Experts Break Down Foxconn’s Future

Frederica Freyberg:

In tonight’s inside look, we look at jobs and Foxconn. The advocacy group Tariffs Hurt the Heartland released a report this week saying the tariffs currently in place could cost Wisconsin more than 14,000 jobs over the next three years and that agriculture and manufacturing will bear a large part of the burden. But what about the 13,000 jobs promised by Foxconn? How will policies coming from Washington impact the mega deal in Wisconsin? We spoke with political and economic affairs commentator Einar Tangen out of Beijing. Tangen has worked in numerous organizations in Asia as well as Wisconsin. We started by asking him about Foxconn’s split between manufacturing and research jobs.

Einar Tangen:

The idea of having a 25/75, where 25 were administrative and research and 75% production workers was never realistic. We discussed this at the time. This is just not possible. When you can hire somebody for what is in essence a one-hour wage, you can hire somebody in Vietnam or India or Bangladesh for an entire week. So from a productivity point of view and labor, it does not make any sense. There will never be a return on the roughly $4 billion that the state has potentially put towards this, mostly in the form of tax incentives, although there’s almost $900 million plus that will be going into infrastructure improvements for the area. I don’t think that will be lost. And quite frankly, it stirred the dust up on an area which has been long overdue for development. We talk about the Rust Belt states. This was an area of traditional heavy industry. It needed a boost. It certainly has a tremendous amount to offer in terms of the intellectual capabilities of University of Milwaukee, Marquette, Milwaukee School of Engineering, Madison and also all the universities in Illinois. So as a place to do business, as a potential Midwest Silicon Valley, it has a lot of the right components, other than this kind of, you know, creating a center. And if that is able to do, if this project was able to kick-start that, it’s probably a move in the right direction, as opposed to trying minor things that fail on a continual basis. There are, yes, cultural differences in how you approach a deal. The difficulty in understanding east versus west is very, very difficult. Terry Gou and his people, they speak English. They’re used to dealing with foreign companies, English-speaking. But, on the other hand, they are very, very eastern in the way that they approach things. And that means that you’ve signed the paper and then you start to figure out how it can be done. And there’s an expectation that you’ll give a little bit in order to get something that you desire. From the western perspective, that is as — that’s not seen as cricket, as they say. It’s more something where they think that this is bad faith. So you have a gulf in the way that these two sides look at a deal. And that is becoming fast apparent. But apart from that, it’s simply getting to know what the bottom line is for each side. Now, you have to remember that their business model is predicated on having huge, huge contracts, like Apple. I mean, that’s half of their revenue. And taking a very, very, very small percentage as profit. So where a normal company in the U.S. would say they need somewhere between 12% and 20% margin on their business operations, Foxconn does it at anywhere between 1.5% — allegedly 1.5 — all the way up to maybe 6%. So as a result, it’s all about the details. Terry Gou has made an enormous amount of money by paying attention to every single penny that is spent, because he doesn’t have the luxury of just kind of wasting time and money. It would literally put him out of business. I think you can expect, as I said, this deal to continue morphing. It will go from one thing to another, depending on where Terry sees the mix of politics and economics. The difficulty of what Donald Trump is trying to do is he stirs so much uncertainty, no one is willing to make a long-term commitment because they don’t know what’s going to happen. Business is not about taking risks that you can’t control. It’s about taking core risks, pursuing them and getting the best result within a very manageable setting. That’s clearly not what’s happening right now.

Frederica Freyberg:

Foxconn’s global grasp can be complicated to understand, from the economics of it to the technology. Paul Semenza is an independent consultant in Silicon Valley and has been a display panel expert for years. He joins us now from San Jose, California. Thanks very much for being here.

Paul Semenza:

Hi.

Frederica Freyberg:

Well, when industry insiders like yourself see what’s going on with Foxconn and Wisconsin, what do you think?

Paul Semenza:

Well, it’s a very interesting case of trying to basically start a very complex, advanced manufacturing facility from a green field, from nothing, in terms of the supply chain. So there’s a huge amount of effort that’s going to be required to bring together all the pieces, the materials, the equipment, the expertise that’s needed to basically jump-start into a very high-tech manufacturing process.

Frederica Freyberg:

Well, not only that, but Foxconn, as you know, has gone from a plant that’s Generation 10 to generation 6, manufacturing to research and back to manufacturing again. How complicated is it in the midst of trying to get it going to switch plans like this from an operational point of view?

Paul Semenza:

It’s very complicated. You know, the phrases Gen 10 and Gen 6 are industry shorthand for the size and scope of this plant. Roughly speaking, a Gen 10 plant is something that’s suitable and customized for making large screen TVs, such as you might have in your living room, 40-inch, 50-inch, larger panels. Whereas a Gen 6 plant is really customize — or targeted to making smart phones and tablets and those type of things. And while the underlying manufacturing technology is quite similar, the specifications of the equipment, the requirements, particularly with regard to glass, so the Gen 10 just roughly speaking, the Gen 10, the sheets of glass that go into the factory are larger than a king-size bed. So they’re very difficult to handle. They basically need to be produced on-site. That may be one of the reasons that they decided to shift from Gen 10 to Gen 6 because in the case of Gen 6, you could ship the glass sheets.

Frederica Freyberg:

Speaking of that, if they are making the smaller screens for smart phones and those phones are manufactured in China, are they shipping components made in Wisconsin back to China and then back again for sale in the U.S.?

Paul Semenza:

Most likely. Yes, there’s no smartphone manufacturing in the U.S. or as far as I know, really in North America. Foxconn itself, as many people know, is the main assembler of iPhones for Apple and that’s all done in China. So, yes, you might have the case where parts are shipped from Asia to Wisconsin. They’re assembled into the displays and then the displays are shipped back to China for assembly into the phone and then that’s shipped back to the U.S. or the final market.

Frederica Freyberg:

Can that kind of supply chain make business sense for high-tech manufacturers like Foxconn?

Paul Semenza:

Most likely not. And that’s why you — if you’re Foxconn, you’re looking for quite a big subsidy, such as they’ve negotiated for with the state, to try to make it make sense. And I think even with the scope of the subsidy that they’ve negotiated, maybe now they’re realizing or really putting pen to paper and saying can we still make this a profitable venture.

Frederica Freyberg:

So how does Foxconn, in your mind, get to the 13,000 jobs even with the combination manufacturing/research operation?

Paul Semenza:

With great difficulty. Foxconn is on record and folks who know about this industry know that the assembly process for making these LCD panels is highly automated. The reason that it costs $10 billion to build a plant is because it’s very sophisticated equipment which requires a great amount of skill and ingenuity to create and install and set up but is very highly automated. So the manufacturing process itself does not require a lot of labor. R & D, research facilities, those are excellent jobs, obviously, but generally speaking research facilities don’t employ thousands and thousands of people.

Frederica Freyberg:

So as to the market, how is the market for Apple iPhones changing right now, and what does that mean for Foxconn in Asia and here in Wisconsin?

Paul Semenza:

Yeah. I think the iPhone or the smartphone market is part of it and then maybe the broader electronics market and the way the LCD manufacturers are responding. So, you know, Apple has reported that, you know, its sales in China are somewhat slowing down. You know, I think it’s clear to lots of people that Apple’s been tremendously successful in pushing out the iPhone around the world. And sometimes that success can, you know, eventually come back to bite you because you basically sell your product to everyone who’s willing or able to buy it and then your sales slow down. So I think that’s part of the issue. The other part is that Foxconn and other LCD suppliers have been putting in a lot of capacity around the world to make LCDs for everything from iPhones to TVs and they’re now — the industry as a whole is starting to slow down on that investment. Foxconn is making — building a Gen 10 plant in China right now and they’ve just made some announcements that they’re going to pull back on the schedule for bringing that facility up.

Frederica Freyberg:

Wow. Well, thank you very much for your insight, Paul Semenza, out of San Jose. Thanks.

Paul Semenza:

My pleasure.