Foxconn Plays Tax-Credit Poker With Wisconsin in Troubled Deal

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(Bloomberg Opinion) -- I won’t say I told you so. But I did.

Three years ago, when then President-elect Donald Trump started getting excited about the prospect of making iPhones in the U.S., I noted that Foxconn Technology Group founder Terry Gou had some history in leading on government officials.

When the state of Wisconsin signed on the dotted line, offering $3 billion in sweeteners to lure a $10 billion investment from the biggest assembler of the Apple Inc. devices, I figured those numbers didn’t add up. And after Foxconn said it would build a leading-edge display panel factory there, it was obvious the plan didn’t make sense.

Correspondence between Foxconn and the Wisconsin Economic Development Corp., or WEDC, obtained by The Verge shows a marriage in trouble. It’s clear that Foxconn has reneged on its original plan to build a massive 10.5-generation LCD plant. The two sides are now squabbling over whether the Taiwanese company will still be eligible for taxpayer subsidies.

I’m not gloating. Promises were broken, environmental policies overridden, and Wisconsin families pushed out of their homes as part of this project. There’s nothing to celebrate here. But it’s not too late for Foxconn and Wisconsin to salvage something out of their failed romance — as long as both sides want to.

Foxconn is now looking to operate a 6G factory. The difference is huge. Each generation number indicates the size of the glass panels, with later iterations made from larger sheets and far more complicated. By way of example, Japan’s Sharp Corp. (which Foxconn now owns) started production at a 6G fab 15 years ago while the first 10.5G lines, operated by Chinese companies, got under way only within the last two years.

Foxconn Plays Tax-Credit Poker With Wisconsin in Troubled Deal

It doesn’t matter why Foxconn changed its mind. Neither does the disagreement over whether 10.5G is a requirement for the tax credits that helped lure the company to the state. The point is that Wisconsin officials clearly believed a 10.5G plant was coming, and Foxconn did nothing to set them straight.

What’s important now is both sides’ willingness to patch things up. The documents reproduced by The Verge show that Wisconsin is trying as hard as possible to make it work by offering to let the Taiwanese company rewrite the contract. Foxconn has steadfastly refused, arguing that its new plans hew to the original deal. Some marriage counselling is sorely needed.

Wisconsin may have another reason to rewrite its vows. The contract agreed by WEDC, the organization tasked with luring investment to the state, may allow Foxconn to claim tax credits for work not actually performed in Wisconsin, state auditor Joe Chrisman noted in his second annual report on the deal this week.

So far, the tax credits have been moot. Foxconn failed to hire the 260 people required to meet its threshold last year, while we’re yet to find out if it hit the 520 jobs specified for 2019. Capital expenditure hasn’t come close to the $192.9 million it’s meant to reach this year. But something needs to be done soon: Those employment-based tax credits can be carried forward, and are refundable, meaning that if Foxconn doesn’t have a tax bill then Wisconsin would need to cut it a check.

Foxconn Plays Tax-Credit Poker With Wisconsin in Troubled Deal

Beyond the tension over what type of LCD factory may get built, if any, Foxconn has been vague about what it’s actually going to do in Wisconsin. The trend has been of scaled-back and delayed plans. At one point, Foxconn unveiled designs for a giant glass orb that would house a data center, and then changed its mind. Ideas extend as far as manufacturing robot coffee kiosks (though there’s been no talk of making iPhones).

Two years after the deal was signed, ground has been cleared and concrete has been poured. But nothing has been manufactured. Only about $150 million in contracts have been awarded by Foxconn, less than 2% of the original $10 billion investment plan and not even 10% of the company’s global capex.

In refusing to draw up a new contract, Foxconn is leaving itself an excuse to walk away if its 6G plans don’t get tax credits. It’s as though the company is daring Wisconsin to call its bluff. That makes for an exciting game of poker, but it’s no way to save a marriage.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Tim Culpan is a Bloomberg Opinion columnist covering technology. He previously covered technology for Bloomberg News.

©2019 Bloomberg L.P.

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