@vondox You know, as I’m looking at the rules again too, I did forget that annexation is considered a combat move, but where no combat actually occurs. So, I could certainly see how the captured factory rule (i.e. reverting to a minor) could be interpreted here.
The fact that the German setup sheet for the 1939 setup has Bohemia as having a medium factory as well though is still what makes me think this was just an oversight. Bohemia is also not German Home Country in 1939 setup, but starts the game German and has a medium factory on it. By your reading of the rules, you’d just make that medium factory a minor the moment the game starts, right? To me, that doesn’t make sense!
I think by strict reading of the rules you guys are correct in the way this would be handled, but I do wonder if it was meant to stay a medium factory for purposes of annexation. But yeah, would love to get input from someone there, this might be a good errata question!