The federal government will provide Volkswagen with up to $13-billion in production subsidies for the new electric-vehicle battery plant it plans to build in St. Thomas, Ont. – nearly double the estimated $7-billion cost of construction.
Ottawa’s backing, which also includes about $700-million in additional support for nearer-term capital costs, is by far the most generous subsidy that Canada has ever provided to an automaker for locating a factory here.
The arrangement will be formally announced at an event in St. Thomas on Friday, but was confirmed by a federal official on Thursday. The Globe is not identifying the source, because they were not authorized to discuss the matter publicly.
The federal funding is meant to match the subsidy Volkswagen would have received through United States President Joe Biden’s Inflation Reduction Act, had it decided to build the factory in the U.S. instead. And it includes a provision that if the U.S. stops offering the subsidies, Canada will stop as well.
Neither the government nor Volkswagen would specify on Thursday how many jobs the new factory will directly create, but industry estimates have put the number between 2,000 and 3,000. The company has said a battery plant that it is currently building in Germany, which appears to be of comparable size, will employ about 2,500 people once operational.
Beyond just its scale, the federal funding deal is structurally different from those governments in this country have previously negotiated. Canada normally sticks with subsidizing investment costs. In previous deals with automakers, those subsidies have usually ranged from 10 to 20 per cent of projects’ capital budgets.
In this case, Canada will be offering subsidies during the factory’s early years of operation, tied to the number of vehicles produced. The U.S. has more history with this type of subsidy, which it provides annually through tax credits.
The billions in production subsidies revealed on Thursday, as well as the $700-million in more-immediate support, will come entirely from the federal government. The production subsidies will be delivered in annual instalments over the next decade, starting when the plant is operational. Further financial support, though in much smaller amounts, is expected to be layered on by the Ontario government.
Volkswagen announced in March that it would build the plant in Ontario, but did not provide any financial details at the time. Prime Minister Justin Trudeau’s government had signalled that it was willing to pay a premium to land the investment, because of its perceived importance to building a Canadian electric-vehicle supply chain.
Industry Minister Francois-Philippe Champagne echoed that message on Thursday, without discussing specifics of the subsidy deal. “When you see a transformation in the industry, you have to seize the moment,” he told reporters, stressing that Volkswagen is making a commitment for decades, not just the relatively short period over which the subsidies will be offered.
Mr. Champagne predicted the factory will indirectly produce “tens of thousands of jobs,” in addition to the smaller number of direct ones.
The hope is that the factory will serve as an anchor that spurs investment in the mining and refining of battery metals, while also benefitting Canadian parts manufacturers who have supplied makers of internal combustion engines and now need to transition to electric vehicles.
Some of that supporting infrastructure could be directly adjacent to the Volkswagen plant. Auto-sector insiders have pointed to the roughly 600 hectares of land that has been designated for the development – a much bigger space than is needed for the factory alone – as a sign the federal and provincial governments are aiming to attract supplier companies, or perhaps further Volkswagen facilities, to St. Thomas as well.
Volkswagen’s commitment also has some perceived symbolic value, because this facility is to be the global giant’s first large battery factory outside Europe. It’s also the first major new foray into Canada since the 1980s by an automaker that does not already have roots here, and is being billed as the single biggest auto-making investment in Canadian history.
Federal officials had previously hinted that they would not need to fully match the American subsidies, because of other Canadian advantages – including access to critical minerals and a comparatively ample supply of clean electricity. Canada also has stronger auto-making infrastructure and a more experienced manufacturing work force than the southern U.S. states that were believed to be the main competition.
The Volkswagen agreement opens the door to greater subsidies for other automakers.
The only other battery plant that Canada had previously landed – a partnership between Stellantis NV and LG Energy Solution currently being built in Windsor, Ont. – has to date received a commitment of only about $1-billion from the federal and Ontario governments combined. The deal was negotiated prior to the Inflation Reduction Act’s passage.
The federal official acknowledged that the federal government is now back at the table with Stellantis-LG, but would not speculate on whether Ottawa will now up its offer to match the production subsidies being committed to Volkswagen.
The details of the government’s commitment to Volkswagen, which have been a topic of speculation since the company announced its Ontario plans, drew a mixed reaction from industry observers and advocates.
Greig Mordue, a former auto-sector executive who is now the chair in advanced manufacturing policy at McMaster University’s engineering school, expressed skepticism that Ottawa has rigorously analyzed whether the leap in battery-manufacturing subsidies – from $1-billion a year ago to around $13-billion now – is justified by the economic value of the investment.
And he suggested that some of the domestic sectors in which the factory could spur investment, such as critical minerals, would have growth opportunities regardless of which country the plant was located in. At the same time, he said, Canada has yet to prove it is capable of accelerating mining to meet demand for battery metals.
Brendan Sweeney, the managing director of the Trillium Network for Advanced Manufacturing, a non-profit that advocates for Ontario’s advanced manufacturing sector, was more bullish.
“There is a lot of emphasis on the $13-billion figure,” he said, “but less on the fact that all of that $13-billion is tied to production and output that exceeds those incentives in multiples. We’ve done the math, and it makes sense for everyone.”
