January 31, 2019 / 5:40 AM / 9 months ago

Breakingviews - Foxconn’s U.S. debacle offers an economics lesson

A shovel and FoxConn logo are seen before the arrival of U.S. President Donald Trump as he participates in the Foxconn Technology Group groundbreaking ceremony for its LCD manufacturing campus, in Mount Pleasant, Wisconsin, U.S., June 28, 2018. REUTERS/Darren Hauck

HONG KONG (Reuters Breakingviews) - Foxconn’s embarrassing reassessment of its ambitious U.S. plans offers a lesson in basic economics. The iPhone maker and Wisconsin taxpayers made a big bet on a manufacturing revival in the United States less than two years ago. Now Terry Gou’s outfit says making flat screens there is uncompetitive, and most of the jobs will in fact be in research and design. It’s a reality check for U.S. President Donald Trump’s industrial dream.

The $32 billion Taiwanese manufacturer, formally known as Hon Hai Precision Industry, announced in 2017 that it would build a $10 billion campus in Wisconsin to make LCD display panel screens. The company would create thousands of new jobs, aided by about $4 billion of tax breaks and other incentives, subject to conditions. Trump took credit for the deal and was photographed, shovel in hand, alongside Gou, hailing the project with characteristic hyperbole as the eighth wonder of the world.

Now the company is signalling it might scale back, or even abandon those plans. A senior employee told Reuters that expensive U.S. workers make production there too costly. Instead, Foxconn can make more money by manufacturing the panels in East Asia, assembling them in Mexico and then importing to the United States. The Midwest plant will be a “technology hub” – seemingly more like an R&D outpost, rather than a factory.

Foxconn has yet to detail fresh plans, and has reiterated the goal of creating 13,000 new jobs. But if Gou does rethink the project, at the cost of a significant reputational hit, he will be underlining just how tough it is to reverse traditional outsourcing patterns and trade logic to create Trump’s blue-collar idyll. Foxconn would just be doing what others have long done: higher-value research and development in the United States, where labor is expensive but productive, and worker-intensive manufacturing in cheaper countries.

Worse, this is true even with eye-popping government support – tax credits alone could cost the state $219,000 to $587,000 per employee, the Wisconsin Budget Project estimated in 2017. Last year, Foxconn didn’t hire enough new workers to qualify for immediate benefits. Companies are squeezing more and more out of states keen to lure business, as Amazon proved. This is unlikely to be the last disappointment.

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