New EV Factory Subsidies Cause OEM Blowback

With the Canadian government announcing a $13 billion subsidy program to entice VW to build EV batteries in southern Ontario, a similar joint venture project in Canada from Stellantis and LG has been stopped. According to the automaker, the reason is a lack of government subsidies. Has EV manufacturing now become an entirely government-financed industry?

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Episode Transcript:

There was a time when manufacturing, and particularly automotive manufacturing, was a competitive industry driven by entrepreneurial spirit and innovation. Choosing the location for a new factory was based on basic parameters like cost and access to labor, proximity to the supply chain and customers, transportation links, as well as the cost of land and capital.

Somehow that changed, and today large manufacturers—particularly those in the automotive space—use a different criterion: government handouts.

For decades, large OEMs have cross-shopped jurisdictions to find states and counties with favorable laws regarding labor rights and corporate taxation. But in my opinion, this has morphed into something more dangerous as a result of the imperative to switch electric vehicles: direct government subsidies.

Now, governments call these things “investments” but they’re not. Rarely do governments take an equity position in the projects that they fund. And this isn’t limited to the United States. In Canada, the government has announced a staggering subsidy to VW to build an electric vehicle battery plant in southern Ontario: 13 billion dollars. VW itself will invest 7 billion and the operation is expected to employ 3,000 people.

Down the road from the site for the VW operation is another EV battery project under construction by Stellantis and LG—at least, it was under construction, because work has now stopped.

Why? Because Stellantis wants more government money, especially since they have seen a major competitor hoover up $13 billion.

I don’t blame them. Now the obvious unsustainability of handing endless amounts of taxpayer dollars to large manufacturers to locate operations in a state or province is clear. It distorts markets, and can produce inefficient supply chains.

There is a potential major role for Canada in the EV space, as a supplier and refiner of critical raw materials used in the production of the batteries and motors, like nickel and cobalt. But oddly, the Canadian government has decided to not pursue raw material production and refining as a key national industry, but instead wants to fight against low-wage jurisdictions in Mexico and right to work states in Dixie.

Irrational? You bet. Will it win votes? Very likely. But in the long run, winning ballgames by bribing the umpire just isn’t sustainable.