Trump Moved Foxconn to America. Why Is Manufacturing Coming Back?

Moving technology-heavy manufacturing back to a developed country is no longer a problem — as long as it hires fewer people.

In the late-June heat of Wisconsin, U.S. President Donald Trump and Foxconn chairman Terry Gou, holding shiny little shovels, turned the first earth for Foxconn's new plant.

Standing beside them were Wisconsin Governor Scott Walker, Speaker of the U.S. House Paul Ryan, and Christopher Murdock, the first employee Foxconn hired in the state.

"This plant is the eighth wonder of the world," Trump said, with his customary exaggeration, "and it is being built entirely out of American steel and concrete."

A year and a half into his term, Trump had moved Foxconn to America.

In November 2016, just after winning the election, Trump told The New York Times that he had spoken with Apple CEO Tim Cook and laid out his plan to bring Apple's manufacturing back to the United States.

"I said, Tim, one of the things that will be a real achievement for me is when I get Apple to build a big plant in the United States — many big plants, not just one. Not go to China like you're doing now, or Vietnam, but build your products right here," Trump said.

Another U.S. president said something similar to another Apple CEO. In February 2011, at a Silicon Valley dinner, Obama asked Steve Jobs: "What would it take to make iPhones in the United States? When are those jobs coming back?" Jobs answered flatly: "Those jobs aren't coming back."

Now Foxconn really is building a plant in the United States, at a cost of $10 billion — the largest manufacturing reshoring project since Trump took office. Other large companies that say they will move more manufacturing work to the U.S. include Bayer, Lockheed Martin, and carmakers such as Ford, GM, Hyundai, and Toyota.

American manufacturing has begun to show signs of a comeback, and the trend started before Trump.

And yet what Jobs said still holds.

$10 billion, 13,000 jobs — the business Foxconn does in America is not the business it does in China

When Trump introduced Foxconn to Americans at the White House, he called it "a great company that makes iPhones and laptops for Apple," and said its arrival in Wisconsin would bring a great many jobs to the area.

But the new Wisconsin plant does not make iPhones. According to Gou, it is called the Wisconsin Valley of Science and Technology Park, and its main line of business is LCD display panels.

The park is part of Foxconn's Flying Eagle project. Foxconn describes Flying Eagle as its U.S. investment program (it even has a trademark), which will bring $10 billion to Wisconsin and create 13,000 jobs over four years. The industries it is meant to cover include panels, batteries, LED packaging, semiconductor packaging, cloud computing, big data, AI, and robotics components. So far the only thing settled is the LCD panel plant.

$10 billion is a large sum — about 2.5 times what Foxconn Industrial Internet raised in its A-share listing.

But 13,000 people is very few for Foxconn. The contract electronics manufacturer employs 1.3 million people, a payroll on the scale of Walmart's; its Zhengzhou plant alone has more than 250,000 workers. Foxconn Industrial Internet, the new subsidiary that also says it is pursuing advanced manufacturing, has 270,000 employees.

Even so, hiring 13,000 people for this plant will not be easy. Last November, Governor Walker said the state planned to spend $6.8 million on advertising to draw workers from other states into the jobs Foxconn would create. The state Department of Revenue estimated that 10% of Foxconn's employees would end up coming from Illinois, and a survey commissioned by the state's economic development arm concluded that as many as half of the construction workers and Foxconn employees could come from out of state.

"We really need the people," Walker said. Wisconsin has 5.795 million residents, 20th among U.S. states. Nanjing, by comparison, has 8.335 million people on 3% of the land.

Gou has said the jobs Foxconn creates in Wisconsin will be "high-tech, high-wage, high-potential, high-value" work. Foxconn says the plant's employees will earn about $53,000 a year — not a low figure, and close to the median household income in the United States.

Judging by Foxconn's own ads on Chinese job sites, an ordinary frontline worker in China earns about 3,000 yuan a month.

"Labor costs in Wisconsin are far higher than in mainland China," Louis Woo, special assistant to Gou, said at the SelectUSA Investment Summit in June. "We need to use the talent here in other ways. People here are not cheap labor."

What moves a businessman first is money — for this, the American government approved $4 billion in subsidies and loosened environmental and union rules

At the groundbreaking, Gou said: "If you were not the president, Mr. Trump, I would not be here today as a businessman. As a global businessman, I have invested in businesses all over the world. And the patience, attention, and support President Trump has shown me are second to none among world leaders."

The "patience, attention, and support" Trump has shown Foxconn are plain enough.

In November 2016, right after Trump won, word got out that Foxconn would move its iPhone production lines to the United States, though the report drew plenty of doubt. Nikkei at the time quoted an Apple supplier saying that moving iPhone production to the U.S. was impossible: the country had no mature infrastructure, and costs would be too high.

Two months later, Gou said publicly that Foxconn was considering a $7 billion investment in an LCD screen plant in the United States, which would bring the country 30,000 to 50,000 jobs.

By March, Gou had grown hesitant about investing in a U.S. plant. He worried, he said, that the Trump administration would find it hard to settle every question around the investment within a few months. He also stressed that the U.S. did not have enough skilled workers, and that its supply chain could not meet the requirements of making iPhones and iPads locally.

For a while the Chinese government was nervous. In May last year, Premier Li Keqiang visited Foxconn's technology park in Zhengzhou and said he hoped Foxconn would put down deeper roots in China.

Foxconn then issued a statement saying it would keep investing in its China business, and that its U.S. investment would be kept entirely separate from China and other markets: "The investment in the United States will focus on making products for an entirely different set of customers." The statement also stressed that China remained the main player in Foxconn's investment plans.

Pulling Foxconn over took more than the state government. President Trump and Paul Ryan — Republican leader and Speaker of the House — both went to work.

In July last year, Trump and Gou announced the Wisconsin plant together at the White House, unveiling a $3 billion package of tax breaks on the spot.

At the time the new bill providing Wisconsin's subsidies to Foxconn — it is called the Foxconn Act — had not yet cleared the state legislature. Facing criticism, Speaker Ryan came out in August to defend the subsidy in public. "This deal is exceptional," Ryan said. "I see this plant as a game-changer for Wisconsin, one that can help push this state to the frontier of high-tech manufacturing in this country."

Asked by lawmakers whether it was improper for government to keep a company with tax breaks, Ryan said state governments are not the national government, and that economic competition between states is normal — meaning the deal with Foxconn was the state's business.

In September, Governor Walker finally signed the Foxconn Act, formally approving $3 billion in economic incentives for Foxconn. Every Democrat in the legislature voted against it; the Republican majority passed it anyway.

Under the plan, local government will pay Foxconn up to $2.85 billion in cash over the next 15 years and give up $150 million in tax revenue.

Beyond the money, the state government also used the bill to open a back door for Foxconn in environmental law.

Ordinarily, an industrial company that wants to draw water from Lake Michigan must get approval from all eight states around the lake. But because Foxconn's still-unbuilt plant lies outside the boundary of the Great Lakes Basin, it need only apply to the city of Racine, Wisconsin, and to Governor Walker to be cleared to use the water.

The bill did away with even that step. It says Foxconn does not need a state permit and does not have to go through review by the environmental agency. Normally that process takes a company more than a year.

The Foxconn Act angered environmentalists, and Senate Minority Leader Jennifer Shilling questioned whether it was constitutional. Republicans insisted the bill was sound and lawful, but that December the state still adjusted the terms of the deal.

The revised subsidy came out $1 billion higher than the original. Wisconsin's $4 billion package for Foxconn breaks down as $2.85 billion in income tax credits (for investment and job creation), $150 million in sales tax exemptions, $764 million in government incentives, and $134 million to improve roads near the plant, among other items.

The $764 million in incentives was proposed by municipal government in the Milwaukee area, since Foxconn's plant will sit in Racine County and the village of Mount Pleasant. If Foxconn delivers on its promise of $10 billion and 13,000 jobs, the money will come through, covering part of the up-front cost of building the plant.

As for the "$134 million to improve roads near the plant," the point is to rebuild a road for Foxconn's use so trucks can drive it autonomously — which means hiring fewer people. Wisconsin officials have acknowledged that Foxconn told them it wants to run self-driving vehicles on Interstate 94 to move materials between Milwaukee's Mitchell International Airport and the plant, and even wants to use self-driving vehicles near the plant to ease the commute.

The huge subsidy arrived with its own controversy. Democratic candidate for governor Tony Evers said: "This deal keeps getting worse. Walker should be ashamed of himself." Democratic leader Gordon Hintz pressed the governor, saying the subsidy cost too much and the process was not transparent enough. What worried them more was that Foxconn might not keep its job promises later on.

Walker shot back that Democrats were "desperately trying to sabotage" the partnership, and called Foxconn's investment "a chance to put Wisconsin among the world's high-tech economies."

When the project will pay for itself was also questioned. Madison-area Congressman Mark Pocan said taxpayers across the state will be paying for 25 years or more while only a few people benefit. Through 2032, local taxpayers will in effect be covering 13% of the cost of building the Foxconn campus and 17% of employee wages. If the project fails, Wisconsin must repay 40% of the public bonds.

But from then until the moment Trump turned the first shovel of earth himself, nothing about the deal changed.

On the day construction started, environmentalists organized a protest march. As they moved through the streets of Wisconsin with their signs, Trump gave a speech: "We have clean air, we have clean water, and we're going to use it, and we're going to speed up the process. It used to take 25 years to get an environmental permit for a plant like this. Now [Foxconn] got it overnight. America is more open for business now than it has ever been."

"The Supreme Court has just handed down a few rulings in our favor. One of them will make Terry very happy," Trump said. "I can't say what it is, but you know what it is."

Voice of America and other outlets guessed he meant the ruling the Supreme Court had issued the week before weakening organized labor. That same month, the Supreme Court struck down the law that required public employees to pay union dues, and it is safe to say unions in many states will keep shrinking. The Chinese glassmaker Fuyao Glass had already run into heavy union resistance at its plant in the United States.

Foxconn's move to America comes down to a change in manufacturing itself

Buying companies with subsidies has always been contentious.

Dan Doctoroff, former deputy mayor of New York and now head of Google's Sidewalk smart-city venture, said recently that governments rarely succeed when they use financial incentives to lure or keep companies. "Companies weigh economic benefit over the long run. A subsidy sways the businessman, not his customers. So it doesn't mean much."

Doctoroff is speaking from his experience helping Bloomberg run New York in the 2000s, but New York does not compete for manufacturing. A factory, once built, is comparatively harder to move.

And $3 billion in tax breaks presumes the plant first produces at least $3 billion in tax revenue. Foxconn plainly took the subsidies into account when it chose Wisconsin, but what made the move possible in the first place was a change in manufacturing itself.

Foxconn, 44 years old, has always been a weathervane for that change. Gou founded its parent, Hon Hai, in 1974, the year electronics manufacturing was moving from Japan and South Korea to Taiwan, and started out making parts for televisions and personal computers on contract. Taiwan's low wages made it the direction manufacturing was heading.

By 1988, with cross-strait relations easing, Gou was among the first Taiwanese businessmen to go back. That year he built a plant on the mainland and used mainland workers to bring production costs down. "Foxconn" later became the name for all of Hon Hai Group's mainland factories.

China grew into the world's factory, using cheaper labor to lower the price of clothing, appliances, and electronics everywhere. In developed countries, manufacturing in those categories has all but disappeared; what survives leans on the feeling that you should "support local industry."

Inside that world factory, Foxconn is the most representative case there is — the plant behind countless computers, phones, Xboxes, Kindles, and iPhones, an indispensable link in the consumer electronics business. Its long run of labor scandals has also shown what globalization costs.

But 30 years on, manufacturing that once left the United States has a chance to go back. Foxconn is only one instance; carmakers of every kind, along with Lockheed Martin and Bayer, have announced U.S. expansions too.

Some of the pull is Trump's deep corporate tax cut, some of it is wariness of his threats to raise tariffs on goods made abroad. More important is that China's cost advantage is shrinking.

Boston Consulting Group found that on wages, from 2004 to 2014, manufacturing pay rose in all of the world's top 25 exporting countries — but average annual wage growth in China and Russia held at 10%–20% for a full decade, while other economies averaged 2%–3% a year. In 2004, average hourly manufacturing pay was $4.35 in China, $6.76 in Russia, and $17.54 in the United States. By 2014, adjusted for differences in productivity, China was at about $12.47 an hour, Russia at $21.90, and the United States at $22.32.

Labor still has the edge, but less of one than before. On energy, the gap between China and the U.S. is widening. Breakthroughs in American oil and gas technology and large-scale shale gas production have pushed North American natural gas prices down 25% to 35% since 2004. Total energy costs in many countries outside North America run 50% to 200% higher than in 2004. Industrial electricity in China costs about 66% more and in Russia 78% more; from 2004 to 2014, natural gas rose 138% in China and 202% in Russia.

Put together, BCG reckoned that between 2004 and 2014 China's manufacturing cost advantage over the United States fell from 14% to just 4%.

But manufacturing advantages are not all equal. Assembling an iPhone, for one, is unusually labor-intensive and not especially energy-hungry — Jony Ive's designs make it impossible to automate. That business is not easy to move to the United States.

QDaily once worked out what it would cost Foxconn to make iPhones in America. At Foxconn's average monthly turnover rate of 5%, an iPhone plant the size of Zhengzhou's — 280,000 workers — would require hiring 1.96 million people locally over ten years. More to the point, the business does not pay well: the production cost of an iPhone X is more than $416, but Foxconn's share of it, the assembly, is only $4.20.

The same goes for clothing, which has gone mostly to Vietnam and other places where labor is cheaper than in China; Foxconn itself bought the old Nokia phone plant in Vietnam.

So what Foxconn is moving to the United States is display manufacturing, a business with a higher technical barrier — and even that has met resistance. Foxconn's original plan for a state-of-the-art Gen 10.5 panel line, for instance, became a Gen 6 line for small and medium-size panels. Nikkei reported that making advanced Gen 10.5 large-size panels in the U.S. would cost 50% to 80% more than making them on the mainland or in Taiwan, because the materials, substrates, and equipment are all in Asia.

What keeps manufacturers in Asia now is less and less cost, and more and more the ecosystem around them.

As technology improves, labor costs matter less. Car manufacturing, for one, is already heavily robotized: General Motors alone cut its U.S. workforce from 580,000 in 1955 to 200,000 in 2010, yet its output capacity now exceeds that of the entire U.S. auto industry in 1955.

The National Bureau of Economic Research — the largest economic research organization in the United States, and one more than half of the country's Nobel laureates in economics have belonged to — published a report last year analyzing the labor market from 1990 to 2007, mostly blue-collar work. It found that each additional robot wipes out 3 to 5.6 local jobs. But the same robot costs the same in wages whether it works in China or in America.

At Foxconn's annual shareholder meeting in June, Gou said the company plans to set up an artificial intelligence lab in the United States, and to replace 80% of Foxconn's workforce with robots within five years.

"The war between China and the United States is not a trade war. It is a technology war, and a manufacturing war," Gou told the meeting.

Moving technology-heavy manufacturing back to a developed country is no longer a problem — as long as it hires fewer people.

Cover image / JEFFREY PHELPS / Oriental IC