Canada's EV Industrial Policy: Picking Losers And Building A Wall

So, Canada did it and joined the US EV Berlin Wall with 100%+ tariffs to supposedly protect Canada’s nascent EV industry. Welcome to the East Germany of EV manufacturing.

Canada’s grandiose plans for electric vehicle and battery production in Canada rest on about C$50 billion of central and local government money being thrown at a company that only produced its first battery in 2022 and is still a tiny new player (Northvolt), a car company that only recently produced its first battery (Volkeswagen), the troubled North American arm of Stellantis allied with the globally third placed battery manufacturer that is losing market share to the Chinese leaders (LG), and the deeply troubled Honda which has been late to the EV game.

The fundamental issue is that the vast majority of the growth in EV production, and therefore in EV battery production is taking place in China. Where non-Chinese manufacturers have hardly any market share, with the biggest foreign plater being LG with an abysmal 2.1% share; and that is in the nearly stagnant ternary battery segment as against the fast growing LFP segment. Outside China, production is hovering between slowing growth and stagnation. This means that non-Chinese manufacturers are locked out of the dominant and fastest growing EV market where competition is driving the greatest levels of efficiency and new product development; becoming the global losers. It is these losers, and worse, that Canada has decided to throw public money at in a deeply incompetent attempt at EV industrial policy.

A total of about C$7.5 billion of financing and subsidies for Swedish Northvolt, which only recently had its largest contract cancelled by its shareholder VW because it was so late in delivering, is massively loss-making, has only produced a pitiful number of EV batteries, and is now in a full-blown financial crisis as it cuts 20% of its workforce, massively scales back Swedish expansion plans, and closes its California office. The Montreal Northvolt plant was scheduled to open at the start of 2026, but the Quebec government has already stated that it may be delayed until well into 2027.

VW has only recently started to produce EV batteries itself, relying on suppliers such as the Chinese Gotion (which it holds a stake in) instead, but gets C$16.3 billion to build a battery plant in Ontario. Its not partnering with Gotion to do this, but with its extremely inexperienced wholly owned PowerCo group. A real recipe for success! To be opened supposedly in 2017. All the while VW has the prospect of losing the one third of its global sales that are made in China, due to its lack of competitive EV models. Its CFO has stated that it has “a year, maybe two to turn around”. In August 2024 its China sales fell 12% year over year, and that fall is set to accelerate as VW misses out on the rapid move of the Chinese market to EVs. VW recently restated its expected 2024 profit margins to 5.6% from a previous forecast of 6.5-7%, and is looking to make unprecedented cuts to its German workforce.

Then perhaps the team with the best chance of success, Stellantis and global third-placed EV battery producer (well behind CATL and BYD of China) LG from South Korea; with up to C$15 billion of government support. One problem is that the China market is the largest in the world (53% of the Chinese car market in August were EVs), and the fastest growing (nearly 40% y-o-y); an EV battery market that LG has a just over a 2% share of and no position in the leading LFP segment. The other is Stellantis US, which is experiencing serious problems and has become heavily dependent upon selling extremely large high-spec vehicles at increasing prices; now in cost-cutting mode as its sales dropped 21% in Q2 2024. The overall Stellantis (which includes Fiat and PSA Peugeot) expects to finish 2024 with a negative cash flow of 5-10 billion euros and reduced profit margins.

Then there is Honda, which will be taking about C$5 billion from Canadian governments to build EV and EV battery plants at its location in Alliston, Ontario. Honda, which has little if any experience of producing EV batteries itself will be partnering with two companies (South Korea’s Posco Chemicals and Japan’s chemical company Asahi Kasei) who also have little experience building EV battery plants. The other major problem is that Honda has been woefully behind in EVs, a position that is leading to the near complete loss of its sales in China that represented one third of its global sales in 2023 (Honda China sales were down 44.3% in August y-o-y to only 56,925). Honda’s global sales had already declined from 5.3 million in 2019 to 3.7 million in 2023, and may very well collapse to 2.4 million by the end of 2026; when Honda will be utterly dependent upon its protected home market (25%) and North America (55%+) for 80%+ of its sales. All ready for its new Canadian factories to be opening in 2028.

In addition, a battery materials plant to be built near Kingston, Ontario has been put on hold by Umicor. It was to receive up to C$1 billion of government largesse. Toyota has no plans yet to build an EVs or EV batteries in Canada. As with Honda, Toyota has lagged far behind with respect to EVs which will result in the probable loss of its sales in China and increasingly in the rest of Asia (excl. Japan), Oceania, MENA and Latin America. Toyota’s car sales in China were down 13% y-o-y in August, and set to fall further given its lack of any competitive EV model in China. Its biggest regional market by far will then be North America.

Global EV-battery market share in first seven months of 2024, with total production of 434.4 GWh (up 22% y-o-y, predominantly in China):

1. CATL (China) 37.6%

2. BYD (China) 16.4%

3. LG (South Korea) 12.4%

4. Sk On (South Korea) 4.7%

5. CALB (China) 4.7%

6. Samsung SDI (South Korea) 4.3%

7. Panasonic (Japan) 4.3%

8. Eve Energy (China) 2.6%

9. Gotion High Tech (China) 2.2%

10. Sunwoda (China) 2.1%

11. All other manufacturers (mostly Chinese) 8.9%

At the same time, Ford has delayed its plans to build EV’s at its Oakville plant until 2027; helped by C$580 million of government largesse. It is in full “reset” mode with respect to its EV plans. GM has delayed its plans to produce EV drive propulsion units at its St. Catherine’s plant, and recently handed US$10 billion to shareholders instead of investing money in EV production.

The Chinese EV market will most probably nearly double by the end of 2026, overwhelmingly with Chinese EVs, to which can be added rapidly increasing overseas sales in Asia, Oceania, MENA and Latin America. China EV-battery market share August 2024, with total production of 47.2GWh (up 35% y-o-y:

1. CATL (China) 44.46%

2. BYD (China) 24.96%

3. CALB (China) 7.34%

4. Gotion High Tech (China) 4.58%

5. Sunwoda (China) 3.35%

6. Eve Energy (China) 2.71%

7. Svolt Energy (China) 2.66%

8. LG (South Korea) 2.10%

9. Zenergy (China) 2.04%

10. Rept Battero Energy (China) 1.86%

With LG (and the other South Korean battery makers, and Panasonic, and of course VW and Northvolt) not benefitting from this huge increase in sales. The sales of the German, Japanese, South Korean and US car manufacturers are also collapsing in China, and have been significantly reduced in Asia, MENA and Latin America; very significantly damaging their financial health and ability to invest in new products. In addition, Geely-Volvo will be selling more and more EVs from its plants in Europe and the US, and other Chinese plants in Europe will be ramping up production. The Chinese EV manufacturers will dominate the world irrespective of North America’s 100% anti-China EV tariffs.

All the while, North America will have taken the slow road to EV adoption with nowhere near the intense competition within China. Little pressure to increase efficiency and drive technological improvements. The US producers will be stuck behind their EV Berlin Wall, along with the Japanese producers relying on just Japan and the US to stay alive. With the Germans relying on a Europe increasingly impacted by Chinese sales and the US to stay alive. With Hyundai/Kia dependent upon North America, Europe, India and South Korea. Any new Chinese plants in the US (not Canada), perhaps allowed under a Trump presidency, will then produce a market shock for those coddled producers. Just in time for those deeply subsidized Canadian EV-battery plants to supposedly come on line!

The Utterly Unqualified Politicians Involved

A reply to a comment made me think about the backgrounds of the people involved, François-Philippe Champagne (Minister of Innovation, Science and Industry), Melanie Joly (Minister of Foreign Affairs) and Justin Trudeau (PM). The first one has been the most directly involved, and is a lawyer who went Europe trotting for two decades as a senior counsel (i.e. corporate in house lawyer) and became nominated as a WEF Young Global Leader. Then he returned to Canada and took a Liberal seat in Quebec in 2015. After failing for two years as Foreign Minister he was moved to his current position. Even a puff piece from Politico points out his aggressive salesmanship and naivety in pushing these deals, a man too eager to please who industry players were happy to take advantage of. He is rumoured to be one of the two possible favourites to replace Justin Trudeau. He is the one on the left, the one on the right is the VW CEO who can’t believe what a deal he got! The chap at the back with the poker face is the head of VW’s battery unit.

Le Journal de Montreal

The Minister of Foreign Affairs, Melanie Joly, who succeeded Champagne, is another Quebec corporate lawyer (mentored by previous Liberal leader Jean Chretien) who gained a masters degree from Oxford and is also a WEF Young Global Leader and holds a Quebec Liberal seat since 2015. Absolutely no experience that is relevant to her role, a fact which can’t be hidden by this puff piece in McLean’s. Below on the right, now that’s a close working relationship with your Prime Minister.

McLean’s

Then there is Trudeau, the eldest son of legendary previous Liberal PM Pierre Trudeau who before becoming a Quebec MP in 2008 taught secondary school, dabbled in extending his education (engineering and the environmental geography), and enjoyed the fame and connections bestowed by being his father’s son . He became Liberal leader in 2013 (after the disastrous leaderships of Paul Martin, Stephan Dion and Michael Ignatieff that had reduced the Liberals to only 36 seats); chosen from a very small talent pool given that there were only 36 Liberal MPs. After winning a majority in 2015 due to the gross incompetence of the NDP leadership (with a leader who was only there because of the death of the previous greatly admired leader Jack Layton) combined with the desperate search of Canadians for a party to rid them of the hated Conservative leader Harper. His leadership was beset with broken promises (proportional representation, climate change, indigenous rights etc.), ethics violations (one leading to the resignation of the minister who had been Attorney General), a major increase in immigration which had not been part of the 2015 platform, and embarrassing gaffes (e.g. pictures of a younger Trudeau in brownface and blackface), together with increasing vassalage to the US; his approval ratings collapsed within 2 years of taking office. In 2019, he only gained a minority government position in alliance with the NDP while gaining less votes than the Conservative opposition. Another election called in 2021 resulted in another minority government, and less votes than the opposition. In the next election, that has to take place by October 2025, current polls point to a devastating defeat for the Liberals.

Ironically, the C$50 billion thrown at second and third-rate players in the global EV industry is a follow-on from the Canadian government’s investment in the Trans Mountain Pipeline; which may end up with a loss of C$20 billion. Sheer amateur night, with an accidental Liberal leader and PM benefitting from his father’s coattails and numerous lucky events (e.g. the 2000s collapse of the Liberal Party, the death of Jack Layton, the incompetence of the new NDP leader); aided by two lawyers with no real knowledge of high-tech manufacturing industry, let alone the EV business.

Compare these three to their counterparts even in rapidly industrializing Vietnam. The leader To Lam, the Foreign Minister Bùi Thanh Sơn, and the Minister of Industry and Trade Nguyễn Hồng Diên; decades and decades of governmental managerial experience and related education. The same for South Korea, South East Asia and of course China.