The Decibel - Canada’s multi-billion dollar bet on the electric vehicle market

Episode Date: July 11, 2023

After months of negotiations, automaker Stellantis and battery maker LG Energy Solution have reached a deal with the federal and Ontario provincial governments. It’s worth up to $15-billion in subsidies for a plant that’s being built in Windsor, Ont.The plant is part of Canada’s push into the clean energy sector, but with a cost in the billions, it raises questions about whether this specific deal is worth the money.Adam Radwanski, The Globe’s climate change columnist and feature writer, takes us through why this deal could set a precedent for future projects like this.Questions? Comments? Ideas? Email us at [e-mail]

We almost never see this sort of thing between automakers and governments out in public, even though it probably happens behind closed doors more than we realize. Ontario is getting a new electric vehicle battery plant. But it comes after a months-long will-they-won't-they negotiation saga. So what happened here was that Stellantis and LG, which are the two companies that are building a battery plant in Windsor, were behind the scenes for a long time, many months, lobbying particularly the federal government for a big increase in the subsidies they're to receive. And at some point got frustrated. And so in May of this year, on a Friday, we got a notice basically threatening to stop construction if they didn't get what they wanted.

And then by Monday, they had largely stopped construction. Last week, the company said construction will resume. Now that the federal and Ontario provincial governments have promised up to $15 billion in subsidies. So not only did we get a fight publicly between the automaker and government, but we got a three-way fight between the automaker and two levels of government, all kind of squabbling with each other. You're probably wondering,

why all this fuss for one manufacturing plant? Well, today, Adam will take us through why this deal is so significant, if it's worth the money, and what it says about Canada's plans for a clean economy. I'm Maina Karaman-Wilms, and this is The Decibel from The Globe and Mail. Adam, thank you so much for joining me today. Thanks for having me. Adam, you've been writing about this for months, and a deal has been on the verge for weeks.

It finally happened. What were you thinking when a deal was finally announced? I largely felt relief that the deal was announced, that I didn't have to monitor every day and keep counting the federal government to find out if there was going to be a deal that day, because we were kind of just waiting for it. I think we knew for a while there would be one, and we were waiting for the details. I think there was one surprise in this one, I guess, which was the relationship that was outlined between the federal and Ontario governments as to who would pay. And that was kind of the big question, I think. We're talking about big numbers here.

So let's actually dive into what we're looking at. It's a lot of money on the table. Ontario Economic Development Minister Vic Fideli said that the deal will be worth So let's actually dive into what we're looking at. It's a lot of money on the table. Ontario Economic Development Minister Vic Fideli said that the deal will be worth up to $15 billion in subsidies for the two companies, so LG Energy and Stellantis. So what does that mean, Adam, $15 billion in subsidies? What it means is that once they are operating and making batteries at the factory, they will annually get subsidies that are tied to the units they produce at that factory. So for each battery they produce, they will get a certain amount of money. And that will add up to billions a year from the time they start operating until, per this agreement, 2032, which is when these are to be phased out by.

And where is this money coming from? So it's to come two-thirds from. And where is this money coming from? So it's to come two thirds from the federal government, one third from the Ontario government. Both of those governments would hasten to add that they don't really consider it an expenditure because these companies will be generating a ton in revenue. And therefore, what you're really doing is essentially giving them the equivalent of a tax deduction. You can debate that, of course, but that would be the way they would explain it. Okay. But it's not kind of a tax deduction. You can debate that, of course, but that would be the way they would explain it. Okay. But it's not kind of a blank check up front. This is going to be over time. They're going to get this money. No. The check they're getting up front, which was

agreed when they initially committed to building this plant, is worth about a billion dollars. That's investment subsidy. So that is about 20% of the total cost of building the factory, about $5 billion. That's pretty standard in the auto sector for decades in Ontario and elsewhere. Governments paying between 10% and 20% of the capital cost is pretty normal. The $15 billion is much more unusual, at least until a few months ago. And that will be paid over the course of time. I guess I'm wondering why is the government willing to invest so much money into this plant? Like what is it trying to accomplish? I think part of the value here has to be seen as symbolic as much as it is tangible. Now there are tangible benefits. I mean, obviously, it provides an estimated 2,500 jobs,

more or less directly. Certainly for the local economy in Windsor and the usual stuff we hear about local businesses, for auto parts suppliers, potentially for mining and refining and all that, there are offshoot benefits. But I think on the symbolic side, it's probably important here to look back a few years. When I came onto the climate and clean economy beat for the globe in late 2019, and at that time, there was a real question of whether the auto sector here would survive at all. There was a sense that it had been in decline pretty much since the 1990s. And as the sector was shifting to RDVs, there was no reason to be sure that auto companies

would invest at all here in making them here. That narrative started to shift a little bit with some vehicle assembly commitments. Ford and some of the other, eventually most of the automakers that are here did commit to keep assembling vehicles here. But what they really wanted to convey, the governments did, was that this could be kind of a new play for Canada that could actually emerge stronger in terms of its auto sector from what it was previously, that we could wind up with an electric vehicle supply chain that would go,

not just in terms of making the batteries and making the vehicles, but as far back as, you know, mining the critical materials and all that. And I think they wanted to send a loud signal to the world of, no, we are serious about building an electric vehicle sector here. And I think they wanted to send a loud signal to the world of, no, we are serious about building an electric vehicle sector here. And look, we can lure the biggest automakers in the world or some of them to commit here instead of Michigan or the Southern United States or Mexico or wherever else. But of course, that was initially a $1 billion proposition. This is interesting because initially the federal and Ontario provincial governments were offering $1 billion, as you said, in upfront subsidy. So that was kind of on the table at first,

but somehow it's ballooned to $15 billion. How did that happen? So this is an issue that I think is maybe best told over a quick timeline, because it helps explain it a little bit. The first announcement of this was in March of 2022, at which point, yes, $1 billion combined between the two levels of government in upfront subsidies was enough to get the factory done. But then a few months later, in August of 2022, the United States passed the Inflation Reduction Act,

which is the giant expenditure bill out of Washington that includes massive subsidies for the Serta factory. So that was in August of 2022. Almost immediately after the United States brought in that new policy, these companies started quietly lobbying the federal government here to match that, or at least to come close to matching it, basically pointing out that if they didn't, they might be inclined to move to the United States where they would be getting exponentially greater subsidization.

So the argument for the companies is like, well, if you don't match what the U.S. is going to pay us, why don't we just move to the U.S.? Exactly. The companies say they received assurances from Ottawa pretty quickly that they would make them whole in that sense. But this dragged on. Then in early this year, in 2023, the federal and Ontario governments reached a deal with Volkswagen to build another battery plant, also in Southwest Ontario, in St. Thomas, which does kind of provide the same sort

of subsidies that the United States is offering, up to $13 billion worth. So that further increased the pressure, I think, to do something comparable for Stellantis and for LG. But by May of this year, they still hadn't reached that deal, at which point these companies decided to essentially up the ante by temporarily pulling the plug on construction and really more aggressively threatening to move unless they got matched. And although it may have been economical for them, presumably they could afford to build it with only a billion dollars in subsidies because that's what they initially agreed to. Their argument would be, okay, but how are we supposed to tell our shareholders that we're going to leave $14

billion, $15 billion on the table just so we can keep this commitment to build this thing in Canada? So does this mean that Canada is now, I guess, needing to overpay just to compete with the U.S. for this kind of business? Certainly, Canada has to overpay compared to what it apparently cost to build these things a year ago. So yes, the decision that Canada faces is how many of these things is it willing to build at this cost, given that it's a very different calculus from what it was prior to the Inflation Reduction Act.

We'll be right back. So the Inflation Reduction Act, we've talked about this a little on the show, but I guess I want to just get a little more details in here because this is a big act by the Biden administration. What is it meant to achieve? So the Inflation Reduction Act isn't totally about low-carbon industry, but it is very largely about that. And the number we've seen reported is $370 billion U.S. over about a decade on subsidies, essentially. It's probably actually quite a bit higher than that. It's partly to help the United States achieve its emission reduction targets

and show global leadership on that. It's also got a very strong protectionist streak. And that's not really directed primarily at Canada. In fact, Canada has been exempted from some protectionist elements of it, including around vehicles. But it's more geared toward taking aim at China and other overseas competitors. And so it's very heavily tied to vehicles, batteries, other forms of clean technology being produced in the United States, not just deployed there. And so this act is the reason why the Canadian government and the provincial governments are going to have to kind of put up this money to attract business to Canada. Are we going to have to compete in a whole variety of sectors then in order to get business to our country as opposed to the U.S.?

Competing with the Inflation Reduction Act was a big focus in this year's federal budget. And you're seeing it in some provincial budgets a little bit, but especially at the federal level. And you're seeing new tax credits in various forms aimed at clean electricity, low carbon manufacturing, hydrogen, aimed at carbon capture. There's also recognition, and federal politicians have been pretty explicit about this, that it's simply not possible for Canada to keep up with all elements of this. We just don't have the capacity to try and match the U.S. on everything. So it is a matter of picking some lanes.

And obviously, one lane that we have decided as a country, or at least the governments have decided on our behalf, is to try and keep up with them on attracting vehicle and battery manufacturing. It is worth noting that both the deals with Volkswagen and with Stellantis and LG in Canada are directly tied to the Inflation Reduction Act. So if that were overturned, if the subsidies stopped rolling there, they also stopped rolling here. Oh, wow. Okay. So this is very directly linked. Very directly linked. So the battery play, it seems to be something the Canadian government is really interested in here. Are we trying to become a dominant power in EV battery manufacturing?

The thinking is that we can be kind of uniquely strong in the battery space because we have the combination of both an existing auto sector, and we do, I mean, despite it having been in decline, you certainly have the infrastructure, the expertise, all of that

in southwestern Ontario particularly. But you also have critical minerals that a lot of other automaking places don't have. So the argument is that you can build the full supply chain in a way that other places can't. And I think that is the play. And of course, that also extends the benefits, ideally, between just a corner of Ontario and into the north and into parts of Western Canada and into Quebec and all over the place. So I do think there's a view there that this is, as we transition into a low-carbon economy, a sector where there's real growth opportunity. And so what the perspective from the government says,

we need a couple of big anchors there that we can then build around, and these are meant to be that. There was also a lot of quibbling between the different levels of governments, right? The federal government and the Ontario provincial government. So what did we learn about the relationship between those two governments? The evolving relationship between Ottawa and Queen's Park has been pretty interesting in this case. And I think that applies to the auto sector in general and how the Ontario government, which is led by a premier, Doug Ford, who came to office in 2018 being pretty skeptical

of all things related to sort of low-carbon transition or climate, and still is on some stuff, but has certainly come around to the idea that you want to attract low-carbon industry and that government has a big role in that, and to partnering with Ottawa. And that relationship has generally been quite positive. We saw it hit some real rocks during this, because in the first few days, right after Stellantis and LG announced they were temporarily shutting things, you had this public battle playing out between the two levels of government. And what that was basically about was the federal government saying, we can't pay the entire thing here. We need you to chip in a portion of it because it's only fair to the rest of the country. And the Ontario government

saying, well, what you're talking about here is matching federal incentives that are offered in the United States through Washington's Inflation Reduction Act. That is a federal responsibility, not our problem, basically. Ultimately, the federal government seems to have effectively won that argument because the Ontario government wound up committing to paying a third of this cost. What was surprising was that now that relationship in terms of the one-third, two-thirds is also going to apply to the Volkswagen deal that was announced months earlier, which initially the federal government is going to be doing on its own.

Oh, that's very interesting. It's surprising. And the implication is that the Ontario government, if there's any more of these battery plants that are announced, will keep paying something along those lines. So that is a significant, I think, a significant win for the federal government and a significant leap of faith by the Ontario government to not just do what they could to keep this one, but to basically say, okay, we'll partner with you in a different way going forward.

Well, this raises a really important point about the precedent that's being set here, right, Adam? So we've got the Volkswagen deal for $13 billion in subsidies that happened earlier this year, and now this $15 billion one with Stellantis and LG. Do these, I guess, in broad terms, do these set a precedent for future deals that the government is going to have to put up this kind of money in order to entice companies to set up in Canada? I think certainly for the auto sector, it sets up that precedent. And I think what it sets up is that where the Inflation Reduction Act in the United States is offering subsidies, Canada is

going to have to come close to matching them. Now, there are different sectors and different considerations, and some cases where it may not be a simple choice for a company if we're going to put this plant in this country or this country, but in this kind of thing where, really, you can put a battery plant in either country. Yes, I think it does set up that precedent. So the question that then faces Canada is, okay, how many more of these are we interested in building at this cost? And I think you are going

to see maybe a little more scrutiny applied going forward, knowing that this is now the cost of doing business, not the $1 billion we started with. Yeah. So after all that we've laid out, all the money that we've talked about and the back and forth that's happened, is this deal with Stellantis and LG, is it justified from the government's perspective? I'm hesitant to give a definitive answer on whether it's justified or not. I think it's pretty justifiable in the current context, which is to say that losing this plant once it had been committed here, it would have been a really bad blow for the city of Windsor, which is a city that has had a lot of struggles over decades. It would have certainly had costs in terms of offshoot benefits elsewhere in the country. It would have jeopardized things like there's a Stellantis assembly plant for vehicles in

Brampton, Ontario, which they are now committed to maintaining and to transitioning over TVs, I think there's a pretty good chance they would have pulled out of there as well if this had fallen apart. So it would have had major ramifications. And again, symbolically, I think it would have sent a real signal of, yeah, we can't compete with the US. We are giving up on the EV thing. Nobody else need think about coming here.

So I can get that. Now, I think you have to say, if you're doing it all over again, would you want to spend $15 billion on this? Or are there better ways to build an EV supply chain? Are there aspects of it, again, on the mining and refining side, even through the battery recycling, other things where there may be opportunities that are not this expensive and a little more precise, and maybe you can build more competitive advantage. Adam, thank you so much for taking the time to walk us through all this.

Thank you. That's it for today. I'm Naina Karaman-Wilms. Our summer producer is Nagin Nia. Our producers are Madeline White, Cheryl Sutherland, and Rachel Levy-McLaughlin. David Crosby edits the show. Adrienne Chung is our senior producer, and Angela Pachenza is our executive editor. Thanks so much for listening, and I'll talk to you tomorrow.