The Canadian government’s latest incentives package, designed to support a new battery facility for German carmaker Volkswagen, is the largest of its kind on record, according to fDi Intelligence research.

The company has been offered tax breaks and grants worth a total C$14.4bn ($10.6bn), which is more than twice the capital investment commitment by Volkswagen itself (C$7bn). 

The incentives package outstrips any other major incentive package on record, according to IncentivesFlow, an fDi Intelligence database. The second-largest to date was the $9.5bn incentive granted to Ford to expand its facilities in Detroit in 2015.

VW announced on April 21 that it is investing via its battery company PowerCo in an electric vehicle (EV) battery plant. Situated in Ontario, Canada, it will serve the North American EV market, creating up to 3000 direct jobs and tens of thousands indirect jobs. The investment has been hailed by prime minister Justin Trudeau as “a win for workers, for the community, and for the economy”.

Flavio Volpe, president of the Automotive Parts Manufacturers’ Association, a trade association, told fDi that in order to “join the major leagues”, Canada has to pay the “franchise fee”.

“All of the car companies in the world serving all the major markets are racing with each other to electrify, while all the markets are racing with each other to force electrification,” he explained. “If [governments] don’t get involved in this race for investment, all these companies will make commitments ... elsewhere.” 

The Canadian government has been explicit about its desire to match the US’s Advanced Manufacturing Production Credit, a tax incentive provided by the US Inflation Reduction Act that gives tax credits for the US production of eligible components, such as battery cells. Producers can receive $35 per kilowatt hour in tax credits for battery cells on an annual basis until 2032.

In VW’s case, the total tax credits available will therefore depend on how many batteries it is able to produce once it starts production in 2027, and is expected to fall between C$8bn and C$13.2bn. Meanwhile, the project will receive separate government funding, with the federal government providing a C$700m grant, while the Ontario provincial government gives C$500m in direct funding.

It is widely thought of as a “strategic play”, allowing Canada to secure some part of the EV manufacturing supply chain. “This is no different to other investment deals in the US for similar plants, except here in Canada we decided to estimate the potential 10-year impact of this commitment on the tax base. We have 10% of the US population, we have about 10% of the automotive industry output. We’re certainly not pressuring the Canadian government to match the US investment for investment,” Mr Volpe said. 

Elsewhere, the Canadian government has been drawing up plans to implement the mining and processing of the raw materials, such as ​​cobalt, lithium and nickel — all key ingredients for EV batteries. Last year, it unveiled its critical minerals strategy, through which it aims to create greater security of supply domestically. In 2022, Canada placed second in Bloomberg NEF’s lithium-ion battery supply chain ranking, after China.

Aaron Wudrick, director of domestic policy programme at think tank Macdonald-Laurier Institute, noted that the [VW] plant “could be anywhere. “[While] the minerals are only in a few places and we have them so we can actually get value out of that without getting into subsidy fund fights with the Americans,” he said. 

Meanwhile, Brian Kingston, president of the Canadian Vehicle Manufacturers’ Association, said that investments in manufacturing facilities should be combined with upstream investments.  

“Motor vehicles are currently Canada’s second-largest export, so there is an economic benefit to having plants as well as raw material inputs,” he continued. “We want to have an integrated supply chain and show that we can mine and process the inputs to feed these plants.”

VW’s investment follows a C$5bn joint investment from Stellantis and LG Energy Solution in a large-scale battery plant in Windsor, Ontario.