VW’s battery plant deal changes Canada’s auto sector. Whether it’s worth $13B in subsidies is debatable

German automaker Volkswagen was in the city of St. Thomas, Ont., this week, announcing details of their plan to build their first electric battery plant in North America, in a move that backers say will super charge Southern Ontario into becoming a key cog in electric vehicle supply chains.

VW’s plan is undeniably huge news in St. Thomas, but whether or not you think it’s enough to transform the place they call the Railway City into something more synonymous with electric cars depends on your perspective.

The sheer scale of the plan is jaw dropping. The auto maker is pledging to spend $7 billion to build a massive, sprawling complex the size of 350 football fields, “or 210 soccer fields,” as Volkswagen executive Frank Blome joked. Once it’s completed by 2027, the factory will have the capacity to crank out 1 million batteries per year. 

It will instantly become the largest manufacturing facility in Canada, employing 3,000 people directly, and ten times that indirectly across the region, officials trumpeted at the launch event, where it was pitched as a clear win for Canada over other jurisdictions.

“Everyone wanted this,” Prime Minister Justin Trudeau said. “It will be worth over $200 billion for the Canadian economy over the coming decades … We’re bringing back a strong, thriving economy for this community and we’re delivering a national anchor for Canada’s electric vehicle supply chain.”

All that anchor-building doesn’t come cheap, however, as the biggest number of all may prove to be the government’s contribution to the plan: just over $13 billion, which is the value of tax subsidies that Ottawa will kick in if certain production targets are met.

The exact price tag for the federal government depends on how things go, but that $13 billion figure doesn’t include another $500 million from the province.

It’s an eye-popping number, but not one penny of cash from government coffers will flow until the assembly line starts moving, Industry Minister François-Philippe Champagne said.

WATCH | Minister says investment is not a blank cheque:

“First Volkswagen needs to build the $7 billion plant,” Champagne said. “Then after, when the plant is built, we are going to provide production support if and when they have produced and sold a battery.”

While the scale of the government investment is raising eyebrows for its size, it’s the cost of doing business in the industry right now, said Sam Fiorani, vice-president of global vehicle forecasting with Auto Forecast Solutions, a U.S.-based consultancy.

“Canada has been losing out deals to states in the United States … because they simply haven’t been luring those those facilities with that kind of money.”

Competing with lucrative U.S. incentives

U.S. President Joe Biden’s Inflation Reduction Act was a game-changer for many industries. And the world’s largest economy’s pledge to dole out unprecedented tax breaks for green investments had officials in Canada and Mexico fearing the U.S. would gobble up all foreign investment in the car industry.

The seriousness of that threat can be seen in how the government structured the deal with Volkswagen: The billions of dollars in subsidies and production expense grants are only valid for as long as Biden’s IRA is also in effect.

Fiorani said Canada had to step up to the table or risk being left behind.

“It takes a lot of money, but it is an auction,” Fiorani said. “If the United States pays $1 billion, then someone else is going to have to pay $2 billion or $1.5 billion or something more.”

Deal has its critics

Franco Terrazzano is among those who says that line of thinking is foolish.

“One of the lessons we learn as kids is just because your friend does something silly doesn’t mean you should do something silly,” the federal director of the Canadian Taxpayers Federation told CBC in an interview.

Federal and provincial government officials claim the plant will pay them back and then some within a few years, but Terrazzano rejects the notion that it’s somehow wise to engage in a tax subsidy arms race to the bottom.

“We’ve seen taxes go up on ordinary Canadians, and now the government’s giving a multinational corporation a huge bucket of cash,” he said. “I trust the business community to know how to invest its own money better than a bunch of politicians and bureaucrats in Ottawa.”

WATCH | Auto parts suppliers say VW deal is money well spent:

Others say the reality is more nuanced. 

Greig Mordue, the ArcelorMittal Chair in Advanced Manufacturing Policy at McMaster University in Hamilton, said governments greasing the wheels to get investment dollars is nothing new, but the numbers behind the Volkswagen deal make it clear that the rules of the game have changed.

“For the past 20 years or so Canada and Ontario have got into this cadence of ‘if you do 10 per cent on a capital project, I’ll do 10 per cent’ … and that’ll be our formula going forward,” Mordue told CBC News in an interview.

“But things are different now,” said Mordue, the former general manager for Japanese automaker Toyota in Canada. “That worked out right up until the Inflation Reduction Act at the end of last year.”

With up to $14 billion potentially coming from the province and Ottawa, the battery plant could see governments put in twice as much as the company itself.

Previous government investments were measured in the hundreds of millions of dollars, so a government contribution matching the massive scale of the facility has raised the bar for future projects, Mordue said.

Governments may have stepped up with “skin in the game,” as VW executive Blome described their efforts, but only time will tell if that game is worth playing at all.

And with a benchmark-raising price tag for taxpayers, it’s fair to wonder if a city like St. Thomas, the place best known for being the final resting spot of famed circus elephant Jumbo, could one day be associated with a new elephant — a white one.

“If we want to compete with the Inflation Reduction Act …  we’re going to need to do some actions that may seem to be a bit illogical,” Mordue said. “We’re into this brand new environment and it’s time to have a real open and honest debate … we have to decide whether this is actually worth it.”