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CEO Daily: Friday, 28th July

July 28, 2017, 11:16 AM UTC

Good morning.

In March, I was in Guangzhou when Foxconn Chairman Terry Gou threw the first shovels of dirt for a new flat panel display factory, and threw some shade at the U.S. in the process. “We are seeing Guangdong’s efficiency. We are seeing Guangdong’s charisma and drive,” he said at the time. “We feel if any state governments in the U.S. want to attract Foxconn, they should come here to study and learn.”

Wisconsin Governor Scott Walker apparently did his homework because yesterday he signed a memorandum of understanding with Gou to build a very similar plant in his state, with $3 billion in government assistance.

The South China Morning Post has a piece this morning analyzing the two deals, which are surprisingly similar. They will both build flat panel display screens for televisions and other devices, and both require investments of close to $10 billion. The Guangzhou factory, expected to open in 2019, will employ 15,000 people; the Wisconsin factory, expected to open in 2020, will employ 13,000. The Guangzhou government didn’t reveal how much assistance it is providing, but preferential land and tax treatment is common for such projects in China, and the recorded sale price for the land appears to be a small fraction of what would normally be paid.

Workers at the Foxconn plant in Wisconsin are expected to be paid around $54,000, which is “six or seven” times the rate a Chinese Foxconn worker is likely to earn. But Foxconn will be required by Chinese law to make contributions to pension and other state welfare programs that raise the hiring cost. And Chinese wages are rising rapidly—more than doubling in the last decade—while U.S. wage inflation is dormant.

Bottom line, concludes Liu Kaiming, head of the Institute of Contemporary Observation in Shenzhen, “the U.S. could possibly end up being a cheaper and better place for Foxconn’s display screen factory” if other costs, including taxes, electricity and logistics are considered.

The U.S. and Chinese plants are intended to serve their local markets. But no doubt they also are intended to help Gou stay out of the trade spat between the two countries. A report out this morning suggests that spat is depressing U.S. investment in China.

Still no word from Apple on President Trump’s claim that the company will build “three big, big, big” new plants in the U.S.

And a reminder: Guangzhou will be the site of the Fortune Global Forum Dec. 6-8, as well as our new Chinese Brainstorm Tech Dec. 5-6. You can find information here and here.

News below—and enjoy the weekend.

Alan Murray


Top News

McCain Sinks ‘Skinny’ ACA Repeal

The Senate’s ‘skinny’ repeal of the Affordable Care Act went the same way as two previous attempts, as John McCain joined Maine’s Susan Collins and Alaska’s Lisa Murkowski and the 48 Democratic senators in opposing it. President Trump, having saluted McCain as “brave” earlier in the week, accused him of “letting America down.” The defeat essentially leaves the repeal process dead in the water. At this point, it appears that any path forward on health care will likely have to involve a more conventional committee process and some collaboration with Democrats. The lack of solidarity in GOP circles extended, in more garish style, to the White House, as new communications director Anthony Scaramucci launched a profanity-laden attack on Chief of Staff Reince Preibus. Fortune

The Border Adjustment Tax Is Dead

The administration dropped its plans for a Border Adjustment Tax, the most contentious part of its broader plans for corporate tax reform. Officials acknowledged that the mooted BAT had “many unknowns” attached to it. The decision represents a victory for the retail sector in particular, which had fretted about passing on sharp rises in prices for imported goods to consumers. The Treasury and senior congressional leaders said in a statement that they expected legislation on tax reform to move through the committee stage in regular order in the fall. It will have the goal of lowering individual and corporate rates “as much as possible,” but how that will be paid for in the absence of the BAT is still unclear. WSJ, subscription required

Wait for it, Wait for it…

Amazon CEO Jeff Bezos briefly knocked Bill Gates off his perch as the world’s richest man as his company’s shares touched a new record high. His reign lasted all of three hours, as a 77% drop in Amazon’s net profit in the second quarter pushed the shares down 3% after the bell. It was the weakest quarterly profit in two years and depended entirely on its cloud computing division Amazon Web Services, whose $916 million in operating income was bigger than the group’s $628 million. The figures revived familiar concerns about Amazon’s willingness to put growth (revenue was up 25% on the year) before profitability. Fortune

Porsche Nailed for Defeat Devices

Germany’s carmakers are spinning further into crisis. Transport Minister Alexander Dobrindt, their most loyal defender, suspended regulatory approval for Porsche’s latest Cayenne SUVs after being told they used  illegal emissions management software. That comes hard on the heels of allegations of anti-competitive collusion, the most damaging of which is that the big three—Daimler, BMW and VW Group—colluded in adopting sub-optimal diesel exhaust treatments. The political establishment is increasingly trying to distance itself from an industry that has long been its favorite child. Environment Minister Barbara Hendricks said the type approval process should be overseen by her department in the future rather than Dobrindt’s, which she said was too close to the sector. To add insult to injury, VW was overtaken as the world’s largest automaker by the Renault-Nissan alliance in the first half. Der Spiegel, English language

Around the Water Cooler

Starbucks Doubles Down in China, But Is Closing Teavana

Starbucks said it will buy out its joint venture partner in eastern China for $1.3 billion, its biggest-ever acquisition. That will bring the number of Chinese stores under its full control to 2,800, more than halfway towards its target of 5,000 by 2021. At the same time, Starbucks will sell its Taiwan stores to its Chinese JV partner Uni-President and President Chain Store, which will run them under license. New CEO Kevin Johnson is under pressure to sustain top-line growth as the U.S. and other developed markets approach saturation. Starbucks’ bet on the Teavana chain of tea shops hasn’t paid off: it said yesterday it’s closing all 379 stores, after paying $620 million for the business in 2012. Fortune

Intel Faces Challenges From a Position of Strength

Intel raised its sales and profit forecasts for the year after handily beating expectations in the second quarter thanks to red-hot demand for chips from the industrial server market. CEO Brian Krzanich said the figures underlined its transition from a PC-centered company to a data-centric one focused on Cloud-based services. Even after stripping out last year’s restructuring charge, profits were up 23% on the year. Intel faces a growing threat from AMD and NVidia in the server market, and has left the mobile device field largely to rivals such as Samsung and Qualcomm. However, it is branching out into other sectors such as chips for autonomous vehicles with its $15 billion acquisition of Mobileye. Fortune

Delta Spreads Its Wings

Delta Air Lines, Air France-KLM, China Eastern Airlines and Virgin Atlantic said they will forge a closer operational alliance, underpinned by new shareholdings. Delta and China Eastern will invest a total of $875 million to buy stakes of 10% each in Air France-KLM. That will dilute the French government’s stake to 14%. The Franco-Dutch group will buy a 31% stake in Virgin Atlantic for $288 million, marking founder Richard Branson’s surrender of control after 33 years. Delta already owns 49% of Virgin. The move reflects the pressure on transatlantic routes both from Middle Eastern carriers and from low-cost entrants such as Norwegian Air Shuttle. Bloomberg

Uber Speculation Switches From Whitman to Immelt

Meg Whitman ruled herself out of being Uber’s next CEO, saying she was “fully committed” to Hewlett Packard Enterprise. “Uber’s CEO will not be Meg Whitman,” she said via Twitter. Bloomberg, which had been the first to link Whitman with the CEO vacancy at Uber, then reported that outgoing General Electric CEO Jeff Immelt was on the ride-hailing company’s shortlist. He declined to comment.  Fortune

Summaries by Geoffrey Smith;