Coming to America: Foxconn and “Offshoring” to the US Rust Belt
A major Taiwanese manufacturer partners with government officials to bring over 10,000 manufacturing jobs to the American Midwest. But is it built to last?
In July, President Trump announced the decision by Taiwanese electronics firm Foxconn to open a new manufacturing facility in Wisconsin, a historically manufacturing-focused state in the Midwestern United States. The planned facility, which would produce LCD panels, represented an estimated $10B investment by Foxconn with the long-term possibility of creating 13,000 new high-quality manufacturing jobs. The announcement of Foxconn’s investment was a highly touted and symbolically important instance of two emergent trends – the so-called “nearshoring” of advanced manufacturing from East Asia to the United States, and the heavy use of government incentives to shape the sourcing decisions of corporate executives.[1]
Foxconn should be wary of near-termism and shallow incentives shaping its commitment to manufacturing in the US in the long-term. The superficial political benefit of Foxconn’s decision to US officials is underscored by the significant investment of taxpayer dollars in the Foxconn project – nearly $3B against the overall $10B investment, primarily in the form of state income tax credits for job creation and capital expenditure.[2] While the heavy up-front offset of site expansion costs is no doubt attractive to Foxconn’s leadership, the supply of skilled labor in places like Wisconsin represents a long-term threat to the viability of its US-based operation. Analysis by Deloitte Consulting LP and the Manufacturing Institute that the so-called “skills gap” in US manufacturing is likely to leave 2 million of an estimated 3.5 million manufacturing jobs unfilled between now and 2025.[3] The US has underinvested in terms of the vocational skills and STEM fields that are essential to supporting an innovative and competitive manufacturing sector.[4]
The long-term consequences of this sourcing decision will be obscured by the spike in investment and activity to bring the Wisconsin facility online, which is currently estimated to take 6 years. During that time, Foxconn will likely surge staffing as a short-term stopgap to constructing its facility and attempting to bring the plant up to full operating capability.
In the medium-term, the step they will take to address the shortfall of qualified workers is more problematic. Foxconn’s solution to cost and skills issues relating to labor is conventional – pursuing cost effective operations through automation. Beyond the apparent jobs-creation fanfare of the Wisconsin announcement, Foxconn is one of Asia’s leading proponents of headcount reduction via the introduction of robotics.[5] Faced with the substantially higher cost of labor in the US, combined with the skills gap in manufacturing and the increasing affordability of robotics, the most likely medium-term solution for Foxconn will be to replace planned human jobs with automated functions in their Wisconsin facility.
Automating the Wisconsin facility will not be as easy a process as Foxconn may hope or expect. The nature of the incentives they have been offered is highly political and rooted in an insurgent brand of economic populism around job creation for displaced workers. The Wisconsin Economic Development Corporation stipulated in its contract with Foxconn specific time-based targets for job creation to receive the full benefit of the tax credits in the investment package, with additional clawback provisions for long-term failure to meet those targets.[6] The result is that Foxconn may find the economics of his $10B investment rapidly souring as it confronts the reality of the long-term challenge in attracting and employing enough qualified workers for his US-based operation.
What Foxconn should do is proactively seek to define the skills gap narrative by forging partnerships with area universities, technical colleges, and vocational schools to specifically train the workers for Foxconn’s future operations. For the relatively low cost of investment in specific manufacturing- and STEM-focused educational programs, Foxconn gains the dual benefit of not only identifying an extended pipeline of qualified workers for its Wisconsin operations, but also preempting criticism of future efforts to automate or streamline its Wisconsin facility in accordance with Foxconn’s operational needs. Foxconn should place the near- and medium-term onus on the state to direct part of its investment in tax credits and additional incentives toward earmarked training programs for Foxconn workers. Creating political upside in the field of education and training programs is another safe hedge against future mendacity or fickle behavior from elected officials with respect to Foxconn’s presence in Wisconsin.
Given the complex situation in Wisconsin and competing long-term incentives, one key question is how should Foxconn evaluate future opportunities to pursue state-backed expansion in manufacturing in the US?
Additionally, what is the right balance for public officials to strike in the provision of taxpayer-supported incentive packages to private firms? In answering this question, consider that Wisconsin is effectively paying as much as $250,000 to $1 million to Foxconn per $54,000 per year manufacturing job created, and that according to nonpartisan analysis the state will not break even in terms of tax receipts on the investment until 2042.[7][8][9]
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References
[1] Bauer, Scott. 2017. “Trump Announces $10 Billion Foxconn Plant In Wisconsin”. PBS Newshour. https://www.pbs.org/newshour/politics/watch-live-trump-expected-announce-foxconn-plant-wisconsin.
[2] Mark, Maley. 2017. “Foxconn In Wisconsin: Facts And Figures”. Inwisconsin.Com. http://inwisconsin.com/wp-content/uploads/2017/07/FOXCONN-WISCONN-MEDIA-KIT.pdf.
[3] Deloitte Consulting LP, The Manufacturing Institute. 2015. “The Skills Gap In U.S. Manufacturing: 2015 And Beyond.”
[4] Allen, John, and Dean Kamen. 2016. “Investing In America’S Future Through STEM Education”. Brookings Institution. https://www.brookings.edu/blog/order-from-chaos/2016/06/03/investing-in-americas-future-through-stem-education/.
[5] Wakefield, Jane. 2016. “Foxconn Replaces ‘60,000 Factory Workers With Robots'”. BBC News. http://www.bbc.com/news/technology-36376966.
[6] Thomas, Arthur. 2017. “WEDC Board Signs Off On Foxconn Job Targets, Clawbacks In Staff Review”. Biztimes Media Milwaukee. https://www.biztimes.com/2017/ideas/government-politics/wedc-board-signs-off-on-foxconn-job-targets-clawbacks-in-staff-review/.
[7] Paquette, Danielle. 2017. “Analysis | Foxconn Deal To Build Massive Factory In Wisconsin Could Cost The State $230,700 Per Worker”. Washington Post. https://www.washingtonpost.com/news/wonk/wp/2017/07/27/foxconn-deal-would-cost-wisconsin-230700-per-worker/?utm_term=.134e9829b9eb.
[8] Culpan, Tim. 2017. “America And The Foxconn Dream”. Bloomberg Businessweek. https://www.bloomberg.com/news/articles/2017-07-27/america-and-the-foxconn-dream.
[9] Paquette, Danielle. 2017. “The Foxconn Deal Trump Championed Won’t Make Wisconsin Money For 25 Years, Report Says”. Washington Post. https://www.washingtonpost.com/news/wonk/wp/2017/08/09/the-foxconn-deal-trump-championed-wont-make-wisconsin-money-for-25-years/?utm_term=.0a84a951f363.
Very interesting to see that American Taxpayers are subsidizing foreign investment into the United States. Your article raises another interesting issue that has plagued our country for at least the last decade, is more education always better for someone, no matter the cost. I have personally seen individuals take out massive amounts of student loans to pursue non-STEM related degrees that end up yield very few job opportunities. Some of the worst situations were students attending for profit universities that gave degrees but students learned nothing. Your article makes me think that a contributing factor to the broken secondary education system we have in the US has potentially been driven by the lack of manufacturing jobs in the US and STEM related jobs. This has created a negative feedback loop exacerbating the education and manufacturing problems.
Very interesting article. I think you highlighted that labor shortages is the key issue that Foxconn and others will face as they evaluate future expansion opportunities in the US. Going forward, firms considering expansion in the US will need to consider the cost of training new employees and the expenditures required to support STEM focused educational programs in the area to generate the required skilled workers. I do not think that Foxconn can rely on government assistance alone to support the programs because the Company will have no control over the timeline or level of spend. The firms should take advantage of the tax breaks they have received and reinvest some of it in the local education system to which could help address the labor shortage problem.
Great article Danny! I agree with you that labor shortages will be a key issue for Foxconn to overcome with this expansion in the US. The company will need to commit a significant amount of funding to train workers. Given the existing low unemployment level (3.1%) and the history of skilled labor shortfalls in Wisconsin, I expect Foxconn will have to look towards nontraditional channels for their recruiting. [1] In response to your comment about Wisconsin spending $250,000 to $1 million per $54,000 per year manufacturing job created, I think it is important to consider the other economic impacts associated with these tax-payer funded incentives. The facility Foxconn is building will most likely require suppliers to co-locate in Wisconsin, bringing additional jobs to the area. Restaurant, retail, and housing expansions will also bolster the economic returns of this investment. In addition, the value of an anchor employer to help with talent recruitment and retention concerns for other businesses looking to expand into Wisconsin can be significant. That being said, even if the taxpayer investment proved to be a financial boom for the state, there are those that would argue against this project. The Koch-brother backed conservative group Americans for Prosperity opposed the deal on the principle that free markets are efficient and that giving expensive “taxpayer handouts” which are not available to other local businesses would be unfair. [2] The “right balance” is sure upset people on both sides of the aisle. However, it must create value for the ultimate stakeholders: local taxpayers.
[1] CBS/AP, “Wisconsin moves one step closer to Foxconn plant,” CBS News. August 17, 2017. https://www.cbsnews.com/news/wisconsin-moves-one-step-closer-to-foxconn-plant/. Accessed November 2017.
[2] Eric Bott, “Americans for Prosperity – Wisconsin Statement on Foxconn,” Americans For Prosperity. August 3, 2017. https://americansforprosperity.org/americans-prosperity-wisconsin-statement-foxconn/. Accessed November 2017.
Thanks Danny. It’s very inspiring to see how the maths work from the perspective of the government. On the one hand, there may be some economic benefits that will be very difficult to quantify. For example, the network effect which may attract other manufacturers. Foxconn may pay itself to improve the infrastructure around the factory. On the other hand, the government officials can be short-sighted and only focus on short term political benefits.
For Foxconn, since the company focuses on automation in the future, the high labor cost in the US will be less a issue. Besides, locating factories closer to customers may also save transportation and logistics cost as shown in Fuyao’s case on top of the tax credits. Therefore, I think the mathematics from Foxconn side may be more favorable in this project.
Finally, I think it may be easier for Foxconn to find talents of automation in the US considering the talent pool here, especially considering the protectionism in the filed of intellectual property. The company may develop better know-how in the US than elsewhere.
Interesting share Danny – I learned a lot. Your comment around how much the US is paying for each manufacturing job is particularly jarring ($250K to $1M per $54K per year manufacturing job). In addition to investing in local education as Nick and Austin mentioned, I think Foxconn should also consider how long the U.S. government will continue to incent manufacturing companies to set up plants in the U.S. For example, as more companies similar to Foxconn building manufacturing in the U.S., could there be positive spillovers effects? For example, more companies could be investing in training talent or improving education, helping combat the workforce skill gap. In addition, I read that Foxconn historically has treated its workforce poorly and/or tried to replace human workers with robots when possible [1], so I think that further validates why the Wisconsin contract includes time-based targets for job creation. This and the clawback feature should further incent the company to invest in the education ecosystem.
1 Singer, Alan. “Foxconn Factory in Wisconsin is a Another Bad Trump Deal.” July 31, 2017. Huffington Post. https://www.huffingtonpost.com/entry/foxconn-in-wisconsin-another-trump-bad-deal_us_597f05b8e4b0c69ef705297c
Great article Danny–thanks for your take on this interesting issue. The fact that the government will spend $250,000-$1,000,000 per $54,000/year job created, and that they won’t break even on the project until 2042, is extremely discouraging. I suspect that even these numbers may be too optimistic, as there is a risk that Foxconn will move to automation more rapidly than currently forecasted (and indeed are likely incentivized to do).
I am a bit more skeptical than other commenters about the magnitude of “spillover” effects from this investment. The logic is sound: if Foxconn opens a facility in Wisconsin, then some of their suppliers should also relocate to Wisconsin to supply that facility, and additional consumer-serving businesses (restaurants, etc.) should open to serve the Foxconn employees. However, I am skeptical the magnitude of these effects will be enough to justify the initial investment. Spillover effects are often used as an argument in favor of government investment in private enterprises: for example, you often hear these arguments when cities are offering subsidies for NFL stadiums. However, studies have shown that new sports stadiums don’t contribute meaningfully to broader economic development [1]; I suspect the same will hold true for Foxconn’s Wisconsin plant.
On the whole, I am very skeptical of government programs like this that effectively bribe private companies to relocate to their country or state. I think that Wisconsin would be much better off if, instead of using the $3B as a handout to Foxconn, they used the money to invest in education, training programs, regulatory reforms, infrastructure, and other initiatives that make Wisconsin a more attractive place to manufacture and do business.
[1] https://research.stlouisfed.org/publications/page1-econ/2017-05-01/the-economics-of-subsidizing-sports-stadiums/
Thank you, Danny! This is very interesting. I agree with your expectation that in the medium run, Foxconn pursues cost-effective operations through automation in the US. From the Foxconn perspective, pursuing automation in the US with the government’s funds completely makes sense because the US gives Foxconn the access to world-class engineers but with high costs. I believe Foxconn is seeking to build automated production facilities with the government’s funds to overcome the high labor cost in the US, reduce logistics costs by crafting production sites closer to US clients, and roll out the automated production facilities in other states to increase production capacities in the long run. As it is likely that local, low-skilled labors lose jobs due to automation, public officials should require Foxconn to train their US employees and develop their capabilities in the medium term. I also think the state government should also assess the magnitude of the influx of top-class talents that Foxconn can bring in as these talents would yield positive spillovers to local low-skilled labors.