How many more battery plants can Canada afford to back?

The spat between Ottawa and Stellantis over funding for its Windsor, Ont., battery-cell plant illustrates the bind ensnaring politicians: They must weigh limited financial resources and public backlash over billions of dollars doled out to automakers against securing a future for a sector shifting toward electrification.

“At the end of the day, it’s a political decision,” said Stephen MacKenzie, president of Invest WindsorEssex, the economic development agency for the region hosting the $5 billion joint venture between Stellantis and South Korea’s LG Energy Solution (LGES).

“And the numbers are immense, more than any previous numbers in history. So, certainly, how can it not be a sensitive topic.”

Flavio Volpe, president of the Automotive Parts Manufacturers’ Association (APMA), agrees.

“Lots of pushback, lots of public debate, a lot of people talking about other priorities across this country — both commercial priorities, regional priorities, social priorities,” he said.

“And it’s incumbent on people like me to explain what the return is on this.”

SPINOFF BENEFITS

Volpe is among the industry stakeholders taking to the airwaves, arguing that billions in taxpayer support for automakers will translate into tens of thousands of well-paying jobs and ensure a future for one of Canada’s biggest industries.

Ottawa’s aggressive push to build an electric-vehicle supply chain has led to more than $25 billion in investments from auto companies. That includes the Stellantis battery plant in Windsor, announced in March 2022, and Volkswagen Group on April 21, when the automaker revealed plans to build a $7 billion battery-cell plant in St. Thomas, Ont.

The two plants are expected to create 5,500 direct jobs and tens of thousands of indirect jobs in economic spinoffs.

But those commitments come with a hefty price tag for taxpayers. In the case of Volkswagen, Ottawa could pay more than $13 billion over 10 years, an amount needed to compete with incentives contained in the U.S. Inflation Reduction Act (IRA).

The Windsor plant, which will produce modules and battery cells, was also expected to secure billions in subsidies.

TALKS GET TENSE

The negotiations, which had been conducted behind closed doors, spilled onto the public stage in May after the companies accused Ottawa of reneging on its promise to match IRA incentives. The companies subsequently halted construction on part of the site amid apparent threats to move module production to Michigan.

Ottawa, meanwhile, urged Ontario — which had initially pledged $500 million to the project — to pony up its “fair share.” After initially balking, Premier Doug Ford stepped up. A source close to the premier and the negotiations told Automotive News Canada the province plans to pay for one-third of the entire financial package, whatever that total eventually is. The source said Ontario could be contributing up to $5 billion.

“The United States Inflation Reduction Act has put Canada in a very challenging situation,” said Brian Kingston, president of the Canadian Vehicle Manufacturers’ Association (CVMA), which represents the interests of the Detroit Three. “These subsidies are unprecedented, and the reality is Canada will not be able to match dollar-for-dollar a US $370 billion piece of U.S. legislation.”

The Stellantis investment in Windsor was announced months before the U.S. government passed the IRA, which gives battery cell makers a tax credit of US $35 per kilowatt-hour through 2030, when it begins to be phased out. By 2033, the credit will be eliminated.

Under the same timeline, automakers also receive a credit worth US $10 per kilowatt-hour for the modules.

“What you’re seeing play out within [the Canadian] government is the fact that they’ve committed over $120 billion to this green transition, and at some point, they will reach their fiscal capacity,” Kingston said. “So they’re trying to decide when, where and how to deploy that investment in the most effective way possible. I would argue that auto is a no-brainer.”

While the U.S. offers tax credits to companies meeting eligibility requirements, Ottawa offers subsidies on a case-by-case basis, said Lana Payne, national president of Unifor, which represents Canadian hourly workers at Stellantis, Ford Motor Co. and General Motors.

“The U.S. approach is very simple. It’s a direct production subsidy that you can calculate based on what you intend to produce at a facility,” Payne said. “The Canadian approach is more bespoke, as the government likes to put it. They engage with companies and negotiate agreements on a project-by-project basis.”

CANADA HAS CAPACITY

How many more battery plants can Ottawa afford to subsidize?

Ontario Finance Minister Vic Fedeli has said the province was pursuing six such plants, while Quebec is also pursuing similar investments. But the APMA’s Volpe thinks Canada can accommodate no more than four.

“The constraining factors are labour and the number of cars we make in this country,” he said. “You’re not going to make a battery in this country if you’re not going to put it in a car unless, perhaps, you’re Volkswagen, which has three different footprints in the U.S.”

Domestic car manufacturers, Volpe said, build up to “two million vehicles in a non-pandemic year, and that will probably limit us to three or four [battery plants].”

Canada’s auto industry, which historically has produced 10 per cent of North American output, has an opportunity to expand its manufacturing footprint, said the CVMA’s Kingston. “If you look at what will be required for this transition to electrification globally, the current estimate is 200 new gigafactories need to be built between now and 2030 to ramp up EV production,” he said.

While the United States will attract the bulk of battery plants in North America, Canada “has a unique opportunity to grow our share,” Kingston said.

To avoid a repeat of the public feuding that has marred negotiations over the Windsor plant, federal and provincial officials “have to be a little bit clearer in terms of what it is that we’re trying to attract and what will be supported by government,” Kingston said.

And both government and industry must do a better job of selling the benefits of these investments to Canadian taxpayers, said Unifor’s Payne.

“There has to be an understanding and a recognition that this is really about creating an auto industry that is truly pan-Canadian right now,” she said. “So while the investment is in a battery plant in Windsor, the supply chain for that battery plant, whether it’s critical minerals or other aspects of this, are really in many other places in Canada, not just Ontario.”