What did Ottawa buy with $13-billion given to Volkswagen? Not as much as you think

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Greig Mordue is an associate professor and the ArcelorMittal Dofasco Chair in Advanced Manufacturing Policy in the faculty of engineering at McMaster University.

What was it that really attracted Volkswagen to Canada?

Clean energy? Our people? Critical minerals?

That’s what some of our policy-makers have told us, but the real answer is this: an incentive package worth $13-billion. That’s the amount the U.S. would have paid for a similar investment, a consequence of the formula established by the Biden administration’s Inflation Reduction Act for a similar-sized undertaking.

Is this the new cost of doing business? In short, yes. Policy maker pronouncements about clean energy, critical minerals and the Canadian work force notwithstanding, it is unlikely that the plant would be located in St. Thomas Ont. – 1,000 kilometres from its assembly-plant customers in South Carolina and Georgia – if Ottawa didn’t at least match U.S. incentives.

But does an industrial-policy tool formed in the U.S. – for the U.S. – make sense for Canada?

This is where things get a little more complex, where an understanding of the different types of auto industries in Canada and the U.S. is necessary. After all, the U.S. auto industry is different than Canada’s in consequential ways; ways that mean Canada will derive comparatively fewer ancillary benefits from the money the federal government has agreed to spend.

Here’s why: The U.S. plays host to the headquarters of major automakers – companies such as GM, Ford, Stellantis and Tesla. And in the auto industry, the geographic location of automakers’ HQs drives all aspects of the value chain.

Most automotive R&D happens in locations close to automakers’ headquarters. The majority of assembly plants are located in the countries that play host to automakers’ headquarters. Vehicle design happens at headquarters. Decisions about finance, marketing, sales and distribution happen at or near automakers’ headquarters.

In fact, so important are the big automakers’ headquarters that most R&D done by large automotive supplier companies – including Canada’s Magna and Linamar – occurs not near the suppliers’ headquarters, but near the headquarters of their big automaker customers.

That means Ottawa’s $13-billion will not generate the same effect as $13-billion spent in the U.S. on a U.S.-headquartered automaker. The United States, to be sure, would not have generated this effect either if it had spent $13-billion on the Germany-headquartered Volkswagen. This, even though Volkswagen has a large and growing U.S. production footprint.

But the United States did not spend $13-billion on this. We did.

U.S. incentives anchor and support automotive value chains that are deeper, broader and much more robust. They encompass all of the most knowledge-intensive portions of the industry: R&D, vehicle design, marketing, distribution and sales, plus operations such as battery or powertrain production and vehicle assembly.

When Ottawa gives $13-billion to Volkswagen, it gets a $7-billion battery plant and some yet-to-be-identified spin-off benefits for suppliers. That’s it. The most knowledge-intensive parts of the value chain will stay in Germany. Even vehicle production will happen in the U.S.

By comparison, when the U.S. gives a company such as Ford, GM, Stellantis or Tesla that kind of money, it helps anchor and support the full value chain.

All of this to say, Ottawa paid the U.S. price for a plant that will not yield or secure comparable benefits.

And we’re probably not done. When Volkswagen’s intentions were announced in early March, information about government incentives was not released, with policy-makers indicating that doing so might influence other targets the federal and Ontario governments had in their sights.

That means Ottawa may be preparing to extend U.S. Inflation Reduction Act-like incentives to others. For example, the cost of securing the 45 GWh LG Energy-Stellantis battery plant announced last year for Windsor, Ont., could balloon to $7-billion.

If there is another potential battery-plant opportunity out there – something our governments alluded to in early March – total spending on battery plants could reach $30-billion or more. However, if that occurs, the most knowledge-intensive, high-value portions of those companies’ value chains will continue to reside outside of Canada.

Clearly, the incentive package that accompanied Volkswagen’s investment is unprecedented. Indeed, Ottawa’s commitment is worth more than 10 per cent of Volkswagen’s total corporate value. But in return, Volkswagen did not give up 10 per cent of the company’s shares nor was it required to offer Canada a seat on its board. Consequently, the federal government did not heighten its capacity to steer headquarter-like decisions and headquarter-like mandates in the country’s favour.

Before similar U.S.-type packages are extended to others, our policy-makers are encouraged to consider the profound differences between Canada’s auto industry and that of the U.S. and whether their willingness to appropriate U.S.-style industrial policy measures is a good fit for Canada.