Northvolt’s struggles a cautionary tale for Canada’s risky industrial policy

Come one, come all! A new era of industrial policy has emerged in Canada!

Governments across the country have called for a nationwide transition to electric vehicles, and they’re willing to spend big bucks to make it happen. In fact, the federal government has mandated that all vehicles sold by 2035 be zero emission.

With chequebooks open, politicians have been generously doling out billions of dollars of taxpayer money to entice electric vehicle manufacturers to set up shop in Canada. So far, Canadian governments have pledged up to $52.5 billion in order to subsidize this domestic supply chain, according to the Parliamentary Budget Officer.

Among the main beneficiaries is Northvolt, a Swedish-based electric vehicle battery manufacturer, which received $7 billion in public funds. In exchange, an area near Sainte-Basile-le-Grand and McMasterville will be the site of a brand new multi-billion-dollar electric vehicle battery plant.

In their press releases, politicians were trumpeting this as a turning point for Quebec’s economy.

But less than a year after the deal was inked, it appears that the honeymoon phase is coming to an end, as Northvolt is facing severe financial difficulties.

Sluggish demand for electric vehicles, especially in Europe, has compelled Northvolt to close down one of its sites and lay off 1,600 employees. Amid the need to cut costs, the company also announced plans to restrict its activities to the manufacture of battery cells.

BMW, unable to procure the parts needed from the company, cancelled a $2-billion order in June.

Worries began circulating that this would impact the Montreal-area plant, but the company has reassured policymakers that, notwithstanding changes to the timeline, it will uphold its commitments.

Such assurances have not been able to calm the concerns in Quebec City, however. Last week, the provincial government began publicly discussing the prospect of cancelling Northvolt’s energy supply if it continues to drag its feet on plant construction beyond a certain deadline.

Despite what the company has said, changes are undoubtedly already underway. What was originally planned for production in Quebec is now at risk due to strategic decisions we see playing out in Sweden.

For one thing, Northvolt has ceased its cathode-related activities in Sweden—one of the operations also intended for Quebec.

So, how did we get here? Why are Canadians now caught up in the business volatility of foreign corporations?

The answer: bad industrial policy.

Industrial policy refers to government actions aimed at promoting and supporting specific industries or sectors within the economy. These include intervening in manufacturing with the goal of achieving specific economic outcomes, such as creating jobs, boosting exports, or encouraging innovation.

Subsidies are just one tool. Thus, with government trying to spur demand for electric cars, a sizeable bet on electric vehicle production is combined with a zero-emission mandate.

Unfortunately, there doesn’t seem to be widespread consensus that industrial policy works, despite the billions we’re throwing at it. The evidence regarding the effectiveness of demand-side instruments is also scanty.

Which brings us back to the question of why Canadians are now worried about the financial well-being of this Swedish-based manufacturer.

The answer is that governments, somehow believing they are good at picking winners on the market, have tied taxpayer dollars to Northvolt’s fate. Subsidies like these force taxpayers to assume the risk for a private venture.

This comes at a time when Canadians are growing increasingly skeptical of government spending.

According to an MEI-Ipsos poll conducted on July, 63 percent of Canadians believe the federal government spends too much. On the question of government stewardship of those funds, 70 percent find that Ottawa does not manage its money well.

Subsidies to electric vehicle companies will amount to nearly $6 billion per year. This is double the additional revenue gained from the new tax bracket the Trudeau government introduced in 2016, which amounted to $2.88 billion this year.

This is money that would be better spent by Canadians; if they have an appetite to gamble, let it be their choice.

Moreover, the MEI found that had this extra tax bracket never been introduced, and had these billions remained in Canadians’ pockets, some 9,820 Canadian companies could have been launched between 2016 and 2020.

Whether or not Northvolt manages to follow through on its commitments, this entire saga reveals the fundamental flaw of subsidies.

Governments are not equipped to predict which industries will succeed, and when they try to do so, it is taxpayers who are left holding the bag.

Subsidies don’t guarantee market success; they distort the market, shielding corporations from the risks they ought to bear. Meanwhile, taxpayers shoulder all the downsides when things go awry, as we may well learn the hard way once again with Northvolt.

Daniel Dufort is President and CEO of the MEI. The views reflected in this opinion piece are his own.