The hype and hope of Wisconn Valley

It was almost as if Gov. Scott Walker couldn’t believe it himself. Speaking at the White House announcement of Foxconn Technology Group’s planned investment in Wisconsin, he described it as a $10 million project. House Speaker Paul Ryan quickly leaned in and corrected the governor.

“Excuse me, 10 billion,” Walker said. “I’m glad Paul Ryan is keeping track of millions and billions.”

It’s easy to see how Walker may have slipped for a second. Wisconsin economic development projects aren’t normally announced at the White House and they don’t reach into the billions of dollars. The projects in the state’s largest tax credit program have averaged $80 million during Walker’s time in office.

The deal is remarkable for its size, but also for its speed. It was just 90 days from Walker’s first meeting with Foxconn chairman Terry Gou to the White House announcement.

During those three months, the governor and the chairman developed a relationship those involved describe as a key reason the technology giant chose Wisconsin. They also put together a deal they believe will transform the state’s economy for decades to come.

The Taiwanese multinational electronics contract manufacturer, which makes products including the iPad, iPhone and Xbox, is to create 13,000 jobs and invest $10 billion in a liquid-crystal display (LCD) panel manufacturing campus over a six-year period in exchange for $3 billion in tax incentives from the state. Gou and Walker say the complex will initially have at least 3,000 jobs and grow from there. The incentive package is contingent on hiring and capital investment.

That level of incentive is unheard of in Wisconsin. For perspective, the Wisconsin Economic Development Corp. has awarded a total of $1.73 billion in tax credits, grants and loans since it was formed in 2011. The size of the incentive for Foxconn has raised some concerns. It will take 25 years for the state to recoup its investment in Foxconn, according to the Legislative Fiscal Bureau.

“The $3 billion subsidy is one of the highest given to any company by any state,” said Marquette University economics professor Abdur Chowdhury. “Foxconn was successful in playing one state against another and squeezing as much subsidy as possible. Any future company coming to Wisconsin will use this precedent to get as much tax and other benefits from the state as possible.

“Foxconn is no doubt a big investment and could be a game changer. (But) despite the hype, Foxconn’s investment in Wisconsin does carry some downside risks.”

If Foxconn lives up to the hype, it could put Wisconsin on the map globally with the first LCD flat panel display factory in the United States. The project is expected to generate another 11,500 jobs at Foxconn suppliers and almost 10,800 jobs at businesses selling to employees, according to an EY report commissioned by the company.

Foxconn could spark the creation of an ecosystem of companies and economic growth that draw people from around the country and around the world, Walker says. The state would evolve from a heritage of bending metal and brewing beer to a focus on the leading edge of electronics technology. Walker is calling the ecosystem that will develop from the presence of Foxconn’s complex “Wisconn Valley,” predicting an impact on the state akin to Silicon Valley in California.

Tech workers flock to Silicon Valley for the abundance of job opportunities there. Supporters of the state’s deal with Foxconn say the same thing could happen in Wisconsin.

“This is an international play to get workforce here,” said Mark Hogan, secretary and chief executive officer of the WEDC.

If Foxconn becomes an economic magnet that draws people to Wisconsin, reversing decades of trends toward net outmigration, businesses in the state, which has an unemployment rate of 3.1 percent, could have an answer to their workforce challenges.

Living up to expectations

But several pieces need to fall into place for the deal. Foxconn has to hit its own capital investment and job creation targets to receive its tax incentives. Those credits are expected to be paid out at around $200 million to $250 million per year over a 15-year period. Wisconsin’s manufacturing and agriculture tax credit would already eliminate much of the company’s tax liability and the incentives are refundable, meaning the state would be cutting Foxconn a check each year for the incentive.

The Foxconn complex will support a significant supply chain, which would benefit Wisconsin companies and attract dozens of companies to the state. That possibility will be one of the most important keys to making the massive state investment in Foxconn worthwhile.

“There needs to be substantial follow along investment from the supply chain,” said Scott Andes, a fellow at the Anne T. and Robert M. Bass Initiative on Innovation and Placemaking, a collaboration between the Brookings Institution and the Project for Public Spaces. “This is a significant gamble. For these things to pay off, you need to build not just one company … you need to build a number of smaller and medium-sized companies.”

Hogan and Scott Neitzel, secretary of the Wisconsin Department of Administration, stress their goal during negotiations with Foxconn was to get a good deal for the state.

“It had to make sense for the taxpayers of Wisconsin,” Neitzel said.

Asked about the potential refund payments to Foxconn, WEDC spokesman Mark Maley pointed to the expected $116 million in annual state tax revenue paid by Foxconn employees, along with the indirect and induced jobs, and described the deal as “a once-in-a-lifetime economic development opportunity.”

“The return on that investment will continue well beyond that 15-year period and will pay dividends to the state for generations to come,” Maley said.

But will Foxconn follow through with its Wisconsin plans? Andes said it “is increasingly the norm for Foxconn” to announce big investments that don’t live up to the hype. That’s included projects in India, Vietnam and Brazil. A planned $1 billion plant in Indonesia didn’t become a reality and neither did a much-heralded $30 million investment in Pennsylvania.

“There is no reason to believe that they will follow through with their promises in Wisconsin,” Chowdhury said.

However, unlike the company’s plans in Wisconsin, the Pennsylvania project didn’t involve any state incentives, Andes said.

Hogan said state officials spent enough time with Foxconn leaders to have confidence in the project and are also encouraged by the amount of time the company spent in the state.

“We addressed those situations with them directly and were extremely satisfied with the answers we got,” Neitzel said.

Mike Knapek, CEO of Waukegan, Illinois-based Yaskawa America Inc., said the planned Foxconn project is more geared toward the company’s Sharp business, not its traditional contract manufacturing focused on smartphones. The combination of the project size and the fact that Foxconn is functioning as an OEM after acquiring Sharp last year for $3.5 billion give him confidence the Wisconsin project will become reality.

“This one is significant enough that I would be very surprised if it doesn’t materialize,” he said.

Japan-based Yaskawa makes industrial robots, motion control systems and drives used in a variety of industries, including Foxconn plants in China and Japan. Knapek said the flat panel display business isn’t quite as cost sensitive or competitive as smartphones, improving the likelihood of success for the Wisconsin campus.

In addition to tax incentives, Neitzel and Hogan pointed to the relationship between Walker and Gou as a reason for the deal coming together.

“It was evident that both the governor and Terry respected each other and found each other to be engaging and interesting and they just hit it off,” Neitzel said.

Gou said as much during the recent event welcoming Foxconn at the Milwaukee Art Museum. He recounted stories from the dinners the two shared with their teams during their negotiations and the governor’s willingness to work through the weekend during his trip to Japan.

“I’ve never seen this kind of governor or leader yet in this globe, in this world,” Gou said.

Beyond leaders, Gou said he chose Wisconsin for its people.

“We like the people here … we like your traditional industry foundation,” he said, noting he made visits to Rockwell Automation Inc. and GE Healthcare during trips to the state.

Finding Foxconn’s workforce

Wisconsin’s people and its workforce may have been enough for the state to land Foxconn, but filling the 35,000 projected jobs associated with the project will take an even bigger collective effort. Many business leaders have referenced raising the bar or companies having to raise their game in response to the workforce challenges.

Earl Buford, CEO of Employ Milwaukee, said the increased demands on the workforce system will push wages up and create an expanded economic base, but it will also require a more systematic approach.

“It’s going to raise the bar on how we recruit people,” said Buford, the head of the Milwaukee County public workforce organization.

The region’s workforce systems have done a pretty good job of getting people into a first job and are working to improve on getting people into better jobs, Buford said. The arrival of Foxconn will force businesses and organizations to address the movement of workers from $12 an hour jobs to those that pay $15, or from the latter to even higher paying jobs.

“It just becomes real cyclical,” Buford said, noting the shifts can cause concerns for businesses. “We have to really solve their fears of that.”

The first step to addressing Foxconn-related workforce needs will be understanding the company’s needs, including what kind of low-, medium- and high-skill positions will be needed.

“To me, that’s the first thing any workforce project needs to do,” Buford said. “If you don’t do that, you’re just kind of working in a vacuum.”

The company plans to hire more than 9,800 hourly technicians and operators, 1,600 process equipment engineers, 820 business support employees, 463 integration engineers and 300 computer-integrated manufacturing engineers.

The largest percentage of indirect and induced jobs will be in trade and transportation, at about 23 percent. Another 18 percent will be in business services, with a similar percentage in hospitality.

Professional and financial services will account for roughly 17 percent of the jobs, while health care and education will be nearly 13 percent of the roles, and construction and utilities will account for 5 percent, according to the EY economic impact report.

Manufacturing is projected to account for just 6 percent of the jobs created beyond Foxconn.

Buford said the structure is in place to fill the workforce needs. Employ Milwaukee, the Southeast Wisconsin Workforce Development Board and the Waukesha-Ozaukee-Washington Workforce Development Board established an alliance a couple years ago. The needs of companies like Amazon, which itself is hiring for 1,500 positions in Kenosha, and others in the region prompted the partnership.  Collaboration among nonprofits, government leaders and businesses will be key to meeting the Foxconn complex’s workforce demands, Buford said.

“We have to now, otherwise it’s going to be pretty tough to achieve this,” he said, adding he would be “thoroughly disappointed” if those involved in workforce development don’t start with Foxconn-oriented meetings in the near future.

Metropolitan Milwaukee Association of Commerce president Tim Sheehy acknowledged Foxconn will stress the region’s workforce.

“There’s two responses: we either pedal faster or quit pedaling,” he said. “It’s also going to draw talent to Wisconsin that’s not here because of this technology.”

Creating the ‘Wisconn Valley’ ecosystem

The Foxconn campus will have about 15 buildings, including a generation 10.5 LCD fabrication facility, along with liquid crystal module assembly and final TV assembly operations.

“TV was invented in America, yet America does not have a single LCD factory to produce a complete 8K system. We are going to change that,” Gou said during his remarks at the White House.

Gou and other Foxconn leaders say 8K technology, however, goes beyond making the next generation of big screen televisions, especially when combined with 5G cellular networks. During the Milwaukee Art Museum event, the company showed off videos of how 8K technology can help with surgeries, allowing for safer, faster and cheaper procedures. The company also has screens for automotive applications and Gou discussed applications of 8K and 5G to drive productivity improvements in industry.

“8K is not display; 8K is not TV; it’s technology,” Gou said.

Hogan said the company was considering the U.S. for two different projects and the one Wisconsin won is focused on the production of larger screens.

“They had an increasing level of confidence that Wisconsin could make two phases into one, basically,” he said, adding it was about two weeks before the announcement that negotiations arrived at the job and capital expenditure figures to which Foxconn committed.

Beyond the potential influx of workers, proponents of the Foxconn deal have touted the creation of an ecosystem surrounding the company as suppliers potentially make investments to be close to the facility.

“Wisconsin now stands at the epicenter of a high-tech industry that simply does not exist in the United States today,” said Gale Klappa, chairman of WEC Energy Group and a co-chair of Milwaukee 7.

Sheehy and Milwaukee County Executive Chris Abele said the company’s supply chain could have 150 to 170 companies who might make investments in “Wisconn Valley.”

“To me, anywhere in the state this happens, everybody’s going to benefit,” Abele said. “The whole supply chain stuff is epic.”

Foxconn already signed a memorandum of understanding with Rockwell Automation Inc., pledging to use the company’s Industrial Internet of Things technology in its campus. Foxconn also will participate in a veteran training partnership Rockwell has with ManpowerGroup.

When the Foxconn deal was announced, Rockwell CEO Blake Moret said it would put the state “at the center of next generation manufacturing for the foreseeable future.”

“That’s good news for business, for customers and for talent,” he said.

A Rockwell spokesman declined to comment further on Foxconn’s arrival, saying the company was limiting its comments to the announcement of the partnership.

Steve Williams, chair of the electrical engineering and computer science department at Milwaukee School of Engineering, said the Foxconn plant will likely be highly automated and Wisconsin has the knowledge base to help the company.

“Wisconsin is very well-known for its automation industry. There’s some leverage there for Foxconn,” he said, although he added the project could take things to a new level. “This is probably one of the most advanced manufacturing processes that Wisconsin would have.”

Driving others to advanced manufacturing

The arrival of more advanced manufacturing by Foxconn could spread to other manufacturers in the state. Tim Wiora, executive director and CEO of Wisconsin Manufacturing Extension Partnership, said when an international OEM locates in a new place, everyone in the area is forced to improve their productivity and that would likely be the case in Wisconsin, especially given the projected workforce demands.

“They’re probably going to have to pay their workforce more to retain them,” Wiora said of small and medium manufacturers. “They’re going to have to get the money from someplace else.”

He said there is an opportunity for WMEP, which has been working with the state on a tool for evaluating manufacturer productivity, to help companies figure out the right places to invest. Foxconn could also serve as a catalyst for some businesses.

“There’s a hesitation in some small and mid-size manufacturers to really look at robotics; this might prompt that to some degree,” Wiora said.

Knapek said Foxconn’s normal cost structure is more Asia-based, meaning the U.S. cost structure will likely be higher than it has dealt with elsewhere.

“They’re not going to come in here throwing money around,” he said, adding efforts to attract talent will be focused on creating the right culture and productivity.

Knapek, who was part of some meetings with the company, said at one point Foxconn officials discussed potentially needing to hire 5,000 engineers, and that the company’s presence would drive attention to science and technology fields.

“I think Wisconsin has a lot of traditional skillset in this area,” he said. “It’s really going to drive the universities to add students.”

Foxconn also presents plenty of opportunity for Wisconsin manufacturers and other businesses. Foxconn is expected to make about one-third of its $4.26 billion in supplier purchases within the state of Wisconsin, a $1.42 billion opportunity, according to the WEDC.

Mark Muro, metropolitan policy program senior fellow and policy director at the Brookings Institution, said the Foxconn project might force the development of some supply chain capabilities that don’t currently exist.

“There may be growing pains in rebuilding or building anew the kind of supplier relationships that may be required,” he said.

Andes pointed out the $3 billion in tax incentives will be going to Foxconn, not toward building the supply chain – at least not directly.

“We’ve seen this all over the country where this doesn’t always pan out,” he said.

Muro and Andes pointed to Google’s effort to make Moto X smartphones in Fort Worth, Texas. Harvard Business School professor Willy Shih detailed some of the challenges the facility faced in a 2014 MIT Sloan Management Review article. Google had to use six employment agencies to recruit applicants and hire 6,500 workers over 10 weeks to eventually fill 2,500 jobs.

Shih noted the shift of the electronics supply chain to China and Asia over the past several decades meant Google faced “a hollowed-out supply base” and most components had to come from Asia.

“Rebuilding a supplier ecosystem takes commitment,” Shih wrote. “It means adopting a strategic view of supply relationships, rather than a transactional view. The long-term development of capabilities becomes far more important than short-term haggling over price.”

The Fort Worth plant closed a little more than a year after production started amid tough competition, higher costs and Google’s sale of the company to Lenovo.

“Foxconn is not a dumb company,” said Doug Fisher, director of Marquette University’s Center for Supply Chain Management, noting the company has been able to operate with Apple over a long period with large-scale production. “My guess is Foxconn has this reasonably well figured out.”

Fisher said the company would look to co-locate its suppliers in the area of the facility. The area would attract entrepreneurs, investment and intellectual capital, as well.

Abele said the company’s presence would benefit the region’s startup community as firms form to try to meet Foxconn’s needs.

“There already has been coastal money moving into the Midwest, but this is going to put gasoline on the fire,” he said, adding there would also be the potential for spinoffs, as has been the case with Epic Systems in Verona. “It’s that on steroids.”

Fisher said Foxconn would likely bring many suppliers with it in an effort to keep short supply chains, but he added that for existing Wisconsin manufacturers “if you relate at all to Foxconn, you will be trying to do business with them.”

Knapek said the company would likely rely on its current suppliers initially and transition to U.S.-based suppliers as industries become more established.

“Most companies … they like to stay with what they know works,” he said.

Wisconsin, and for that matter the U.S., does not have much recent history with production related to LCD panels, and the Foxconn plant has been presented as the first flat panel display factory in the U.S. 

The semiconductor and electrical component manufacturing industry, under which LCD panels fall, accounts for just 3 percent of the nation’s manufacturing employment and just 1.4 percent in Wisconsin. The broader industry group of computer and electrical product manufacturing makes up just 5 percent of state employment.

The state’s manufacturing sector employment is dominated by three main industries – metal fabrication, food manufacturing and machinery manufacturing – which account for nearly 45 percent of employment.

Even without a heavy focus on electronics, Wiora said Wisconsin manufacturers will adapt to find ways to supply Foxconn.

“I don’t think you can ignore the fact that this major OEM is coming into the state,” he said, suggesting the sooner companies can begin understanding what they need to do to become a supplier, the better.

Williams said in addition to electronics and automation, the Foxconn project will need glass and plastics.

Corning Inc. plans to build a $1 billion, 400-job glass manufacturing facility near the Foxconn complex in Wisconsin, according to Metropolitan Milwaukee Association of Commerce president Tim Sheehy.

Plastics manufacturing is an established industry in the state that could benefit from Foxconn’s presence. Wiora said he expects state businesses to rise to the occasion.

“We have a good work ethic,” he said. “When pressed, we will innovate our way out of it.”

Hogan and Neitzel said the opportunity for the state continued to grow as negotiations with Foxconn continued. They said Wisconsin companies are set up to handle the potential disruption and have already been working to improve their productivity.

“This is a natural extension to who we say we are right now because the manufacturing is in our blood,” Hogan said.