@chris_henry I think I will just amend the set-up to make it a minor factory and leave it at that for now…
If the rules had a different mechanic for the annexation process other than a combat move then I might think that the medium factory could stay a medium factory. The rules state any factory that was a major or medium in a territory that is conquered becomes a minor factory.
I guess there is nothing to stop the Germans from building another minor factory there if they want but why would they?
I think it was just a mistake when the neutral set-up was getting developed.