing market prompted Foxconn to change its Mount Pleasant plans for a Gen 10.5 plant to a Gen 6 plant, with the company confirming the switch just before a ceremonial groundbreaking headlined by President Donald Trump.
The shift meant, as Woo told BizTimes last year, that having a Corning Inc. glass plant on site would no longer be a necessity. The size of Gen 10.5 glass makes it impossible to ship, but Gen 6 glass sheets could be brought in from a Corning plant in Kentucky.
The change solved a problem that emerged after the Foxconn announcement was originally made. Corning chairman and chief executive officer Wendell Weeks said his company would not add capacity without two of every three dollars coming from somewhere else. Suddenly, a potential $1 billion investment required nearly $700 million in subsidies and state officials did not want to provide additional incentives for Foxconn or a project tied to Foxconn.
With no Corning plant on the horizon, the state lost a potential avenue to recoup the costs of providing incentives. Foxconn itself will receive tax refunds, while taxes paid by employees, suppliers and employees of suppliers would help the state make its money back. The Corning decision took a major investment and 400 employees out of the equation.
Shih pointed out that when China first started to ramp up its work in electronics manufacturing, the country did not have the supply chain in place. Instead, logistics companies in Hong Kong would put together kits with components and ship them to the mainland for assembly.
Eventually, the government put local content requirements on electronics sold in the country, and towns and provinces gave incentives to lure supply chains and the thousands of jobs that came with them, Shih said.
“That’s sort of the same vision of what could happen in Wisconsin, but the driver (in China) was there was economic incentives for a company who was manufacturing there to bring in the suppliers,” Shih said. “The question (in Wisconsin) is who is going to give them the economic incentives to move in.”
Wisconsin officials were reluctant to offer any additional Foxconn incentives when Walker was governor. Current Gov. Tony Evers, a critic of the project who has discussed revisiting permits awarded under Walker, would seem even less likely to provide additional support.
At the local level, the tax increment financing district used to support the project extends beyond the main Foxconn campus. The infrastructure being put in place for Foxconn is also intended to support suppliers and related businesses. It remains to be seen if ready-to-develop land is enough to attract those businesses.
Racine County executive Jonathan Delagrave said the most important reason for the Foxconn campus to have major manufacturing is it would bring jobs to the region, but the second reason is that it attracts suppliers. More suppliers would help fund the infrastructure work already being done, although local officials say taxpayers are protected with Foxconn’s guarantees alone.
RORSCHACH TESTS
At least in the first year, Foxconn has fallen short of its aggressive job projections. The company announced in mid-January that it had created 178 jobs in 2018 and would “not seek” any incentives for the year.
Never mind there were no incentives to seek because the company had fallen short of the 260 jobs required to receive any tax credits. The announcement represented a Rorschach inkblot test of sorts.
To critics of the Foxconn project and the $3 billion in state incentives awarded to the company, the announcement represented an “I told you so” moment. Of course the company that had fallen short of projections in Pennsylvania, Brazil, Indonesia and India was doing the same in Wisconsin.
To supporters, the announcement, and the hundreds of millions Foxconn has invested around the state, was proof that taxpayers are protected and the Foxconn project is having a ripple effect, the “Foxconn Bonus” Walker touted whenever possible.
The reality is somewhere in between. The project is not yet an unmitigated disaster, but it also has a long way to go to live up to the promises made by Foxconn and its supporters.
On last year’s pace – around 68 percent of the job minimum in the state contract – the company would reach 3,560 jobs by 2022, the first year the company needs to hit 13,000 jobs to earn all of its payroll tax credits. Even at that pace, Foxconn could earn $528 million in tax credits for capital spending, if it invested $3.5 billion in its Mount Pleasant campus.
The company has repeatedly said it remains committed to creating 13,000 jobs in Wisconsin.
The possibility of paying out millions in incentives even if Foxconn falls short of its hiring goals only reinforces the importance of other developments following the Foxconn project. At the same time, Foxconn executives have discussed an increased research and development focus for the project, fueling speculation that manufacturing would not play a major role. The same manufacturing needed to attract other developments.
Wenjie Sun, an associate professor in geospatial science, computer science and Asian studies at Carthage College, said the research focus fits with global trends in the electronics industry, as lower-end production is increasingly shifting either to India or southeast Asia, while innovation and research and development work is shifting to developed countries in search of skilled labor.
“This is not surprising from an economic geography standpoint because that’s what countries like the United States are providing,” Sun said.
She added an increased focus on R&D could make it more likely Foxconn would attract people with advanced degrees from northern Illinois or outside the region entirely. Lake County, Illinois, just across the border, happens to have more people who got their first degree in computers, mathematics, statistics or engineering than Milwaukee, Racine and Kenosha counties combined, according to U.S. Census data.
Delagrave said he has been in communication with Foxconn on a weekly basis and the company’s commitment to manufacturing has not wavered. He also said research and development work was a major part of the project from the start.
“Yes, that manufacturing is critical for a variety of reasons, but we knew this was going to be a package deal and that’s why we’re excited about this opportunity that we’re going to be able to get,” he said.
FLYING, BUILDING AND REDESIGNING
When Foxconn announced its 2018 hiring, the company also said it had made a strategic decision to broaden its investment throughout Wisconsin. The company has already spent around $48 million on real estate for its innovation centers around the state, including almost $7.5 million on two buildings in the city of Racine.
The Racine buildings are intended to focus on smart city projects, a portion of the 8K+5G ecosystem Foxconn is envisioning. Delagrave said the facilities would also address autonomous vehicles, with a test area near the lake to start and the possibility of a route to the Mount Pleasant campus in the future.
Racine mayor Cory Mason, a Democrat and former state lawmaker who voted for the Foxconn incentive package, said the city will be able to take advantage of its existing assets to improve the lives of residents.
Those assets include the water utility, transit system and public safety infrastructure, but also things like 27 miles of fiber optic cables connected to around 4,000 light poles. Those features provide connectivity and a place to mount sensors and antennas.
Mason said he wants Racine to be an early adopter of technologies like 5G, regardless of Foxconn’s presence. He said technology can help address the challenges people face on a day-to-day basis.
“What we don’t want to do is automate inequality or expand the digital divide that exists right now,” Mason said. “We know that if we’re going to have these assets come to the community, they have to be broadly shared and available to everyone if you want to reap the benefits that smart cities promise.”
Mason said the region is well poised to take advantage of Foxconn and counteract the effects of the deindustrialization that has taken place in the area during the last few decades.
“The idea is really to change the technology ecosystems for the entire region so that this kind of innovation comes to the area,” he said.
With or without Foxconn, McLees said there is reason for Wisconsin’s manufacturers to start working more collaboratively. The vendor readiness program he helped develop for Foxconn to use in the state is designed for any OEM to use.
The program identifies top-performing suppliers based on their core capabilities, customer feedback and ability to adapt to changing technology. It then uses the data to identify shortcoming in operations, talent or technology. Service providers and technology companies are then invited to work with the manufacturers to improve the overall supply chain.
Individual companies could identify their own shortcomings, find a service provider to work with and try to do it on their own, but McLees says the program benefits from the data and experience of a wider group of companies.
“It’s extraordinarily inefficient right now and we’re looking to streamline all of that through what is truly, buzzword or not, an ecosystem approach,” he said.
Bill Mitchell, a Foxconn executive who has worked with McLees and joined him for presentations on the program, told attendees at the Manufacturing Matters conference in Milwaukee recently that the pace of change requires companies to be flexible and collaborative.
Mitchell is CEO of Aguila, a Foxconn subsidiary that handles logistics and distribution. He was also part of site selection efforts when the company initially decided to locate a $10 billion manufacturing campus in Wisconsin in the summer of 2017.
“In just that amount of time, over the last couple years, so much has changed about the way things are done and what gets done,” he said.
Foxconn executives have also been instructed to localize their suppliers where possible, hire the best and transform the company into a solutions provider. Doing all of that, and doing it quickly, means the company operates like a multi-billion dollar startup that doesn’t always have all the answers, Mitchell suggested.
“What we’re doing here,” he said, “it’s kind of like we’re building the airplane while we’re flying it and we’re redesigning it.”
