Canada is paying 'an enormous price' for the Volkswagen battery plant. Is it worth it?

Auto industry analysts say Canada paid a big price to bring Volkswagen's first North American electric vehicle (EV) battery plant to St Thomas, Ont., but whether that money will deliver lasting benefit to the economy is a matter of debate. 

On Wednesday, parliamentary budget officer Yves Giroux released a report detailing his calculations.

Giroux said it would cost the public at least $16.3 billion to build the plant, $2.8 billion more than the federal government first announced in April because of the differences in U.S. and Canadian corporate tax rules. It's expected production at the plant will start in 2027.

Giroux called the $16.3-billion sum "significant,"  but said he was unable to calculate the full economic spinoff from the factory because the federal government is still bound by confidentiality when it comes to Volkswagen's actual production numbers.

Beyond the estimated 1,400 jobs generated by the plant's construction, it's impossible to know how much economic activity the plant will generate or whether it will be enough to justify the gigantic bill for taxpayers, creating fodder for debate for years to come. 

Prof outlines cost of going toe to toe with U.S.

For Greig Mordue, an associate professor of automotive engineering at McMaster University in Hamilton and a former Ontario auto manufacturing executive, the price doesn't justify the return on investment.

"No," he said. "We're going to get some ancillary benefits from the St Thomas investment, there's no question of that. They just won't be as deep, and as broad and as wide ranging as they might be if those investments were done in the U.S. by the U.S."

For Canada, Mordue said, the $16.3-billion price tag illustrates the exorbitant consequence of Canada going toe to toe with the Americans when it comes to subsidizing EV production. 

To encourage Americans to buy more EVs built in North America, Congress introduced a host of incentives under the Inflation Reduction Act. Canada lobbied hard to be part of the policy shift, but instead of devising its own set of subsidies tailored to the Canadian auto industry, Mordue said, Canada simply copied the American ones. 

"The reality is the U.S. automotive industry is different in pretty substantive ways from the Canadian industry."

The biggest difference, he said, is the American auto industry is dominated by companies with headquarters in the United States. Having a head office, he said, brings the most return on investment because the knowledge-intensive work — including research and development, finance and corporate decision-making — brings the most economic value. 

"We get a battery plant," he said. "We don't get all of the highest value, most knowledge-intensive work. So we've got this U.S. industrial policy tool that we have appropriated for our own purposes, but it's a different industry, so we are paying an enormous price."

Cost rooted in Canada playing catch-up

Nate Wallace, the clean transportation program manager with the Canadian organization Environmental Defence, agrees the price is enormous, but it's one Canada must pay if it wants to be competitive in an industry where China is the global leader. 

"Do we want to be stuck making gasoline cars over the next 10 years, or do we want to be making cars of the future for the next 100 years?"

Wallce said that a decade ago, China saw what North American leaders didn't when it retooled its automotive industrial policies following the 2008 financial crisis. 

At the time, governments in Canada and the U.S. were forced to bail out domestic automakers, but what should have been an opportunity to set the industry on a greener path was wasted, according to Wallace. 

"[This is] the consequences of the policy choices that we've made over the past decade and and not having good industrial policy, so that now, when the clock is ticking, we're stuck ponying up."

"We don't really have a domestic automaker," he said. "All the automakers that make cars here are headquartered somewhere else. We're kind of forced to deal with that."

'It's worth it'

It's also difficult to say how much prosperity the money will bring, especially without a full accounting of what the Volkswagen plant will produce. But according to Sean Dyke, chief executive officer of the St Thomas Economic Development Corporation, the view is certainly different on the streets of the city. 

"Certainly from our perspective this means added prosperity for our community for generations to come," he said. "I think it's worth it."

Dyke said that for St Thomas — with its prosperity partly written by the industries that have called the city home for generations, including Freightliner, Ford and, before them, mighty American locomotives — it's about the ability to put in a day's work and the pride that comes from self-reliance. 

"This means thousands of jobs for our region. It means spinoff opportunities for tens of thousands of people. It means families that will be able to afford their groceries for the next several decades.

"I don't see that there's any negative to any of that."