The Canadian and Ontario governments broke a long stalemate with automaker Stellantis and battery giant LG this week, agreeing to grant subsidies worth up to $15 billion to keep an electric-vehicle battery plant in Canada, after the companies pressed for a deal to mirror the U.S. Inflation Reduction Act. 

As the public digests the details—and perhaps the sticker shock from this deal and the $13 billion offered for Volkswagen’s gigafactory—it’s become clear they represent only part of the public investment needed to build a competitive Canadian battery supply chain serving an industry expected to grow to US$7 trillion globally over the next two decades. 

“What we don’t want to see happen is thinking that the government’s work is done now,” said John McNally, the program director of clean and resilient growth at the Smart Prosperity Institute’s PLACE Centre. 

“Everyone needs to get involved, different levels of government, to make sure that our skills training, our immigration streams are aligned,” he said, noting that the expected influx of workers to the industry will require essentials like affordable housing and transit. 

The Ontario and federal governments’ new agreement with Stellantis and LG is tied to how much the companies make and sell. Provincial support will account for about a third of the subsidies until either they hit a cap of $15 billion or IRA benefits end in the U.S.

In exchange for Ontario committing to pay more in production incentives (the province previously offered $500 million to help with upfront construction costs), Stellantis agreed to keep Ontario auto-assembly plants in production and establish an R&D hub, according to the provincial government.

As a result of Ontario’s potential maximum pledge of $5 billion to Stellantis and $4.3 billion to VW, the federal and provincial governments were able to match the IRA incentives for both companies.  

Stellantis, which aims to launch battery production at the Windsor, Ont., plant in 2024, and Volkswagen, beginning production in St. Thomas, Ont., in 2027, will also need suppliers, McNally noted. As The Logic has previously reported, government officials were already in talks to woo lithium hydroxide companies to spend billions here before the kerfuffle with Stellantis and LG. Meanwhile, the federal government is advancing talks with battery makers in Quebec like Northvolt.

On top of infrastructure to support existing investments, Stellantis, Ford and General Motors will enter negotiations with Unifor this summer, raising questions about the limits of Canada’s coffers for future deals: in 2020, those negotiations resulted in automakers commiting to retool their assembly lines for EV manufacturing, with government support.

To avoid overspending to compete with big countries like the U.S., policymakers in smaller countries must create strategic support packages that are “more holistic and focus on the sector’s structural challenges—labour, technology, partnerships, etc,” said Oliver Montique, an industrial and supply-chain analyst at the Eurasia Group.

“Post-IRA, developed markets really have no choice but to provide tailored support through industrial subsidies and tax incentives … especially Canada, whose automotive sector is so close to and integrated with the U.S.,” Montique said. 

Ontario Economy Minister Vic Fedeli said he’s not worried that matching the IRA’s incentives for Volkswagen or Stellantis and LG will leave his government on the hook for more lavish subsidies to close upcoming union negotiations with automakers, or for critical-mineral supply-chain deals. 

“The IRA pays for battery production. It doesn’t cover various components,” he said. 

Bentley Allan, a co-coordinator of the Centre for Net-Zero Industrial Policy, agreed that the IRA’s structure is carefully targeted. Its incentives—including the US$45-per-kilowatt-hour production tax credit that Canada plans to match for Stellantis and VW—are designed to make American batteries cost-competitive with countries like China that sell to the worldwide marketplace.

Canada is also investing in the highest-value parts of the EV supply chain, Allan said, by focusing on batteries and cathode active materials. Batteries are the biggest-ticket item in an electric vehicle, with battery-pack manufacturing representing about 20 per cent of the cost of a battery’s total value, and cathode materials about a third.

Montique said that Canada’s wealth of critical minerals—like those used in battery cathodes—promise to make the country “irreplaceable in global EV and battery supply chains.” But the mining industry generally expects automakers and governments to finance the bulk of the transition to EVs, Montique noted, and that includes building out the rest of the supply chain. The carmakers, he said, will “need all the help they can get.” 

Fedeli argued that the Stellantis deal did just that, securing auto-assembly jobs in Windsor and Brampton, Ont., as well as a 600-worker R&D centre, and the downstream battery supply chain. McNally said there is some truth to the idea that mega investments—if they come with higher salaries, health benefits and training—have a multiplier effect that grows prosperity in the community beyond the initial investment; that’s particularly true in areas of the manufacturing Rust Belt that would otherwise face economic decline.

The government has nonetheless faced fallout for bending to Stellantis’s demands, with some suggesting Canada should have waited for the IRA’s influence to fade before doling out subsidies. Kent Fellows, an assistant economics professor at the University of Calgary has said that spending on gigafactories is “irresponsible and inflationary,” and that the job-creation from the deals amounts to “shuffling the deck.” Some businesses will lose workers, he said, “so that those workers can move to newly created jobs in government-subsidized plants.” 

“There are ways that we can design tax credits that can help us attract more investments,” said McNally. “Because there haven’t really been any details announced for this, it’s hard to know whether we’re spending money in ways that are ultimately going to help support the region as a whole.” 

Fedeli dismissed the idea that Ontario was spending to the detriment of other government priorities, defending the Progressive Conservatives’ record on health-care and infrastructure investment and noting that Stellantis’s performance-based incentives are not a “cheque out of the treasury,” but foregone tax revenue over time. 

“If you don’t have the company, you don’t forgo the tax,” he said. “Waiting 10 years until you don’t have the IRA, that would be irresponsible for the 100,000 auto workers that we have in Ontario.” 

Allan noted that Canada still has other industries, like hydrogen, sustainable aviation fuel and mass timber, that could legitimately ask for similar support in transitioning to net zero. 

“How are they going to take the strategic approach that they’ve applied in the battery supply chain and do another supply chain?” Allan asked. 

“If they stopped just at batteries, then the conclusion will just be, ‘Well, you know, the one industry that has a really strong lobbying arm in the government was the industry that was able to secure industrial-policy support.’ A true change in industrial policy in Canada … is really developing a more critical public process of collaboration with the private sector.”