Volkswagen AG caused a stir in March when it said it had chosen St. Thomas, Ont., as the location for its first battery plant outside Europe. Decades had passed since Canada had enticed a major new global automaker to build out manufacturing operations here.

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The announcement suggested a revitalization of Canada’s long struggling auto sector: Not only is Volkswagen one of the world’s largest, most profitable automakers, it was committing to produce battery cells — the most valuable component in an electric vehicle. More than that, proponents held up the commitment as proof that the transition away from fossil fuels could actually revitalize the economy’s manufacturing base.

But the revelations this week that the federal government had lured VW with subsidies that could reach $13 billion, possibly higher, cast the news in a different light. The subsidy package was carefully calibrated to match what Volkswagen would have received in the United States, but its sheer size has raised questions about the feasibility of building an electric vehicle supply chain in Canada.

Industry Minister François-Philippe Champagne, who has spent much of the past year flying around the world pitching Canada to the biggest automakers, frames the green transition as an opportunity to reverse the trend of auto investment and manufacturing jobs flowing out of the country. The moment to seize the opportunity is now, as car makers pivot to electric vehicles. The upfront investment could be steep, but the new plants they build will provide jobs for years to come.

“I am very bullish about this sector,” Champagne said in a Financial Post interview on May 5, 2022, shortly before he visited Germany to meet with Volkswagen’s board.

By that point, he estimated automakers had committed to investing around $9 billion to build assembly plants for batteries and electric vehicles, but Canada had not yet attracted a battery cell manufacturing plant — the holy grail of an electric vehicle supply chain, comparable to an engine in a gasoline-powered car.

Champagne acknowledged the automakers had received financial incentives, but declined to disclose details, saying it would interfere with ongoing negotiations with other companies considering investment in Canada.

“First of all, we have stabilized the auto sector for generations to come,” he said. “That was my mission number one — it was about the workers because it always comes back to them.”

Given Canada’s long history of manufacturing automobiles and automotive components, Champagne said it was an easy call to draft subsidy packages: 90 per cent of vehicles manufactured in Canada are exported to the U.S., which like Canada, has adopted net zero emissions goals that all but ensure it will phase out internal combustion engine cars in the next decade.

Canada’s auto sector directly and indirectly employs roughly 500,000 people, and represents the largest export out of Ontario, where most of the country’s population is based, valued at $42.9 billion in 2020, according to the Canadian Vehicle Manufacturers Association.

Against that backdrop, proponents of offering automakers subsidies to build an electric vehicle supply chain said that not acting would have all but ensured that one of the country’s largest industries slowly withered.

Champagne downplayed the significance of subsidies, saying they were necessary to compete.

“I never win on the money,” he said, “where I win is on the talent, on the ecosystem, on the stability, the proximity to resources. I think that makes Canada Canada, it’s never about the money.”

Experts said an electric vehicle supply chain could create 250,000 jobs, all of which would durable as the world moved away from fossil fuels and built a new green economy.

The key is deploying subsidies in a strategic way to maximize the potential economic benefits, according to proponents.

“The fact that VW is one of the largest automakers in the world and they’ve decided to invest in Canada sends a signal to other automakers that there’s something special about Canada,” said Dave Adams, president of Global Automakers of Canada, a lobbying group that represents foreign automakers in Canada.

Large battery manufacturing plants as well as assembly plants often spur other investment. Suppliers spring up nearby, and an automaker may choose to expand in the area. The concentration of expertise becomes a magnet for other automakers to invest. That’s how what MBAs call “ecosystems” develop.

Since the 1980s, there have been five automakers manufacturing in Canada, including General Motors Co., Ford Motor Co., Stellantis SA, Toyota Motor Co. and Honda Motors Co. Volkswagen marks the sixth. (Hyundai Motor Co. briefly manufactured in Canada, and Volvo AB had assembly operations in Atlantic Canada, but both exited years ago, according to Adams.)

Champagne stressed that Canada risked squandering that ecosystem if it did not act decisively to secure a strong electric vehicle supply chain.

Still, the $13-billion Volkswagen package, which includes tax credits to offset the estimated $7-billion cost of building the plant, as well as ongoing production credits for every vehicle produced, raises questions about how much other automakers received or will receive.

Both the federal and Ontario governments have been cagey about the amount of money they are prepared to stake to make Canada an EV manufacturing hub, arguing that some opaqueness is necessary to protect their bargaining positions.

“I understand the desire for some lack of transparency,” said Greig Mordue, chair in Advanced Manufacturing Policy at McMaster University, but added there needs to be a debate about how taxpayers funds are spent.

Although Champagne has long said that automakers are interested in Canada because it has critical minerals and cheap, clean electricity, Mordue expressed skepticism. For now, the country produces little in the way of critical minerals, and there’s no guarantee the miners won’t export them outside the country, he said. Mordue also noted that other automakers have built electric vehicle and battery plants in the U.S. — where the electrical grid remains coal- or natural gas-based.

Then there’s debate about corollary or side benefits of advanced manufacturing, including whether it actually spurs other research that enhances industrial development, which is inherently difficult to quantify.

Mordue contended that the most advanced industrial research generally occurs in close proximity to a company’s headquarters, not in an overseas manufacturing plant, suggesting Canada may not see all the benefits of having foreign automakers manufacture products here.

“There’s this mad stampede right now to do industrial policy,” but there needs to be an informed debate about it, he said.

• Email: gfriedman@postmedia.com | Twitter: GabeFriedz