Foxconn: No LCDs in Wisconsin?
Note: parts of this article appeared as a blog on DSCC’s site on Thursday, but after news broke Friday that Foxconn has decided to go forward with Gen 6, I made some edits and added the update at the end.
According to a flurry of news reports this week, Foxconn will not be building LCD panels at its complex in Wisconsin. While the company reiterated its plan to employ 13,000 workers in that state, statements by the company leave many open questions about what shape the investment will take.
Foxconn Groundbreaking in June 2018
Foxconn’s Louis Woo, special assistant to CEO Terry Gou, gave an interview with Reuters where he described the substantial pullback in Foxconn plans for Wisconsin. Some of the comments from Woo in the article are problematic:
- Woo was quoted as citing the steep cost of making advanced TV screens in the United States, where labor expenses are comparatively high. “In terms of TV, we have no place in the U.S.,” he said in an interview. “We can’t compete.” While this might be true, it’s not fundamentally different than the situation two years ago. When Foxconn was pitching the Gen 10.5 deal to various states, they claimed that they could make a business building TVs in the US; many in the display industry (including DSCC) were skeptical.
- Woo was quoted in the interview as saying that about three-quarters of Foxconn’s eventual jobs will be in R&D and design - what he described as “knowledge” positions - rather than blue-collar manufacturing jobs. In other statements, Woo has described the ratio of knowledge workers to be as high as 90%. I find this implausible. For comparison, Universal Display Corporation, which makes OLED emitter materials, outsources all its production and operations, so it basically consists of nothing more than R&D, and consists of 2/3 researchers, with the other 1/3 of employees consisting of the many support functions needed in any major organization. If Foxconn is going to not only do R&D but also manufacturing, then the percentage of knowledge workers will almost certainly be lower.
- In both Woo’s statements during the interview, and in subsequent statements from Foxconn, there was no mention of the planned investment. In contrast to the jobs number of 13,000, Foxconn did not reiterate its plans to invest $10 billion in Wisconsin. With the variety of descriptions of activity to be done by Foxconn in the state, it seems highly probable that the actual investment amount will be much less.
- Woo seemed to emphasize a shift away from manufacturing, stating that the “technology hub” in Wisconsin would largely consist of research facilities along with packaging and assembly operations, and would also produce specialized tech products for industrial, healthcare, and professional applications, he added. “In Wisconsin we’re not building a factory. You can’t use a factory to view our Wisconsin investment,” Woo said. This seems to be at odds with a statement issued later by Foxconn, although it’s possible there’s a translation error involved.
The Milwaukee Journal Sentinel reported that Foxconn stated that “In the next 18 months, the company said it plans to construct at the Mount Pleasant campus:
- A liquid crystal module backend packaging plant
- A high precision molding factory (emphasis added)
- A system integration assembly facility
- A rapid prototyping center to help startups test out their hardware ideas and concepts which will go in line with building the AI 8K+5G ecosystem
- A research and development center
- A high-performance data center inside the park or in the vicinity
- A town center to support the people working in the Wisconn Valley Park
The first three items on that list seem much in line with some of the original plans for the Wisconsin campus, as they describe the back end of a vertically integrated LCD TV facility. While Foxconn did not detail the products to be made at the assembly facility, two developments that I saw at the CES show have me wondering whether it might be TVs after all.
First, Sharp’s return to the CES with a large exhibit in the LVCC Central Hall makes it look like that brand (controlled by Foxconn) may be returning to the US TV market. Under a deal signed in 2015, Hisense owns the rights to the Sharp TV brand in the US until December 2020, but while Sharp’s US President told me at the CES that they have no announcement to make on the Sharp brand for TVs, the big presence on the show floor at CES suggests that they may be in discussion with Hisense to end the deal earlier.
The other end of that hypothesis comes from Hisense, as their representative at the CES exhibit indicated that Hisense would be greatly expanding distribution of its own-brand TV sets in 2019, with a major product line expansion including their ULED products (the Hisense version of Samsung and TCL’s QLED – an LCD TV panel with a quantum dot enhanced film). If Hisense is now pushing its own brand, they may be preparing to exit the Sharp brand.
So what do I take away from these latest developments? Frankly, I’m still not sure what to think about Foxconn’s plan in Wisconsin. It seems very likely that the final investment amount will be much lower than the $10 billion promised, as Foxconn no longer is defending that figure. It also seems unlikely to me that Foxconn will ever reach the full 13,000 jobs figure, considering their planned scope of activities.
On the other hand, I’m convinced that Foxconn will be having a major operation in Wisconsin. If we simply consider the investment to date ($200 million, per Foxconn’s statement) and the operations planned in the next 18 months, the investment is likely to approach $1 billion. With a Gen 6 TFT LCD fab the investment will exceed $2 billion. That’s not chump change even to a huge multinational like Foxconn, and they will make a running business out of that investment.
There is perhaps good news for taxpayers in the state of Wisconsin for the Foxconn retrenchment. Because the deal between Foxconn and the WEDC is graduated based on the number of jobs and investment, state taxpayers will be on the hook for much less than the original $2.85 billion deal. The investment subsidy in the deal is 15% of the investment made, up to $9 billion, so if the actual investment is (for example) only $1 billion instead of $10 billion, then the state subsidy is only $150 million instead of $1.35 billion.
Similarly, the jobs subsidy is proportional to employment, so fewer than 13,000 jobs means a subsidy less than $1.5 billion. Further, the deal is structured with a minimum jobs threshold, and if Foxconn fails to meet the minimum jobs threshold they get no subsidy at all. This was exactly the case for 2018, when Foxconn failed to meet the minimum of 260 jobs qualifying for the deal (they only reached 185). In 2019 that minimum increases to 520, and it continues to increase to 10,400 jobs in 2027. Further, there are minimum jobs thresholds not only for the jobs subsidy, but also for the investment subsidy, which also requires 520 jobs by the end of 2019, increasing to 8450 in 2025.
Because of the minimum jobs threshold numbers in the deal, with Foxconn’s current description of their plans I find it quite plausible that Foxconn will not receive any subsidies from the Wisconsin deal. Just to get the minimum in 2019, they need to increase employment by 3x, and getting the minimum in 2020 will require increasing employment by 10x to 1820 employees. Foxconn will only reach that number if they scale up quickly. They are more likely to do this with a Gen 6 TFT planned, but it remains by no means certain.
While the state’s taxpayers might be spared, the local entities may suffer if Foxconn does not follow through on plans. Local government incentives to Foxconn under the original plan amount to an additional $764 million, for such items as land acquisition, infrastructure and local services. To date, local municipalities have paid out $190 million, mostly for land acquisition, according to the Milwaukee Journal Sentinel, including $60 million from Foxconn.
The local government deal does include a provision that Foxconn will pay property taxes on the complex at a minimum value of $1.4 billion, or at the assessed value, whichever is higher. At today’s tax rate, the $1.4 billion value would involve property taxes of $31 million per year.
Foxconn is pulling back its plans not only in Wisconsin, but also in China, as reported by the Nikkei Asian Review. Some phases of the planned Gen 10.5 fab in Guangzhou, China will have production start pushed back by six months to 2020 owing to market uncertainty.
A report by Mizuho securities suggested that Foxconn was slowing down its plans because of disappointing performance in Sharp’s TV business in China, and a build-up of inventory at the existing Gen 10 facility of Sakai Display Products.
The various shifts in Foxconn plans all take place under the cloud of uncertainty created by the trade conflict between the US and China. As negotiations take place to land a deal before President Trump’s deadline of March 2nd to avert a significant increase in tariffs on US imports from China, businesses in many industries are evaluating their supply plans.
With massive operations in China to supply Apple and other customers, Foxconn is uniquely vulnerable to a US-China trade war. The Wisconsin complex could end up serving as Foxconn’s hedge against such a trade war, and while that might end up looking very different than the Gen 10.5 fab originally planned, it may be extremely valuable to Foxconn.
Update – Friday afternoon, the Wall St. Journal reported that Foxconn has decided to go forward with plans for LCD manufacturing after a discussion between Foxconn Chairman and CEO Terry Gou and President Trump. The report indicated that Foxconn “would make small LCD screens” after the discussion.
This would be consistent with the approach described in mid-2018, with a Gen 6 production facility. The smallest scale Gen 6 would still represent a small fraction of the $10 billion investment originally planned, at about $1 billion, but it would still be the first major TFT LCD fab outside of Asia. Such a fab could serve several markets with LCD panels – automotive displays, notebook PCs, monitors, and many niche markets.
I find it conceivable that these market niches could provide enough demand to load a small to mid-size Gen 6 fab. This would be even more likely if Foxconn would include Sharp’s oxide TFT technology (IGZO). The statement released by Foxconn to the media indicated that “Our decision is also based on a recent comprehensive and systematic evaluation to help determine the best fit for our Wisconsin project among TFT technologies.” (emphasis added)
If the Wisconsin Gen 6 fab is an amorphous silicon or a-Si fab, it will likely make standard products for several markets, but an oxide TFT fab would make higher resolution panels. Sharp’s oxide TFT panels are used in the iPad Mini and other similar products, and the more advanced technology would open up additional market opportunities.
We’ll continue to follow this closely.