Though forged in the fires of a deal gone sideways, the new “auto pact” between the federal and Ontario governments is about more than just saving the Stellantis and Volkswagen battery factories

There has been no shortage of drama surrounding the fate of the Stellantis-LG Energy Solution gigafactory in Windsor, Ont.

The project’s future was secured last week when the federal government and the province of Ontario announced a new, comprehensive incentive package (more on that momentarily) that won the support of the Stellantis-LG Energy Solution partnership.

But getting there was a roller coaster ride for all concerned.

To recap, Stellantis and LG Energy committed to building a $5-billion battery cell factory in Windsor, Ont., in March 2022. The factory is to operate under a joint venture called NextStar Energy. The firm figure for government financial support was not public.

A few months later, the United States government signed into law the Inflation Reduction Act (IRA), game-changing legislation that contains enormous subsidies to attract EV supply chain investments to the U.S.

Then, this March, Volkswagen revealed that it, too, would be building a gigafactory in Ontario. The big difference was Volkswagen’s $7-billion factory will receive $13 billion in incentives over 10 years. A carrot linked directly to the need for Canada to match the IRA incentives to land new major EV-related investments.

Two months later, NextStar announced it was halting construction in Windsor until the governments provided a competitive deal to Volkswagen’s. That move sparked weeks of tense negotiations between NextStar, Ontario and Ottawa, punctuated by several public spats between the various stakeholders.

Finally, last week, a deal came through. Under that new arrangement, NextStar is eligible for up to $15 billion in government support over 10 years.

But in tandem to a satisfactory arrangement with NextStar, the Ontario and federal governments announced something else: they are combining forces and entering into a first-in-Canada “auto pact.”

What is the auto pact?

So, that’s the big question. What is the auto pact and how will it impact onshoring the EV supply chain moving forward?

For the moment, the auto pact is an agreement between the Ontario and Ottawa governments to offer US$45 in incentives per kWh of production not only to Stellantis, but also to Volkswagen. The federal government will provide two-thirds of the funding, while Ontario will supply the remaining third.

“We have this historic deal as a way to recognize the challenges that the IRA posed,” says minister of Economic Development, Job Creation and Trade of Ontario, Vic Fedeli, in an interview with Electric Autonomy.

“I think [the Auto Pact] adds some definition. Companies who are interested in Ontario don’t have to be curious wondering what our response to the IRA is going to be. The auto pact is the only way the federal government could get this deal done.”

Fedeli spoke to Electric Autonomy just hours after returning from a trade mission to South Korea. On the trip he went to LG headquarters to personally assure them a deal regarding the NextStar factory was “imminent.”

But LG wasn’t the only entity watching the situation closely. Fedeli says while in Asia his team met with “more than a dozen companies.” All could be potential suppliers for NextStar and Volkswagen.

“We’ve done our job for them. We’ve attracted two gigafactories in Ontario. Now it’s up to them to come here and make parts,” says Fedeli.

“A big piece of both battery plants are six major components. Those are: cathodes, anodes, separators, electrolytes, copper foil and lithium hydroxide. We are relentless in doing everything we can to attract these six types of suppliers. And perhaps even more than one. Each of those six that I mentioned, they are a minimum billion dollar investment. Some are two billion; some are three billion to get into those businesses.”

And therein lies the potential value of the new pact: it’s not just a package securing a pair of factories for nearly $30 billion dollars. Rather, it’s a framework also intending to attract and support future investments in the massively exploding EV value chain.

“We’ve got this perfect story that is Ontario. LG [and] Volkswagen have done a big part of the sales messaging for us,” says Fedeli. “These companies would have done a rigorous worldwide search. And they landed here.”

The cost of not doing business

Even though the government support to secure the NextStar and Volkswagen battery factories is largely coming from a decade-long tax holiday rather than capital, the price is still eye-watering.

But, cautions Fedeli, “The cost of losing this plant would have been much greater.”

The alternate world where Ontario and the federal government didn’t come together in an auto pact, in Fedeli’s mind, at least, looks bleak.

If the battery factories had never come to Ontario, “[These taxes are] not revenue that you would have otherwise had,” says Fedeli.

“Yes, you’re foregoing the revenue [now], but you’ve got billions invested and thousands of jobs created. How can you afford not to have them here?”

Not securing NextStar’s and Volkswagen’s gigafactories would likely mean Ontario’s (and Canada’s) EV ecosystem would be significantly smaller than its potential. Perhaps it wouldn’t survive at all.

“We know that we needed response to the IRA. This is our new agreement between the province and the Feds to secure the jobs.”

Partnership limits

On the subject of affordability, for any Ontarians wondering if the massive corporate government incentives will trickle down to become consumer incentives to close the loop on a complete auto ecosystem, Fedeli is unequivocal.

“Quite frankly, all we’re interested in is the jobs. Let’s look at the history of auto making in Ontario: 85 per cent of all vehicles made in Ontario are exported. It’s the jobs we want.”

So, it is here where the non-partisan agreement for an auto pact diverges between the province and the federal government. The latter will, it appears, remain the sole partner in the strategy willing to make EVs cost competitive with combustion vehicles.

For Ontario’s Conservative government, perhaps the hope on the consumer side of a robust auto making ecosystem is akin to “if you build it, they will buy.”

Fedeli doesn’t say.

Regardless, the clear prize for the Ontario government remains getting as many corporate shovels in the ground — and fast.

An auto pact with Ottawa seems to be the best vehicle to achieve that.

“In order for Ontario to remain competitive on a global stage…this is the right path forward,” says Fedeli. “We picked the right way.”