What’s Behind Foxconn’s Flipflop on U.S. LCD Plant?

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Anyone familiar with Foxconn/Hon Hai Precision Industry retained a healthy dose of skepticism when Foxconn announced it would build advanced liquid-crystal displays (LCDs) in Wisconsin. To put it charitably, Foxconn is not renowned for honoring its contracts.

More than 20 years ago, when I was working for Electronic Business magazine, one of our editors spent months arranging an in-person interview with Hon Hai executives in Taiwan. The editor arrived at Hon Hai headquarters only to be told the interviews would not take place.

Little has changed. On January 29, media outlets reported that Foxconn was scaling back its U.S. manufacturing plans. Instead of its proposed “campus,” Foxconn would build a “technology hub” to focus on research and development. Its employees would largely consist of engineers and scientists.

On February 1, Foxconn reversed that decision and announced it would build a Gen 6 LCD plant in Wisconsin after all. An estimated 13,000 manufacturing jobs are to be created.

Count me as perpetually skeptical. From a supply chain perspective, a U.S.-based LCD factory simply doesn’t make business sense. Let us count the ways:

Technology

LCDs are one of the oldest, best-established and lowest-cost display technologies for applications ranging from gas-pump kiosks to sports-stadium broadcast screens. Production can easily be scaled to accommodate a 2-inch panel or a 60-inch TV. Within the past 30 years, manufacturing challenges—such multi-layering, yield-per-glass panel, circuit test and repair, “dead” pixels and a host of other issues -- have been largely resolved. While there is always room for improvement, recent LCD-technology advancements aren’t measured by leaps and bounds.

Additionally -- Foxconn already owns LCD manufacturing facilities in Japan and China. Foxconn bought a majority stake in Japan’s Sharp Corp. in 2016.

Infrastructure

Japan, thanks to its longtime consumer-electronics dominance, was the capital of LCD manufacturing for decades. That distinction has since been bestowed on South Korea, which has invested heavily in flat-panel-display (FTD) manufacturing infrastructure. Samsung and LG Electronics remain among the world’s largest LCD producers. Chinese companies have recently been added to the top producers of LCDs.

But investment in new LCD fabs and equipment has leveled off in recent years.

Toshiba Corp.—whose PC business is now owned by Foxconn—tried, unsuccessfully, to build LCD TVs in the U.S. In the early 2000s, Toshiba set up offshore assembly operations close to its biggest end-markets. By 2015, Toshiba had exited TV manufacturing altogether, citing price competition in the U.S. as a factor.

Price

LCD panel prices have been declining for some time, and China’s entry in the market will pressure them further. With LCD manufacturing concentrated in Asia-Pacific, panels can be produced in high volumes and at relatively low costs. Even Foxconn admitted it’s cheaper to build LCDs overseas; ship them to Mexico for assembly; and import the assemblies into the U.S.

LCDs have also become a commodity, much like memory products. Prices fluctuate based on supply, demand and inventory levels. In the first half of 2018, LCD prices plunged, according to IHS. Panel makers began to clear out low-priced inventory, but hiked panel prices when demand returned for the year-end shopping season.

So why does Foxconn want to build price-sensitive commodity products in the U.S.? Apart from New York-based Corning Inc., which makes glass used in FPDs, the LCD supply chain is nominal.

Shift to new technology

Although LCDs are still a staple for phones, tablets, TVs and jumbo screens, the market is shifting to newer technologies such as organic light-emitting diode (OLED). OLEDs have considerable advantages over LCDs—they consume less energy; do not require backlighting; and can be manufactured on flexible substrates. They’re also easy on the eye: colors are vivid; OLEDs don’t wash out in intense daylight; and pixels don’t short circuit. It’s fair to say the holy grail in the smartphone industry is a shatter-proof screen.

According to IHS, panel-related spending in 2019 will center around converting legacy LCD fabs to advanced active matrix (AM) OLED factories. Panel manufacturers are utilizing previously-purchased TFT tools while adding OLED frontplane, color conversion, cell and module equipment to their factories.

Overall, panel suppliers are decreasing their investment in display equipment. A slow-down is expected to continue through 2020.

“Hope for expanding the new technology investments in AMOLED and quantum-dot (QD) OLED TVs as well as foldable displays; combined with industry restructuring and increased demand as prices fall, offers the hope of another positive cycle,” IHS said.

So…about Foxconn…

It’s apparent that pressure played a role in Foxconn “Coming to America.” Foxconn’s biggest customer – Apple Inc. – has been criticized for not making its products in the U.S. Through its longtime manufacturing relationship with Foxconn, Apple can –somewhat--counter that argument.

The promise of new manufacturing jobs was a slam-dunk for Wisconsin’s former governor Scott Walker for political reasons. But Foxconn does not have a good track record with employees. In 2016, investigations revealed Foxconn was overworking and underpaying its workers among other abuses. Apple, which promises its supply chain partners meet Apple’s own conduct standards, spent years rehabilitating its relationship with Foxconn.

Finally, state and federal agencies offered Foxconn a lot of incentive to build in America. An estimated $4 billion in tax breaks was secured for the Taiwanese company; its Wisconsin groundbreaking was publicly celebrated by local politicians and President Donald Trump.

As an electronics manufacturing services provider, Foxconn is so big it has its own category in global EMS rankings. Foxconn secured that position, in part, by keeping its materials, employment and facilities costs low. But there’s no evidence Foxconn will adjust its supply chain toward the U.S.

“For a period of 25 years, display suppliers have built an infrastructure and expertise in Asia, and while importing components and materials is possible (and for certain materials like liquid crystal, importing the raw chemicals is likely the most economical solution), a local supply base is essential for making a productive fab,” according to DisplaySupplyChain.com.

The bottom line, in my humble opinion, is the combination of corporate greed (who can resist $4 billion tax breaks?) and politically motivated campaign promises (Scott Walker, President Trump) can only provide dishonest narratives, fueling confusion among the business/tech community and tax payers in Wisconsin. Foxconn’s two-day flipflop—after a call with President Trump—is no reassurance of its commitment. Fabs, after all, take a long time to build and an election is coming up in 2020. If the political winds shift next year, there’s still plenty of time for Foxconn to change its mind—again.