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 cityof St. Thomas, Ont., this week, announcing details of their plan to build their first electric battery plant inNorth America, in a move that backers say will super chargeSouthern 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 tobuilda 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 indirectlyacross 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 inif 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 ofcash from government coffers willflowuntil the assembly line starts moving,Industry Minister Franois-Philippe Champagne said.

WATCH| Minister says investment is not a blank cheque:

Ottawa says billions of dollars for VW EV project will flow after plant is built

1 year ago

Duration 0:49

Innovation Minister Franois-Philippe Champagne says the money Ottawa pledged for the VW battery project will come only after the sprawling St. Thomas, Ont., plant is built.

"First Volkswagen needs to build the $7 billionplant," Champagne said. "Then after, when the plant is built, we are going to provide production supportif and when theyhave 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, saidSam Fiorani, vice-president of global vehicle forecasting withAuto 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. Andthe world's largest economy's pledgeto 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 saidCanada 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 billionor something more."

Deal has its critics

Franco Terrazzanois 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 officialsclaim the plant will pay them back and then some within a few years, but Terrazzanorejects 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:

Up to $13B for an EV battery plant and that's just from the feds

1 year ago

Duration 4:07

Flavio Volpe, president of the Automotive Parts Manufacturers' Association, talks about what a massive financial infusion into a planned EV battery plant in Ontario might mean for the province's auto industry.

Others say the reality is more nuanced.

Greig Mordue, theArcelorMittal Chair in Advanced Manufacturing Policy at McMaster University in Hamilton, saidgovernments 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 centon 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 theInflation 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," asVW executive Blomedescribed their efforts, but only time will tell if thatgame is worth playing at all.

And with a benchmark-raising price tag for taxpayers, it's fair to wonder if a citylike 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 someactions 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."