A Threat to South Korea?
Terry Gou’s American Dream
Foxconn’s plan to build an LCD flat panel factory in the U.S. still has to be approved by the Wisconsin State Senate. If it does go forward, what does Foxconn boss Terry Gou really want from it, and why is he seen by South Korea as its biggest threat?
Terry Gou’s American DreamBy Elaine Huang
From CommonWealth Magazine (vol. 630 )
How far-reaching can the implications of a dream really be?
Foxconn Technology Group Chairman Terry Gou is testing the limits with his "American Dream" that is shaking up the global technology coopetition between the United States, China, Japan and South Korea.
For his dream to become reality only one step remains – approval by Wisconsin's Senate, the upper house of the Wisconsin State Legislature. If the Senate gives the green light, America's first flat panel factory will rise up in the southeastern part of the state near the shores of Lake Michigan. Putting up a US$10 billion LCD display campus in Wisconsin is the first act in Gou's "Flying Eagle" plan to invest billions in the U.S. over the next four years.
Foxconn, known formally as Hon Hai Precision Industry in Taiwan, gave more details of its plans on Aug. 21, the day before the Wisconsin Senate was to hold a public hearing on the package of incentives cooked up to lure Foxconn to the state. It announced it would first set up a back-end packaging line, a high-precision molding line and an end-device assembly line as part of the LCD display complex.
Louis Woo, a special assistant to Gou, was cited by Reuters as saying that as soon as the investment plan gains final approval from the Wisconsin Legislature, the company will begin surveying land for the project. He also said it could begin importing glass substrates, an essential material in the production of flat panel displays.
Wisconsin’s Attractive Incentives
Gou has always driven a hard bargain when investing overseas, and his decisions on whether to go ahead with projects often depend on the incentives offered by local governments. It’s clear that the state of Wisconsin’s package of incentives that could be worth up to US$3 billion have caught Foxconn's eye.
Those incentives have been approved by the Wisconsin Assembly, the lower house of the state's Legislature, and now face a vote in the Senate. If the measure passes, Governor Scott Walker will sign it into law, completing the legislative process.
The Wisconsin Economic Development Corporation would then formally negotiate the terms of the investment project with Foxconn. The state’s goal is to have all details settled by the end of September.
Though everything seems primed to go forward, the incentive package tailored to luring Gou to Wisconsin has not been without its skeptics. Both Republicans and Democrats in the State Assembly questioned why Governor Walker offered such a massive package of benefits to the company.
There is also the sense that the signing of the investment MOU with Foxconn on July 27, 2017 and the desire to finalize the agreement by the end of September has all seemed very rushed. A growing number of local residents are also unhappy that the US$3 billion in tax breaks and other incentives won't pay for themselves for 25 years, according to the nonpartisan Legislative Fiscal Bureau. And environmental groups have been highly critical of the deal, arguing that because flat panel plants consume huge amounts of water, the new plant could threaten local wetlands.
Despite the rumblings, Gou has pushed ahead. On July 31, he met with governors of several U.S. states, including Michigan and Ohio, at Foxconn's manufacturing complex in Shenzhen to discuss potential investment in the United States.
He told Michigan Governor Rick Snyder that he was considering putting a research center in the state, home to 70 percent of the U.S. auto industry's R&D activity.
"We will definitely cooperate with Michigan on the next generation of automobile technology, such as the Internet of Vehicles and driverless cars," Gou told Chinese media at the time.
Posing a Threat to South Korea
Regardless of whether Gou actually invests US$10 billion in the United States, his move to develop a bigger presence in the U.S., his acquisition of Japan's Sharp Corporation in late March 2016, and his pursuit of Toshiba's NAND flash memory business have shown Gou's clear intentions to open battlefields in the U.S. and Japan.
Those developments in combination with Foxconn’s massive production base in China have many wondering about the endgame behind Gou's American Dream, and they have already fueled anxiety in South Korea.
An article in Korean business media Business Korea published on Aug. 21 said Foxconn has an ambitious plan to become a global IT company, starting with the acquisitions of Sharp and Toshiba Memory, and the “Flying Eagle” plan represents an important part of that ambition.
The article also said Foxconn used its influence with the U.S. government to have it put pressure on Japan to block the sale of Toshiba Memory to Korean memory chip giant SK Hynix, hoping it would get the inside track on the deal.
"If Foxconn succeeds in acquiring Toshiba Memory and makes a chicken game-like investment, the memory semiconductor market can fall into a serious turmoil," Business Korea quoted an industry official as saying.
The goal of the “Flying Eagle” plan is to establish Foxconn as the world’s strongest player in the IT industry by maximizing the synergies of its U.S. political and economic support, advanced Japanese technology and Chinese manufacturing base, the article said, with potentially adverse consequences for South Korea.
“Foxconn…. is emerging as the biggest threat to the Korean semiconductor and display industries,” Business Korea contended.
On the flat panel side, Gou first acquired the world’s only 10th-generation LCD display plant – Sharp affiliate Sakai Display Products Corp. – and then bought the Sharp brand. Armed with the Sakai’s plant technology, Gou is setting up a flat panel display plant in Guangzhou in southern China and is now planning the 10.5-generation plant in Wisconsin.
In the face of Gou’s aggressive moves to build an LCD display empire, a top executive at a leading Korean electronics company told CommonWealth Magazine in an interview that flat panels will be strategic commodities in the world of the future.
“Selling capacity will be more important than how many products you sell. The key will be have the right LCD plants in the right places,” the executive said.
Looking at North America, for example, Gou knows it’s a huge market for large-sized screens, and setting up a 10.5-generation plant enables him to efficiently produce panels used in high-definition televisions with screen sizes of 60 inches or above.
James Lin, an analyst with the Industrial Economics and Knowledge Center under the Industrial Technology Research Institute, says North America has a 25 percent share of the global LCD TV market and is big enough to justify the Wisconsin facility.
“If Terry Gou builds a 10.5-generation flat panel plant, even if it runs at full capacity, it will still only satisfy about 20 percent of U.S. demand. The market’s appetite is plenty big enough,” Lin says.
Moving toward a Vertical Integration Model
If the Wisconsin Senate approves the deal, and land considerations can be worked out, Foxconn will begin building its factory. Once it opens, Gou will want to run it around the clock and will need to pursue customers.
“The key to selling panels is having outlets. Foxconn has the Sharp TV brand and it has LCD TV assembly clients,” says the executive with the Korean electronics company.
Sharp’s TV business has grown considerably since Foxconn acquired it. Just this year, Sharp’s global LCD TV market share rose to fourth in the second quarter from ninth in the first quarter, according to figures released by market research firm TrendForce.
Along with that growth, the five-year contract Chinese company Hisense has to represent Sharp in North America conveniently expires in 2020, the year when Foxconn expects the Wisconsin flat panel plant to ramp up production.
Aside from Sharp, Foxconn also assembles TVs for such major brands as Vizio, which has the second biggest market share in North America, and Sony, with which Gou’s right-hand man and now Sharp President Tai Jeng-wu maintains close relations. In the past, Foxconn’s plant in Yantai in China was devoted to assembling Sony products, and Gou also bought Sony’s TV assembly plant across the border in Mexico.
“Terry Gou is studying Samsung’s system of vertical integration,” the Korean executive says of the Foxconn boss, who has long advocated partnering with Japan to take on Korea. In acquiring upstream flat panel capacity and a prominent consumer brand, Gou has forged a model that looks increasingly like Samsung’s, explaining why South Korean media sees the company as the biggest threat to that country’s high-tech vendors.
Playing Politics and Business
But could all this in the end be just another dream and end just as in Indonesia, India and elsewhere where Foxconn signed MOUs for large-scale investments that never materialized?
“It’s kind of like a two-man act between him and Trump,” says an executive with a Taiwanese company in Apple’s supply chain, who believes that after Foxconn’s many pledges of investment that fell through, its investment plans in the United States should be seen with at least some skepticism.
Liu Da-nien, director of the Chung-Hua Institution for Economic Research’s Regional Development Study Center, says the U.S. is the world’s biggest economy, and with the challenges posed by China’s economy and manpower costs growing bigger by the day, there’s no reason for companies not to invest in the U.S.
He also sees a clear logic in Gou’s potential interest in Wisconsin as well as Michigan and Ohio as investment destinations.
“These states are all part of the Rust Belt around the Great Lakes, and are states mainly involved in traditional manufacturing sectors. But many businesses have moved away in recent years, and Trump promised in these states to bring jobs and manufacturing back,” Liu says.
“Terry Gou is just giving Trump what he wants,” Liu believes. These states already have existing manufacturing strength and infrastructure, and now Wisconsin is offering huge tax breaks and hundreds of acres of land. “Where else would somebody be willing to come up with those kinds of conditions?” he says.
The idea of “bringing manufacturing back to the United States” was actually advocated by Barack Obama when he was still president, and incumbent President Donald Trump is simply continuing it.
“But during Obama’s time in office from 2008 to 2016, far more manufacturers left the U.S. than returned there, so Obama’s advocacy did not have any concrete results. If Trump can leverage Gou’s investment to create jobs and boost the economy, it will turn into political capital for him in the future,” Liu says.
In fact, not long after Foxconn announced its plans to invest in Wisconsin, Japanese car maker Toyota announced a plan to partner with Mazda in investing US$1.6 billion in a new plant in the United States, which would likely produce SUVs.
“Terry Gou is somebody who looks at the overall strategy. I would not underestimate him,” observes an executive at a Korean supplier to Apple.
The ball is now in the Wisconsin State Senate’s court. How it decides will determine not only whether the world’s biggest electronics manufacturing services provider can build the first flat panel factory in the U.S., but also whether the Trump administration will be able to claim a political victory and how the global tech battle between Taiwan, China, Japan and South Korea plays out.
Translated from the Chinese by Luke Sabatier