Final Foxconn contract needs tough approach

Foxconn has a reputation as a hard-nosed negotiator, a requirement in its business of contract manufacturing. It drives hard bargains with its vendors as it relentlessly drives down costs.

Contract manufacturing operates on high volumes, but with low margins of 2.5% to 3.5%. Hence, the rigor in its sourcing methods. If fights for every dollar of cost savings.

By that token, it makes sense for Gov. Walker and his team to drive a smart bargain as it fleshes out its pending deal with Foxconn to invest up to $10 billion in a display panel plant and bring 3000 to 13,000 jobs to the state.

At this point, the two parties do not have a final deal. They have an MOU, a memorandum of understanding that outlines the broad shape of the deal. There are many points to be worked out in the final contract.

Though the $3 billion price tag in the MOU is very high by any historical standard — $230,000 per job if 13,000 jobs are realized — I favor making the bet. Wisconsin has lagged the national average on growth and therefore wages for more than four decades. Foxconn won’t change that glide path all by itself, but it certainly will be an upward accelerant.

Note though that this deal is yet another bet on the manufacturing sector, where the state already has a strength and an economic development emphasis. This move does not diversify the state’s business portfolio. That said, it is clearly in the realm of advanced manufacturing where many technologies will be involved in the production processes.

Some critics of the deal decry the projected use of robots in the plant, but manufacturers have no choice but to deploy robots and other forms of automation if they want to stay in business. That’s just reality. It is one way for U.S. manufacturers to compete with $1-$3 labor in the Far East.

On the other side of the coin, automation, combined with lean disciplines and out-sourcing, limit organic job growth from manufacturing. That creates a strategic need for Wisconsin to diversify way from manufacturing for the long term. We have to reinvent our economy, which is often accomplished by entrepreneurs.

That said, I prefer the economic argument that anything that improves productivity, like robots, is good in the end for the economy and for worker wages.

It is to be expected that pundits in the cheap seats will have countless suggestions for making the deal a better one. Here are mine, gleaned from smart people:

• Bargain for a Foxconn long-term commitment to bring follow-on technologies into the Wisconsin plant when LCD display panels go obsolete. They won’t be around forever in the fast-moving technology world.

• Negotiate claw-backs on the $1.35 million in capital credits if the company pulls out of the plant before the end of the 15-year subsidy package. The company has reneged on promises in Brazil, Indonesia, Taiwan and Pennsylvania. It spent $9.5 billion companywide on capital projects over the last five years, but has kicked off projects reported at about $14 billion since 2015 in China and India. That predates the Wisconsin $10 billion over the next six years. You get the picture on Foxconn’s reliability.

• In exchange for an accelerated permitting process, require Foxconn to submit to the state its Environmental Management System (EMS) for the new plant. Every company of any size that pollutes has an EMS. Expose its EMS to public view. That would a substitute or sorts for the waiver of an environmental impact statement.

• State officials have suggested $20 million in Foxconn training funds, but the company will likely be putting in some matching dollars for education programs like apprenticeships and internships. Work that match into the contract.

For perspective on the magnitude of the state package, the recent $10 million in subsidies awarded to Generac for the addition of 400 jobs at an expanded headquarters in Waukesha County serve a benchmark. That amounts to $25,000 per job. At an estimate of $5,000 in new sales and income taxes per job per year, that bet pays off in five years.

Another benchmark is the 2012 deal to consolidate Mercury Maine’s operations in Fond du Lac. Mercury has added 1700 jobs, which means the per-job subsidy worked out to $72,000. The ROT (return of taxes) will be 14 years.

Both projects are far less costly to taxpayers.

At the far end, the payback for Foxconn could be 25 years or more. (Indirect jobs are not included in any of the cases cited.)

Every major business decision entails risks. The risks in the Foxconn deal are obvious. That’s why hard bargaining on the front end is called for as the final contract is drafted.

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