Five Ways to Fix Wisconsin’s Factory Deal With Foxconn

(Bloomberg) -- Last week, Foxconn Chairman Terry Gou made headlines for announcing plans to run for president of Taiwan, citing divine inspiration from a Chinese sea goddess. While commentators obsessed over what the business magnate’s bid could mean for the Asian island or for the world’s largest contract manufacturer of electronics, I couldn’t help but wonder what his decision will mean for—of all places—Wisconsin.

Back in 2017, Gou personally helped strike a landmark deal with U.S. President Donald Trump and Wisconsin’s then Governor Scott Walker to build a colossal presence in the Badger State. In exchange for an estimated $4.5 billion in government subsidies and other incentives, Foxconn agreed to invest $10 billion and hire 13,000 workers at its new factory operations just south of Milwaukee. Yet, almost from the outset, as Bloomberg Businessweek reported, the arrangement has been steeped in controversy, questionable promises and ever-changing goals.

Foxconn’s deal with Wisconsin would probably undergo material changes without Gou at the helm. The day after Gou’s presidential announcement, Wisconsin’s recently elected Democratic governor, Tony Evers, said he wants to renegotiate the state’s contract with the company. With the original agreement signed into law and the state senate and assembly in Republican control, it’s unlikely Evers would be able to renegotiate anything without a contentious political fight. But as Foxconn signals openness to “new ideas,” here’s a list of five proposals that would strengthen the state’s investment, based on more than four dozen interviews in the past six months with people familiar with the project:

1. Figure out the real economic impact

If Wisconsin were to reestablish the terms of its deal, the state first ought to negotiate on more solid financial footing. The original deal was based on fiscal analyses for an entirely different operation—a much larger facility, with a faster hiring schedule and different types of jobs, which the company has since inexplicably modified. Yet, the state continues relying on studies of this now-irrelevant project scope to justify extensive corporate subsidies. Even Noah Williams, the economics professor who originally crunched the jobs numbers used by the Walker administration, said the state needs to reassess. “They say they’re still going to build up to 13,000 workers,” Williams said. “It’s not very clear how.”

2. Reduce corporate subsidies

The current deal offers two extremely lucrative incentives: Taxpayers would essentially subsidize 17 percent of salaries to Foxconn workers and 15 percent of its capital expenditures within the state, provided the company hit a set of staggered hiring and investment targets in the decades ahead. These cash subsidies are abnormally large; other companies have received roughly half these financial incentives. Wisconsin agreed to such heightened concessions because of the sheer magnitude of what Foxconn was promising: thousands of jobs and billions of dollars in spending. Now that observers say the company will never get close to hitting these pledged amounts, the state may need to wind down its commitment. It could use a sliding scale, whereby Foxconn would only receive the full weight of subsidies for hitting targets.

3. Increase monitoring and metrics

The state can’t examine Foxconn’s progress in real time. The main check so far has been from reporters and intermittent corporate disclosures, which have proven to be too opaque. Many officials were surprised when Foxconn said in January that it had fallen 82 percent short of its maximum first-year job target. Wisconsin could implement more frequent reporting requirements—maybe a quarterly progress update, filed alongside the company’s earnings reports. In such filings, officials would benefit from a breakdown showing the types of jobs Foxconn is staffing, as well as more metrics detailing factory output.

4. Encourage Foxconn to buy locally

One of the biggest shortcomings of Wisconsin’s contract is that it doesn’t stipulate that Foxconn buy from suppliers in the state. According to our reporting, many of the parts Foxconn was using for its early electronics manufacturing operations there were being shipped from Mexico. It isn’t feasible for Wisconsin to require every part be sourced locally—the state simply doesn’t have them all—but officials could incentivize a Wisconsin-first approach. They could redirect some of Foxconn’s incentives to local suppliers and foster an industry to support electronics products. Corning, for instance, reportedly decided not to establish a Wisconsin glass factory after the state refused to offer comparable subsidies.

5. Introduce reasonable penalties

The only punishment when Foxconn misses hiring and investment targets is that it doesn’t earn its annual incentives. This form of penalty doesn’t entirely protect taxpayers from negative consequences. Not only has Foxconn already whiffed on its 2018 job targets, it set hiring goals through 2020 that are below what the company agreed to in its contract. This offers a justification for Wisconsin to introduce real financial punishments. For a $750 million factory deal with Tesla Inc. in New York, the automaker agreed to pay a $41 million fine to the state for each year it misses its own targets.

As sensible as all this may sound, Foxconn likely won’t agree to such measures. Nor is it likely to ever be presented with a bipartisan plan under the divisive political atmosphere in Wisconsin, something Gou probably realized when he finalized the original deal. Gou should fit right in to a life in politics.

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