Wisconsin Wins the Hunt for Foxconn Mega Factory with Heavy Charm Offensive and Heavier Incentive Package
The Taiwanese contract manufacturing powerhouse Foxconn announced a region-changing $10 billion investment will come somewhere in southeastern Wisconsin.
This post is updated below. Last update 08/17/2017
Last week the hunt to site the humongous new factory for Foxconn–the manufacturing megashop from Taiwan that makes iPhones for Apple, gadgets for Google and many others–ended when the word went out from the White House that Wisconsin had won. The Badger State beat out eight others in the final running (Illinois, Indiana, Michigan, New York, North Carolina, Ohio, Pennsylvania and Texas), many of whom pulled all the stops and sent their governors to make pitches in person.
The promise of a bigger manufacturing future with Foxconn made best efforts worthwhile. The foreign manufacturer has a reputation for industrial mastery and a history of building up manufacturing might. Its success helped turn China into the epicenter of electronics manufacturing that’s dominated production in recent decades and has been relied on by industry leaders to make high end products, such as Apple's iPhone.
And this is a big deal. The $10 billion investment would eventually build a 20 million square foot facility–or 11 Lambeau Fields, as Wisconsin Governor Scott Walker pointed out at the White House last Wednesday. It would also create 13,000 jobs with average salaries at the factory around $53,000 annually, plus benefits, Walker also said.
Foxconn’s new Wisconsin factory will start with ~3,000 employees principally making display panels used in televisions. The specific site is still to be determined, but the location will be somewhere south of Milwaukee and just north of the Illinois border. That is, somewhere in House Speaker Paul Ryan’s district.
Big incentives, fast-tracked environmental reviews, corporate autonomy.
Wisconsin won with a whopping package of tax incentives, infrastructure promises and environmental concessions, which demonstrated its willingness to compete for such a game-changing investment by dealing in multiple dimensions. First, Wisconsin will provide Foxconn with a $3 billion, 15-year incentive package. The state’s tax credits are tied to job creation, capital expenditure and the purchase of construction materials and related start/build-up activities.
Roughly half of the $3 billion incentive package is linked to creating jobs in Wisconsin. Wisconsin waives all taxes on manufacturing in the state, so Foxconn’s incentives would be paid as cash as opposed to receiving a credit against taxes owed. So, as long as the scale up goes to plan and Foxconn keeps hiring, Wisconsin would pay the company $200 million to $250 million a year over the 15 year period. If the facility does eventually get to the full 13,000 member workforce, it will cost Wisconsin roughly $230,700 per job–and be recouped on pro-rata in the event of job loss.
State officials told the Wall Street Journal analysts with Ernst & Young estimate the plant will create 22,000 indirect jobs and another 10,000 construction jobs. And an estimated $5.7 billion of the total potential $10 billion Foxconn investment will go toward construction and equipment from local businesses.
To speed up construction, a wide array of Wisconsin environmental regulations would be waived. Governor Walker unveiled a bill on Friday that would allow Foxconn to discharge dredged materials, fill wetlands, change the course of streams, build artificial bodies of water that connect with natural waterways and build on a riverbed or lakebed without permits.
Also, Foxconn would also be exempt from having to create a state environmental impact statement, a basic due diligence requirement necessary for much smaller projects–although in this case would require a large and comprehensive review by a team of experts. Advocates might point out such a study is worth the investment of time and delay, and risk managers might order studies to thwart future adverse impacts (and costs), but Governor Walker took the ‘damn the torpedoes’ approach to win this $10 billion Foxconn hunt.
Walker called on Wisconsin’s Republican-controlled legislature to consider the measure as early as this week. It would also borrow $252 million to finish rebuilding Interstate 94, which connects Milwaukee with Chicago and runs near where the Foxconn factory is expected to be built along the eastern side of the state.
The big win for southern Wisconsin comes roughly six months after Foxconn said it would begin investing in the U.S. and create between 30,000 and 50,000 jobs here. At the White House last Wednesday, Foxconn Chairman Terry Gou again said this was the first in a series of U.S. investments. The company is making a major shift in strategy and pivoting toward substantial U.S. operations. Foxconn will essentially build a new electronics supply chain. The Wisconsin display factory will be the cornerstone of a new manufacturing ecosystem.
Governor Walker said the factory could draw as many as 150 supporting suppliers to southeastern Wisconsin and nearby states.
Global manufacturing in flux again, and advanced technologies rising
As noted previously here, here and here, the forces ordering the old global manufacturing normal are changing. Wages in China have risen steadily during its decades of manufacturing dominance. While it’s middle class is ascendant, China’s cost of labor has crept up to the point of being a negative determining factor in site selection decision making. So, firms have begun leaking out of China to lower-cost producers in southeast Asia–which are still close enough to the region’s well-developed electronics supply chain and deep labor pool. It’s a familiar formula for an increasing number of Asian manufacturers, which are–like manufacturers of bygone ages–expanding beyond borders and readjusting to the ever shifting winds of the global macro environment.
But this Wisconsin facility marks the first major U.S. investment for Foxconn. Four years ago, the company announced plans to build a new $30 million factory in Pennsylvania, to much fanfare, but it was never built. Apparently, Pennsylvania was not able to close the deal with a compelling enough incentive package. Although some are doubting the Wisconsin deal.
Standing alongside President Trump and Foxconn chairman Gou, Governor Walker called it a “once-in-a-century opportunity” for Wisconsin. “We are calling this development ‘Wisconn Valley,’ because we believe this will have a transformational effect on Wisconsin just as Silicon Valley transformed the San Francisco Bay area.”
Southeastern Wisconsin is not San Francisco/Oakland. This reach of real estate is a largely rugged, rural and agrarian terrain, with a wet, rolling landscape marked by creeks, streams, lakes and wetlands of all shape and size. Many small towns flourish in the region with seasonal recreation and bluefield economies. For generations, Chicagoland residents have flocked over the border north to the “lakes and woods country. Some lakes, such as Lake Geneva, are surprisingly well developed and their populations disguise the density of people you’ll find there in the summer months. Along mansion row, you can find estates worth 10’s of millions of dollars.
But like Silicon Valley, the promise of jobs and the synergistic energy of a cluster of companies co-existing in similar supply chains could create a powerful pull to the area. Also like Silicon Valley, quality of life exists there in spades–if you don’t mind the occasional snow shower in the off-season. Although the area does boast some level of winter sporting, which gets better the further north in Wisconsin you go.
Wisconsin's going to need more workers.
To staff a facility with so many tech workers, Foxconn will pull workers from every community and then some. With U.S. unemployment near a 16-year low and unemployment claims near a 50-year low, it’s hard to imagine finding 13,000 local workers for any single facility anywhere in the U.S. Labor availability is the top complaint heard from companies in all markets, and in a growing number of industries. After 8 years of recovery in Wisconsin, its unemployment rate was reported to be 3.1% in June–the best number since 1999.
Northern Illinois would be a major winner here. Unemployment across the border in Illinois is 4.7%, and the labor pool is much larger. It would be impossible for southeastern Wisconsin to lift this project on its own, but it makes sense from an economic geography perspective once you realize that this subregion is a spoke in Chicago’s orbit–a global hub with supreme logistics. Kenosha county already has two large Amazon distribution centers.
And Wisconsin’s 1st congressional district benefits from dual orbit by sharing the reach of Milwaukee’s economy and laborshed, a re-emerging regional hub with the largest population in the state. In fact, the area is practically hemmed in on all sides by urbanscape: Chicagoland to the south (from Waukegan along Lake Michigan west to Rockford and South Beloit), Milwaukee and Waukesha to the North, Racine and Kenosha in the east and Janesville and Beloit in the West–with Madison, a major rising metro star, just over the northwestern horizon along Interstate 90.
From a high altitude, the location looks like mega-regional infill. Half the beneficiaries may ultimately be in Illinois. And that has some in Wisconsin concerned: “Gov. Walker has to some explaining to do to taxpayers in every corner of the state who will foot the bill for this deal on the Illinois border," Scot Ross, director of the liberal activist group One Wisconsin Now, told Fortune.”
One state pays but two states eat?
Some of the biggest blowback to Walker’s proposed legislation came from Democratic state Sen. Dave Hansen, who represents Green Bay–in the north-central portion of the state at the top of the Fox River Valley manufacturing corridor. He said moving quickly on the $3 billion incentive package would be "a serious case of legislative malpractice."
Walker went on a whirlwind tour by air on Friday in a campaign-style barnstorm of multiple cities via small airplane. "There's a whole lot of people out there scrambling to try and come up with a reason not to like this," Walker reportedly said in Eau Claire. "I can tell you, that's fine but I think they can go suck lemons. The rest of us are going to cheer and figure out how we get this thing going forward."
Many in Wisconsin are cheering. Seizing on the moment to make a branding impression, Kurt Bauer, president of the trade group Wisconsin Manufacturers & Commerce, is now calling the state “Wis-Foxconn-sin.” He reportedly told Bloomberg: “This could be for Wisconsin what the Bakken did for North Dakota–we could see a jobs gold rush driven by Foxconn” and a ripple effect from the a virtuous circle that would follow the Foxconn investment. If the Fox River Valley corridor that runs up the central part of the state to Appleton and Green Bay–which boasts its own history of manufacturing prowess, high quality of life, density of manufacturing workforce and relatively low cost of housing–then “Wis-Foxconn-sin” could take on even more comprehensive meaning.
Greenshoots growing in pockets across the Silicon Prairie
And though Governor Walker may run with a ‘Wisconn Valley’ branding, the eventual 20 million square foot Foxconn campus will be another bridge in the building Silicon Prairie–a patchy ecosystem of Midwestern innovation centers that reaches from the Champaign-Urbana area north through Chicago, then west through pockets of Iowa, Wisconsin, Nebraska, Minnesota and the Dakotas. North Texas also boasts an urban prarie oasis.
Fed by the new economy and forces of re-urbanization, the creative class is raising economic prospects in areas around thriving urban outposts in Des Moines, Lincoln, Omaha and Sioux Falls. Minnesota’s Twin Cities has been particularly hot, with several of its own incubators–like COCO, housed in the old grain exchange building.
But Chicago stands out as the unofficial capital and center of the Silicon Prairie orbit. Cook County may be losing a trickle of population, but the downtown is white hot. The permanent population of Chicago's central business district–the "Loop"–more than doubled between the 2000 and 2010 Census–and the urban infill pressure and development intensity have only grown from there. For five years in a row now, Chicago has located more corporate headquarters than any other U.S. city. Growth in its many tech ecosystems is explosive. Chicago’s groundbreaking business incubator, 1871 inside the old Merchandise Mart, has helped created many thousands of jobs–enough to launch one of 1871's founder, J.B. Pritzker, in a bid for Illinois Governor.
Full spectrum upgrade for a giga-evolution
The global macroeconomic landscape is shifting rapidly and its mixing up every category. Rare are conditions in real estate when residential, commercial, industrial and alternative segments (such as recreational, green infrastructure, ecosystem service and preservation uses) are each experiencing evolutionary change. Advances in green infrastructure design and habitat restoration, for example, add very high quality space and amenity that is helping to drive quality of place to ideal levels. And industrial uses are coming back in a size and scale unseen in generations.
Tesla’s Gigafactory in Nevada, for example, will be the largest manufacturing facility in the world when complete. Nevada beat out competing states for that facility by offering $1.3 billion in tax benefits over 20 years. Tesla followed up by partnering with Panasonic to build another large facility in Buffalo, New York to manufacture solar panels. Tesla announced its subsidiary SolarCity’s commitment to create over 1,400 jobs in Buffalo—including more than 500 manufacturing jobs.
More recently, speculation is building that Tesla will soon announce locations for two to four massive new factories by the end of 2017. Several facility negotiations are underway as Elon Musk builds his own manufacturing ecosystem in the U.S., and deal announcements are unlikely to come until negotiations are finalized.
But Musk isn’t alone. New industrial giants are popping up across the U.S. As covered previously, many massive Liquefied Natural Gas (LNG) export terminals have been and are being constructed, which will be some of the largest terminals in the world when complete and more than double the amount of natural gas afloat in global trade. Big River Steel’s billion dollar plant–a new, more efficient steel plant–is already Arkansas’ largest consumer of electricity.
Braidy Industries Inc.–a U.S. company with a new, more efficient aluminum plan–recently announced it will build a $1.3 billion aluminum mill and create 550 advanced manufacturing jobs in Greenup County, Kentucky to produce sheet and plate for the automotive and aerospace industries. “Braidy Industries’ decision to locate in Eastern Kentucky has the potential to be as significant as any economic deal ever made in the history of Kentucky,” Governor Bevin said in a statement:
Braidy Industries will construct a 2.5 million square foot aluminum mill on 300+ acres near South Shore in Greenup County. The company expects construction to begin in early 2018 with completion in 2020.
Foxconn isn’t alone either. Foreign investment into the U.S. is also setting new all time records. And according to A.T. Kearney’s FDI global confidence index, the U.S. has beat out rivals China and Germany as the #1 destination for capital investment for the 5th consecutive year in 2017. Earlier this summer, Samsung announced plans to open a new factory in South Carolina–citing proximity to the American customer. Yuhuang Chemical is already developing a $1.85 billion methanol complex in St. James Parish, Louisiana. And China’s Wanhua Chemical is building a $1.12 billion chemical plant in Louisiana as well.
In an interview in which President Trump had (correctly) foreshadowed Foxconn’s plans with the Wall Street Journal Tuesday, he said Apple CEO Tim Cook had committed to build three big manufacturing plants in the U.S. Apple would not comment, but the President is routinely inviting CEOs to meet at the White House and continues to vow to revive U.S. manufacturing and single out companies moving facilities abroad.
Results are mixed so far. After initial success holding back the migration of Indiana manufacturer, Carrier, the company nevertheless announced jobs cuts/plans to move production to Mexico. Despite Mr. Trump’s best efforts, no one can stand in the way of the economic forces reordering the global economy.
But now, new manufacturing clusters and ecosystems are sprouting up across the U.S. and replacing the older ones dying off. The competitive position of the country is multifaceted, structural and growing. New growth is picking up the slack and then some.
In fact, we’re running out of slack. Soon the U.S. may run out of workers.
Update Friday 8/11: Wisconsin legislators will vote on Foxconn's big incentive package on Monday, 8/14. This post will be updated to reflect events as they become material.
Update Monday 8/14: The Milwaukee Journal Sentinel reports that the Wisconsin Assembly has voted to advanced Foxconn's incentive package, even as a new report emerged that cast doubt on job creation projections: "Without any Democratic votes, Republicans on Monday advanced a $3 billion incentive package to encourage Foxconn Technology Group to build a display panel plant in southeastern Wisconsin that could employ thousands.The 8-5 vote in the Assembly Committee on Jobs and the Economy came as a new report concluded the ripple effect from the Taiwanese tech giant's investment would produce 4,000 to 10,000 fewer jobs than previously estimated. On the positive side, the report by consultant Baker Tilly Virchow Krause predicted a greater number of short-term jobs resulting from the construction of the Foxconn factory." Read the complete story...
Update Thursday 8/17: The Wisconsin Assembly has passed Foxconn's ~$3B incentive package.