by Lawrence Tabak
As the Wisconsin Economic Development Corporation (WEDC) prepares to make public the final contract between the state of Wisconsin and Foxconn, which sees the Badger state giving the Taiwanese tech manufacturing giant up to $3 billion in taxpayer money in exchange for the promise of 13,000 jobs in southeastern Wisconsin, Belt magazine breaks down how Gov. Scott Walker got taken.
It may seem trite to go back to the July 2017 announcement of the deal at the White House, but the comedy of errors that occurred in the East Room — Walker mischaracterizing it as a $10 million deal (it’s $10 billion), Gov. Walker misidentifying Foxconn’s Sharp subsidiary as “Sony,” and multiple times referring to Wisconsin’s new long-term business partner as Foxcom — portends the lack of study and business savvy the governor would employ in a negotiation that looks poised to become a case study in false premises, bad judgment, and crony capitalism gone wrong. Business schools will be studying this fiasco far longer than the viable lives of any factories Foxconn completes in southeastern Wisconsin. Gov. Walker has trumpeted the Foxconn deal as one of the biggest business development deals in American history. He seems immune to the prospect that it’s poised to emerge as the worst.
But then, what else would you expect when a man who has proven to be deeply resistant to facts, and who believes most strongly in his own destiny, sits across the table from hard-nosed, profit-driven, and mathematically based Chinese technocrats? Here’s what you get: one side believing that rural Wisconsin will turn into Mountain View, California, while the other side plays their cards so close to the vest that we won’t know their true plans for years, even decades. But of this you can be sure: Foxconn will walk away with a tidy profit, a profit underwritten by $3 billion in Wisconsin taxpayer money, and Wisconsin will come nowhere near obtaining 13,000 quality jobs for its citizens.
The Winner’s Curse
It all started with Foxconn’s anonymous RFP (request for proposal). A company was looking for a very large site (750 acres) in the United States for a plant that would cost hundreds of millions of dollars and employ 2,000 workers. Think of it as the bait. Wisconsin and other states responded and like contestants in Donald Trump’s Miss Universe contest, waited anxiously while Foxconn mulled over the bids, played one state off another to up the offers, and finally announced the finalists.
It was at this stage that Wisconsin could have benefited from some additional negotiating support, from someone who was studied in the psychology of auctions. Someone who could have explained how often auctions are awarded to the bidder who most seriously miscalculates the value of the auction’s object, leading to a well-validated phenomenon known as the “winner’s curse.” As a Journal of Economic Perspective study by Stanford professor Paul Milgrom summarized: “Even an experienced estimator working in familiar terrain can lose money if he doesn’t understand the subtleties of competitive bidding.” Imagine what can happen to novices bidding on what amounts to promises for a manufacturing facility in an industry in which they have at best a cursory knowledge.
Backing Walker were two key administrators, Mark Hogan, whose background is in domestic banking, and Scott Neitzel, who has spent most of his career in utilities and utility regulation. None of the team had any experience with large Chinese corporations, or even with Chinese business culture in general. Could this have been a handicap?
The proposed plant combined everything that an ambitious Republican governor could want. Not only a lot of jobs, but manufacturing jobs. Never mind that these were not the sort of jobs that would revive the Rust Belt, let alone jobs that would employ a significant number of Wisconsinites.
You don’t have to go to Harvard to appreciate this one from Harvard Law School’s Program in Negotiations. “Enlist an advisor from your counterpart’s culture.” On the other side of the table were experienced Foxconn executives with extensive international experience and 10 years of continual contact with their main U.S. business partner, Apple.
Do you think Gov. Walker and his team consulted this article from the Journal of Business Studies Quarterly in 2013 titled, “Doing Business in China: What is the Use of Having a Contract?” They’d have learned that contracts in China don’t have the same binding effect as in the Western world. For instance, in China, when the economic situation underlying a contract changes, the Chinese party expects the terms of the contract to be renegotiated. And this is to say nothing of the fact that Gov. Walker’s final deal with Foxconn Chairman Terry Gou was hand-written on what might as well have been the back of a napkin.
Deb Weidenhamer, an American businesswoman with extensive experience in China, agrees that contracts are just the starting point for negotiations and adds that, for the typical Chinese businessman, “a win-win deal is considered impossible.” The Chinese believe “that there can only be one winner and one loser — and that foreigners aren’t as clever or as capable. They’re perceived as easy targets.”
Know What You’re Buying
Not only did the Wisconsin team operate without cultural expertise, they decided, fatally, to work without industry-specific expertise. The leading U.S. consultants in the field are Display Supply Chain Consultants. The founder of this Michigan-based firm, Bob O’Brien, explains, “We would have brought an understanding of what an LCD plant is and what and how much it could produce. Not just the products, but the markets for those products and all the process steps involved.” This in turn would illuminate the precious “supply chain” and its economic multipliers. Display Supply Chain Consultants, or any other industry experts, were not consulted. Instead the economic impact studies used for the deal were paid for by Foxconn — studies that Gov. Walker took at face value.
As the process proceeded, the Foxconn deal not only got bigger, but it got suspiciously bigger in just the way Gov. Walker would want. In the final negotiation, handwritten on Walker letterhead and signed by Walker and Gou, the cap expenditure somewhat magically jumped from $8 billion to $10 billion, while the jobs almost miraculously increased from 8,000 to 13,000. In response to these wonders, Walker upped Wisconsin’s payroll kickback from 10 percent to 17 percent.
The proposed plant combined everything that an ambitious Republican governor could want. Not only a lot of jobs, but manufacturing jobs. The very sector that had dubbed the upper Midwest the Rust Belt as all those great jobs in automobile manufacturing and other industries faded away. You know, those union jobs that paid a living wage to multi-generations of high school educated workers. Back when America was great. As Pres. Trump had promised, here were some of those manufacturing jobs coming back. Never mind that, as Belt magazine reported in September, these were not the sort of jobs that would revive the Rust Belt, let alone jobs that would employ a significant number of Wisconsinites. The good jobs at an LCD plant are for degreed engineers and highly trained technicians. If Foxconn’s Indiana plant is a trustworthy indicator, many of these jobs would go to H-1B visa holders. The assembly line jobs, as our report on Foxconn Indiana suggests, would go to vulnerable, often undocumented workers at the lowest allowable wages.
It certainly appears that other states were more cautious. North Carolina’s bid, for example, topped out at $570 million, a fifth of Wisconsin’s final offer.
It certainly appears that other states were more cautious. North Carolina’s bid, for example, topped out at $570 million, a fifth of Wisconsin’s final offer. One reason that Ohio chose to step away from the interstate bidding wars, which some have dubbed “the race to the bottom,” could have been industry specific information. With augmented reality, the competing technology of OLED screens monopolizing today’s top-rated TVs, and other quickly advancing visual technologies, who’s to say there will even be a market for LCDs in 25 years, the projected best-case (and widely optimistic) payback for Wisconsin’s cash payments to Foxconn?
When we talked to Display Supply Chain Consultants’ O’Brien he seemed immediately skeptical of a lot of the promises offered by Foxconn. They simply didn’t match up with what he knew about LCD production.
“We certainly were never contacted by Wisconsin, and as far as I know, neither were any other industry experts.”
O’Brien could see the lack of industry briefing in Gov. Walker’s White House address. For instance, when the governor praised the amazing sight of the 8K Sharp TVs he witnessed on a trip to Japan. The 8K describes the pixel count — the current top of the line is 4K. The problem with this observation is that having more pixels doesn’t buy you much after a certain point, because those pixels are invisible from a distance of a few feet or more. Once again Scott Walker was seeing what he wanted to see.
In May of 2017 O’Brien and his colleagues ran a seminar specifically on LCD manufacturing at the largest related U.S. convention, Display Week in Los Angeles.
“JobsOhio attended,” he says, “but no one was on hand from Wisconsin.” When asked why JobsOhio dropped out of the bidding O’Brien postulated that “maybe they learned something about the industry during their crash course in May.”
One of the things that Gov. Walker and his team could have learned from an expert was the same revelation we made in our previous story about LCD manufacturing jobs. A modern LCD plant takes about 1,000 workers to operate; the necessary co-located feed-in operations take another 1,000, a number which matches Foxconn’s original RFP. So where does Foxconn Chairman Gou come up with 13,000 jobs? It’s either a smoke screen to make Gov. Walker happy, or he plans to put in a large assembly line to build Sharp consumer products. This would be just like the lines in Foxconn’s Indiana or Houston operations that rely heavily on temp agencies, minimum wage workers, and undocumented workers. As for that $53,000+ average wage? Well, it’s just an average — a calculation that includes the millions a Taiwanese management team would get paid.
Another tidbit Gov. Walker and his team could have used was O’Brien’s observation that Corning, Foxconn’s necessary partner in LCD manufacturing, has no interest in building the glass plant needed to feed any large-scale domestic LCD production. They spent $1 billion to build one in Sakai Japan to feed the LCD factory that Foxconn bought there last year. But when Foxconn announced plans to build a second LCD factory in China (ground was recently broken), Corning said no thanks. Corning just couldn’t make enough in the LCD business. This is no secret. On Corning’s website is a link to a presentation from a former Corning Chief Technology Officer who summarized the LCD manufacturing business as bankrupt, a “25-year suicide pact.” For their China plant, in order to lure Corning, Foxconn had to come up with a combination of private and public capital equal to two-thirds of Corning’s $1 billion up-front cost.
The “Losers’ Perspective”
What does Wisconsin’s big win look like from the perspective of states that “lost” out on a deal with Foxconn?
“We certainly were never contacted by Wisconsin, and as far as I know, neither were any other industry experts.”
“I’ll tell you one thing: It’s not going to take us 40 years to make back the investment we make,” Ohio Gov. John Kasich, a fellow Republican, told reporters in August when asked about Walker’s deal with Foxconn. “We don’t buy deals.”
Site selection specialist Steve Weitzner from Cleveland, Ohio-based Silverlode Consulting seconded Kasich. He surmised that JobsOhio, the state’s private economic development corporation, would have dropped out long before bidding neared the deal’s final costs.
“It’s a philosophical thing,” he explained. “JobsOhio is very careful with taxpayer money and insists on a relatively short return on investment.”
Gov. Walker’s semi-privatized economic development entity, WEDC, has a much more jaded history. Dr. Robert Kraig of Citizen Action of Wisconsin summarizes WEDC’s history as one of “repeated audits of bad loans, uncollected loans and payments to companies that failed to create jobs, many of them Walker contributors. As late as May of this year an audit showed that WEDC is still not gathering the information needed, such as payroll records, to get a reliable count on the agency’s claimed job creation. Some say it’s incompetence. I say it’s policy.”
Site selection specialist Weitzner also cautions that the Foxconn plant may evolve into something far different than what Gov. Walker and his team have envisioned. “I’ve been involved in hundreds of projects over 25 years and seldom do they go from start to finish without changes — often substantial changes.” For the Foxconn deal that could be “a much smaller project than advertised, deep delays or even its disappearance. Foxconn had done it before.”
The Things That Dreams Are Made Of
Rather than dig deep into Foxconn culture or the LCD industry, Gov. Walker and his team chose to hear only the drumbeat of jobs. Once they were fixated on that intoxicating image, they were not to be deterred. Sure, there were doubters out there (Walker told them to “suck on lemons”). But in a supreme example of confirmation bias, once the governor and his team were convinced they had to have Foxconn, they could only see what they wanted to see: jobs and in those jobs the perfect antidote to any future political opponents who tried that old Trump trick from the 2016 Republican presidential primary of pinning Wisconsin economic underperformance on Gov. Walker.Corning may not want to be in the domestic LCD business, but thanks to Scott Walker, every Wisconsin taxpayer is. And so are their children, if they stay in Wisconsin. The nonpartisan Wisconsin Fiscal Bureau ran a best-case scenario with 13,000 “family supporting jobs” and still couldn’t see a payback for 25 years. Clearer minds prevailed in Ohio and North Carolina.But perhaps Corning is right and the LCD manufacturing business is such a huge risk that Foxconn may hesitate to commit the billions necessary. Is it possible that LCD manufacturing may not be in the works at all? Perhaps it’s just the carrot that got Gov. Walker to put up such a rich offer and it will end up being one of the great bait and switches in history, as Wisconsin taxpayers pay Foxconn the LCD manufacturing premium for a lesser plant, one that produces TVs with imported screens.It’s not so hard to picture. An upstart American company, Element Electronics, is assembling TVs in South Carolina and selling them at competitive prices in big box stores. Foxconn could certainly do it cheaper with its own imported LCD screens and a plastics plant in Wisconsin that could make the necessary parts, using inexpensive U.S. electricity and North American petroleum products.As for the cheap labor needed to assemble consumer electronics? Foxconn has a way of finding those workers and squeezing the most out of them. Housing them on-site would be one way to attract desperate workers — the kind that staff Midwestern meat packing plants and pick strawberries for minimum wage. Maybe the real gem from Foxconn’s point of view is a 1,000-acre island of China right in the middle of the United States where they can do business the way they like best: without interference and with the cheapest labor possible.
In a recent interview, Foxconn’s lead negotiator with Wisconsin, Louis Woo, let a bit of the cat out of the bag. He indicated that Foxconn would not immediately break ground on the coveted LCD factory, but would first begin working on three other main construction projects, for what could total $1 billion in costs. While he didn’t reveal what these first factories could be, it’s likely they will be the fabrication and assembly operations for Foxconn’s new line of Sharp consumer products. Foxconn Chairman Gou will want these in the market as soon as possible, and the way to do that as cheaply as possible is to take full advantage of Wisconsin’s largesse.
If all this seems cynical, it pales with the take from the East Asia press. These reporters know Foxconn well and are skeptical that the company has either the capital or business need to build a third multibillion-dollar LCD plant. Knowing how close Gou is to the center of power in Beijing, their interpretation is that the whole enterprise is a government-encouraged hedge against the tariffs that Trump threatened during the election. They can use Foxconn’s Wisconsin project as a sign of good faith and as leverage, threatening to pull the plug should the talk of trade wars revive. And they can stretch the process out as long as Trump is in office.
Gov. Walker’s conceit that an insular manufacturing site will somehow be the viral start of a Midwestern Silicon Valley is magical thinking.
Regardless, while the general assumption has been that the Wisconsin plant will produce large LCD panels, suitable for the biggest TV sets being sold, The China Post reported on August 12 that a Sharp official described the proposed U.S. plant as focused on making small LCD panels, primarily for the automotive market. Just more evidence that what Gov. Walker and his team have envisioned is unlikely to come to pass.
Regardless of the final nature of Foxconn’s development in Wisconsin, Gov. Walker’s conceit that an insular manufacturing site will somehow be the viral start of what he is calling “Foxconn Valley,” a Midwestern Silicon Valley, is the kind of magical thinking which would be comical if it didn’t involve decades of dipping into the wallets of Wisconsin taxpayers.
Banner photo: Wisconsin governor Scott Walker and Foxconn chairman Terry Gou.
Lawrence Tabak is a writer based in Madison, Wis. His work has appeared in Fast Company, Forbes, and The Atlantic Monthly, which published his exposé on the false assumptions behind convention center construction. He can be reached at: email@example.com.