European automaker Stellantis AG has announced it will immediately halt construction on the $5 billion electric vehicle battery plant it is building in Windsor, Ontario — weeks after news leaked the federal government had offered a rich subsidy package to Volkswagen AG to build a battery plant in the province that could reach $13 billion by the end of a decade.

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A federal government official, who was not authorized to speak publicly, said the Stellantis project was “paused” as negotiations over the level of financial subsidies escalate.

What they’re saying

Stellantis announced the battery plant last March as a joint venture with South Korea’s LG Energy Solution. Now it’s saying the federal government has not lived up to its end of the bargain in terms of providing support to build the plant, but it did not disclose any details.

“As of today, the Canadian government has not delivered on what was agreed to therefore Stellantis and LG Energy Solution will begin implementing their contingency plans,” the company said in a statement.

A federal government official, who was not authorized to speak publicly, said the two parties already reached an agreement about the capital incentives to offset the cost of construction of the battery plant. But negotiations are now stuck on the level of subsidies for operating expenses.

The federal government said it is still in negotiations, and has consistently declined to answer questions about what types of subsidies it is providing to automakers and battery companies to build plants here.

Why it matters

The factory carries a $5-billion price tag, encompasses enough space to fit 114 hockey rinks and is expected to create 2,500 jobs. The federal government along with members of the Canadian auto industry have hailed the plant as a symbol of the revitalization of the sector in the electric vehicle era, under which the battery will replace the engine as the single most valuable component.

The 180 perspective

Critics said Canada erred in trying to compete with the U.S. Inflation Reduction Act that contains incentives to encourage an electric vehicle supply chain that some private estimates say could reach hundreds of billions of dollars by 2030.

“You can put me in the skeptical camp,” said Greig Mordue, chair in advanced manufacturing policy at McMaster University, and formerly the general manager of Toyota Motor Manufacturing Canada, where he worked on strategy and external affairs.

Mordue said a key difference is that many automakers are headquartered in the U.S. and companies tend to conduct critical research in proximity to their headquarters. As a result, the U.S. is likely to receive more benefits from shoring up its auto sector than would Canada, which he said is unlikely to receive the same add-on benefits.

On the Financial Post’s Down to Business podcast earlier this month, he sharply criticized the Volkswagen AG deal as too rich and  predicted that Stellantis would demand a similar level of support.

What happens next

Industry Minister Francois-Phillipe Champagne has spent the past year announcing deals with automakers and chemical companies to build out the country’s battery and electric vehicle supply chain. Europe’s Umicore has also started building a battery plant in Kingston while other companies are building battery cathode plants in Quebec and electric vehicle assembly plants in Ontario. Industry members are watching closely to see if any other companies pull the plug on the projects over federal government support.

It is also unclear if Stellantis/LG can resolve their differences with the federal government and reach a mutually agreed upon level of support.

Mordue said the fact that the plant is already under construction does not mean that Stellantis is too far down the road to back out.

“The real costs comes when machinery and equipment starts to be installed,” he said. “Windsor’s LG-Stellantis plant had not yet reached that stage. That means Stellantis has quite likely determined that it is more advantageous for them to walk away from the few hundred million dollars they have poured into Windsor in favour of incentives worth several billion dollars in the U.S.”

Broader considerations

The episode could affect efforts to revive industrial policy in Canada — a catchall term that loosely refers to government strategies to support specific economic sectors. Such policy has been enjoying a resurgence of attention after the pandemic demonstrated the risks of pushing manufacturing far from home.

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