Foxconn’s Wisconsin Factory Proposal Questioned

Terry Gou (2nd L), chairman of Apple supplier Foxconn, shakes hands with Wisconsin Gov. Scott Walker (R) as House Speaker Paul Ryan looks on.

It’s become an article of faith among CEOs looking to expand facilities and the economic development agencies looking to lure growing companies that one of the key inducements at their disposal is a well-crafted, well-considered incentives program, usually to the tune of billions of dollars.

So it was that Wisconsin, in entering into an incentives deal with Taiwan’s Foxconn Technology Group expected nothing but congratulations from all factions within the state when Foxconn announced the pending construction of its $10 billion flat panel manufacturing facility and the potential creation of 13,000 jobs.

The outcome, however, wasn’t what anyone expected. And now, not only is the State Senate examining the deal under a magnifying glass, but CEOs, companies and EDCs across the country are wondering if this is an isolated incident or a harbinger of future headaches.

Foxconn’s proposed facility is facing some scrutiny from lawmakers concerned with the potential economic impact of the $3 billion incentive package that helped entice the Taiwanese manufacturing giant to the state. The Wisconsin state Senate is looking for more time to investigate the potential economic impact of the project.

Lawmakers fear that taxpayers may end up with a raw deal if the plant doesn’t meet its capital and employment targets, and are considering amendments related to things such as minimum salaries in the plant, environmental concerns, how the plant would be assessed for local property taxes if the plant is not used, and the funding of training programs for Foxconn workers.

“the Foxconn campus is expected to have at least a $7b annual economic impact on the state and create 22,000 indirect and induced jobs.”

However, Wisconsin’s Economic Development Corp. reiterated that the project will result in great opportunity for the state beyond jobs and investment dollars.

“Once fully operational, the Foxconn campus is expected to have at least a $7 billion annual economic impact on the state and create an additional 22,000 indirect and induced jobs throughout Wisconsin,” Mark R. Hogan, secretary and CEO of the Wisconsin Economic Development Corp. told Chief Executive.

Hogan added that “there will be many other future opportunities that cannot currently be quantified as it relates to expanded supply chains and talent attraction and retention. The input I have received from our partners in academia, industry, government, and local and regional economic development has been clear—the ecosystem that will be generated by establishing the facility, dubbed ‘Wisconn Valley’, will change the trajectory of Wisconsin for generations to come.”

The thinking is that creation of the Foxconn facility will help kick-start new manufacturing opportunities in the state.

The political scrutiny on the project was fueled in part by a report released last week by Wisconsin’s Legislative Fiscal Bureau, which found that it would take 35 years for the state to recoup the funds invested in the project.

“Beginning in 2033-34, payments to the company would cease and increased state tax collections are estimated at $115 million per year,” the report states. “[The state Department of Administration] estimates that the project’s break-even point would occur during the 2042-43 fiscal year.”

“We believe Foxconn will exceed its goals, but if it doesn’t, it won’t get the full incentive package. There are plenty of safeguards for taxpayers.”

State officials continue to stress the economic possibilities that the Foxconn factory deal could bring to Wisconsin.

Wisconsin Governor Scott Walker has said that the $3 billion in incentives from the state will generate $10 billion in investment and more than $10.5 billion in new payroll to Wisconsin—and that the incentives from the state won’t kick in if Foxconn doesn’t meet its goals in the agreement.

“Pay to grow is the focus of our incentive package. Foxconn invests $10 billion and creates 13,000 jobs paying an average $53,875 per year plus benefits,” Walker wrote in an op-ed column this week. “In turn, the state provides up to $3 billion worth of incentives. “We believe Foxconn will exceed its goals, but if it does not, it won’t get the full incentive package. There are plenty of safeguards for the taxpayers. State lawmakers now need to affirm the package.”

Foxconn CEO Terry Gau, Gov. Walker and their teams worked closely to come up with the proposed incentives package that resulted in the proposed factory deal, under which Foxconn would be exempt from $150 million in sales taxes on equipment and materials tied to the plant’s construction, as well as up to $200 million in refundable tax credits annually, which would be capped at a total of $2.85 billion if the company hits its capital and employment compensation target figures.

But coming to an agreement on a project of this size is only the first step in a complicated process, with one of the most challenging being obtaining buy-in from lawmakers.

CEOs who are looking to relocate or branch into new locales and want take advantage of incentive plans should take these areas into account.

1. Political challenges. Just because a deal has been reached between a company and state representatives doesn’t guarantee rubber-stamp approvals from state governments. While lawmakers welcome new employment opportunities for constituents, they also are elected to keep their best interests in mind—and to make sure any incentive deals approved make sense for taxpayers.

2. Financial challenges. While deals to bring companies and facilities to new locales often rely heavily on tax breaks, CEOs need to pay close attention to what a company’s financial responsibilities will be once the incentives and tax breaks come to an end to get a clear picture of what the incentives truly mean.

3. Human challenges. Finding the personnel to fill positions at a new facility can be a challenge—especially if there are provisions in a deal with a state to fill those jobs with state residents, or to create training programs to prepare the local work force to assume those roles. Wisconsin lawmakers are currently discussing whether to require Foxconn to give priority to in-state workers in some areas, and how training programs will be funded.

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Patrick Gorman

Patrick Gorman is managing editor at Chief Executive magazine, based in Stamford, CT. His business journalism background includes 12 years covering the C-level marketing and technology spaces.