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German auto giant Volkswagen on Monday announced that it has chosen St. Thomas, Ont., as the site for its first battery factory outside Europe.Benoit Tessier/Reuters

Canada’s effort to position itself as a major player in electric-vehicle manufacturing, and to prove that it can compete with massive new U.S. subsidies for automakers, has received a major boost from Volkswagen Group.

The German auto giant on Monday announced that it has chosen St. Thomas, Ont., as the site for its first battery factory outside Europe, after considering locations in both Canada and the United States.

Details of the planned investment, including the dollar amount and production capacity, were not provided and are expected in the coming weeks. But federal Industry Minister François-Philippe Champagne pointed to Volkswagen’s description of the facility as a “gigafactory” – a term that is meant to indicate massive scale – to describe it as “probably the largest single investment in the auto sector in Canada’s history.”

He and others also highlighted that Volkswagen will be the first European automaker to set up major manufacturing operations in Canada, sending a signal about the country’s ability to leverage access to the growing U.S. and Canadian EV markets to not just maintain but also expand its auto sector during the transition away from gas-fuelled vehicles.

Neither Mr. Champagne nor Ontario Economic Development Minister Vic Fedeli would disclose how much money their governments have put on the table for the project, citing commercial sensitivity.

While they are believed to have committed roughly $1-billion combined for the other major EV battery-assembly investment in Canada to date – by Stellantis NV and LG Energy Solution in Windsor, Ont., – industry insiders have speculated that more would be needed to land new commitments given that the United States is now offering greater subsidies through its Inflation Reduction Act production tax credits.

But both ministers also cited other factors – including labour-force advantages, a relatively large supply of clean electricity, and access to key minerals used in EV batteries – as factors that worked in Canada’s competitive favour despite being unable to win a subsidy battle.

As for the specific choice of St. Thomas, near the larger city of London and its population of 400,000, Mr. Fedeli pointed to its geographic position close to other auto-making sites in Ontario’s traditional manufacturing belt. He also trumpeted his government’s decision, prior to Volkswagen negotiations, to designate a 1,500-acre swath of land there for this sort of industrial development.

As well, other possible destinations such as Windsor have already reached their capacity to support such projects because of recent EV-related commitments by other manufacturers. The work force in St. Thomas, which has struggled to replace hundreds of jobs lost when its Ford assembly plant closed more than a decade ago, is not stretched as thin.

The hope among Canadian policy makers, though, is that Volkswagen’s commitment will have spillover effects across Ontario and beyond.

That includes significantly bolstering Canadian claims to be able to establish a full EV supply chain, by helping accelerate plans to mine and refine critical minerals that have been slow to take shape.

It also stands to create opportunities for smaller domestic manufacturers, such as parts suppliers, some of which may need to transition from making components of gasoline-fuelled internal combustion engines in order to survive.

Symbolically, the decision carries extra weight because it involves an automaker with limited manufacturing roots in Canada.

A flurry of recent EV-making commitments has mostly involved companies – such as General Motors, Ford Motor Co. and Stellantis – that have long histories of making gas-fuelled cars in Ontario effectively opting to stay through the transition to electrification.

Volkswagen will be the first since the 1980s to set up new assembly operations there.

And it will do so in service of aggressive and somewhat unique efforts to get to the front of the EV-making pack.

Most other North American or European automakers have launched joint ventures with Asian battery makers to supply their new lines of EVs – such as Stellantis partnering with South Korea’s LG for the battery factory being built in Windsor.

Volkswagen has instead launched its own in-house battery division, called PowerCo, which to date has been developing a pair of large assembly plants in Germany and Spain.

The company has previously indicated that it intends to build six European battery factories in total. But more recently it has signalled that it is prioritizing its first North American one – largely because the Inflation Reduction Act in the U.S. is poised to boost EV sales on this continent, through generous purchase subsidies for which vehicles made overseas are partly ineligible.

Canada offers access to the American market, without penalty for components made outside the U.S., after Canadian governments and industry successfully lobbied Washington to make the purchase-subsidy content requirements North American rather than just American.

That’s separate from the production subsidies, which were still seen to give U.S. locations a possible edge, even after Volkswagen executives publicly indicated last year that they were leaning toward Canada.

How Canadian officials overcame that disadvantage, including what share of the factory’s capital costs they committed to covering, may become clearer as details of the deal emerge.

With a report from Laura Stone in Toronto

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