Here’s how Canada locked down Volkswagen’s first overseas EV battery plant

The $14-billion deal that will see Volkswagen, the world’s largest automaker, set up a manufacturing presence in Canada for the first time in history, took a year of negotiations on both sides of the Atlantic Ocean.

But the talks that led Volkswagen to choose southwestern Ontario for the location of its first battery plant outside Europe all started with a whim.

Out of the blue in early 2022, Industry Minister Francois-Philippe Champagne decided he should call the company’s then-North American CEO, Scott Keogh. His staff dug up the number.

Champagne said in an interview with The Canadian Press that he’d never met Keogh before, but he got him on the phone on St. Patrick’s Day last year.

“I introduced myself, and I said, ‘Listen, here I am, Minister Champagne from Canada. I would like to start a discussion.”’

Volkswagen has sold cars in Canada for decades, but it has never made them here. Still, like other large automakers, it is making the transition to produce electric vehicles. And producing the batteries that power them requires a solid supply chain.

Canada is in the midst of a massive push to corner at least some of that industry for itself, with enthusiastic buy-in from provincial and municipal governments.

Champagne, who is well known for his boundless energy, seems to have taken that on as his personal mission. Even Ontario Premier Doug Ford was referring to the minister as the “energizer bunny” by the time the deal was done.

When he called Keogh, Champagne was getting ready to announce Canada’s first-ever gigafactory, a joint venture by LG and Stellantis in Windsor, Ont.

Canada also had electric-vehicle manufacturing deals announced or in the works with Ford, General Motors, Honda and Toyota.

But, as always, Europe’s car manufacturers were proving elusive.

“We have never really had strong relationships with the European automakers,” said Champagne. “So when I saw that there was this big generational shift toward electric vehicles ? I said, ‘There must be a fit.”’

In 2021, Volkswagen had announced its intention to build six battery plants by the end of the decade. Last July, it launched a new company, PowerCo, to run them.

The first, in Salzgitter, Germany, is set to open in 2025. The second will be in Valencia, Spain.

It was in early 2022 that Volkswagen was beginning to consider where it might locate a battery plant to service its North American manufacturing sites. Champagne’s perfectly timed call led to a meeting being scheduled in Toronto just over a month later, in late April.

Keogh invited the entire board of directors of Volkswagen’s North American arm to join him, and Ontario’s Economic Development Minister Vic Fedeli would be in the room to help make the first pitch.

But Champagne said he thinks the first glimmer of a potential partnership came a few hours before, when he chased down Volkswagen’s chief procurement officer after seeing him on the street.

“He was a bit flabbergasted,” Champagne said, chuckling that the man couldn’t believe someone had recognized him.

“I said, ‘I just want to welcome you in Canada.’ And I think from that moment, there was kind of a spark that was created.”

The meeting was considered to be a great success.

“You could see the Volkswagen team being drawn into the Ontario story,” Fedeli said April 21 when the details of the deal were announced.

Within two weeks of that meeting in Toronto, Champagne was in Germany, meeting with the company’s big leaders. Another two weeks after that, he made the pitch again on the sidelines of the annual World Economic Forum meeting in Switzerland.

In August, with Prime Minister Justin Trudeau and German Chancellor Olaf Scholz looking over their shoulders, Champagne and Herbert Diess, who was then the CEO of Volkswagen AG, signed an agreement in Toronto to co-operate on making electric-vehicle batteries and their components.

But with nothing yet set in stone, Fedeli and Champagne each travelled to Germany before the end of the year to keep making Canada’s case, and a European team from Volkswagen visited London, Ont., in November.

By December, when Champagne met with new Volkswagen CEO Oliver Blume, the executive made it clear that Canada was at least on the company’s shortlist. They signed an addendum to the August agreement confirming the search for a suitable site for a Canadian plant would begin.

Even so, the company held its cards close to the chest. Fedeli said that while Volkswagen told them there was fierce competition, it was never clear who Canada was competing against. They were “the nicest we’ve ever met” but also “the hardest negotiators ever,” he said.

Amid that uncertainty, the Canadian ministers had a big question to answer: If Volkswagen was going to build a plant in Canada, where would it go?

Enter St. Thomas, Ont.

The city of fewer than 40,000 people, located about a 30-minute drive south of London, is in the heartland of Ontario’s auto belt. More than eight million vehicles rolled off the assembly line of a Ford plant in St. Thomas between 1967 and its closure in 2011.

Mayor Joe Preston, a former Conservative member of Parliament, said his city began working on an industrial expansion strategy long before its gigawatt-sized dreams featured a flashing, neon VW sign.

In 2019, the year after Preston was elected to the role and the year after Ford began serving as premier, Ontario included St. Thomas in what Fedeli called a “job-site challenge.”

The initiative was meant to create an inventory of industrial sites the government could bring to domestic and international manufacturing companies that needed a large swath of land to build on.

St. Thomas began putting together a new industrial park in its northeast corner, buying two large of tracts of land and working to get the area serviced with everything a new tenant would need: water, electricity, wastewater and even access to a functional rail line.

The city was almost ready when Volkswagen came knocking.

But to make that happen, Preston said, some of the work needed to happen on the sly.

When talks began, he wasn’t even told which company he was dealing with. Scouts swanned into town but declined to say who their client was.

“They didn’t even want us to know it was Volkswagen for the longest time,” said the mayor. “They wanted to finish their due diligence on the site before we talked about it. And so between us and the provincial government, we were almost talking in code about what we’re working on.”

The city had abundant clean electricity and a trained workforce to offer. Job candidates would have skills in auto manufacturing and high-tech.

It also had Wendy’s.

Preston is the owner of a local franchise of the fast-food chain, where negotiators would dine on fries and double-patty cheeseburgers called Baconators.

Just as Champagne pointed to his accosting of an executive on a Toronto sidewalk as a key moment, Fedeli joked _ during the public announcement of the deal _ that another was getting PowerCo’s chief operating officer, Sebastian Wolf, hooked on Wendy’s.

“We broke a lot of bread together over the last year,” Fedeli said.

In a written response to questions, PowerCo CEO Frank Blome gave a tongue-in-cheek nod to the minister’s Wendy’s joke. “We deny this strongly,” he said, adding a smiling face emoji.

But he made clear the real negotiations did not actually take place in a fast-food joint.

“Negotiations on such comprehensive investment contracts are highly confidential and would not be conducted in public places,” he said. “And yes, some members of our team, including myself, love burgers!”

The most intense work came in January and February, as Volkswagen’s team and officials from all levels of government pored over the details.

Wolf and his team set up an office in Ontario’s investment and trade office in downtown Toronto and made countless trips back and forth down Highway 401 to St. Thomas, where Preston was ready to accommodate their every need.

But even at that point in the process, Fedeli said, the auto company remained coy. Executives made it clear they were having the same conversations with teams in other jurisdictions. They never said where.

Between mid-December and late February, the premier hosted officials at his Queen’s Park office.

It was the final Feb. 23 meeting when Ford seemed to sense that things were coming to a head, and laid it all out on the line.

“This is the right place for you to be,” Fedeli recalled Ford telling Volkswagen executives that day. “This is a place you’ll be able to call home for a hundred years.”

A little over two weeks later, on March 13, days before the anniversary of Champagne’s first entreaties to the company, Fedeli said he was sitting alone in his office. The phone rang. It was Volkswagen.

He told the premier first. Then his wife. Later, he spoke to Preston.

“Minister Fedeli gave me a call and said ‘Mayor, you know how you’re always saying yes?”’ Preston recalled. “’Well, somebody else did today, too.’ And I haven’t stopped smiling since.”

The decision was made public later that same day, and the formal announcement came on April 21 in St. Thomas.

The plan hadn’t come together without controversy.

Just 11 days before Volkswagen publicly announced that St. Thomas was its choice, the province passed legislation to annex part of the site from the Municipality of Central Elgin, so that the entire 1,500 acres would be located in St. Thomas alone.

Fedeli said the province redrew the boundary to help avoid bureaucratic duplication during the building process.

Central Elgin was disappointed, some residents said they were never consulted and nearby farmers have said they fear the impact of big industry taking over agricultural land.

It’s hard to overstate just how prominent Volkswagen is set to become in the immediate region.

The company aims to build a gigafactory that will be twice the size of those planned in Germany and Spain. Planned to begin operating in 2027, the plant is expected to be able to make enough batteries for up to one million electric vehicles every year.

The plant itself is going to be so big that the front door will be located 1.6 km from the end of the parking lot. It could directly employ up to 3,000 people, and Volkswagen intends to make batteries there for decades to come.

The spinoff jobs at companies expected to source the supplies this plant needs could number close to 30,000.

The deal includes $700 million in up front capital cash from the federal government, $500 million from Ontario and a unique agreement that will see Canada subsidize the cost of every battery that is produced, to the tune of between $8 billion and $13 billion over a decade.

Those subsidies were created to keep Canada in line with the United States, which added production subsidies for batteries in its Inflation Reduction Act in August _ and where jurisdictions were also competing for the Volkswagen plant.

If that law is ever to be torn up or adjusted downward, the Canadian subsidies for Volkswagen will likewise go down or disappear, as written into the deal.

“Our investment strategy is based on a long-term partnership,” said Blome. “If the competitive environment changes with the IRA in the U.S., it is only fair to be reflected in our agreement with Canada.”

Blome said Canada had to offer subsidies to be considered.

The size of the investment by Canada, described as a “bespoke” deal, is not without potential consequences beyond its effect on the public purse.

On Friday, LG and Stellantis said Ottawa has not lived up to its side of the deal for the battery plant in Windsor, Ont., and they are making contingency plans. All levels of government were to provide financial support in the pending deal, but the size of that commitment has not been made public. The federal government says negotiations are ongoing.

Blome said Volkswagen’s final choice came down to more than subsidies.

Ontario’s mostly emissions-free electricity supply, the infrastructure available and the location of the St. Thomas site, the clear commitment of the municipality and the quality of life in the area and even Canada’s public health-care system were all factors in the decision.

“We would have gotten subsidies at other locations too, so yes, it needs more than that,” he said.

Source link