Why Honda’s deal to manufacture electric vehicles and batteries is different

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A few minutes after the announcement of the single biggest automotive investment ever in Canada, standing on the floor of an assembly plant at the heart of what will soon be his company’s electric-vehicle hub for North America, the president and chief executive officer of Honda Motor Co. HNDAF addressed an obvious question that went unanswered during the event itself.

To this point, Honda had moved more slowly than most its competitors in shifting toward EV production. So why dramatically ramp up now – in the form of a $15-billion commitment to make EVs, their batteries and battery components in Ontario – even as slowing demand growth for the vehicles contributes to other automakers dialling back their rollout plans?

One reason, Toshihiro Mibe told The Globe and Mail in an interview through an interpreter, is that the plan is only to start producing EVs in Ontario starting in 2028 – by which point, he believes, demand will be more robust.

The other, more telling part of his response was about keeping the current bumps in perspective.

“When we look into the mid-range or long-term viewpoint, there is always a wave pattern in market movement,” Mr. Mibe said. “In the long view, we’re quite sure that the EV market will grow.”

It was the sort of answer that many auto executives might have given to defend risky plans. But coming from the head of this particular company, it carried particular weight at a moment when many critics outside the industry are questioning whether the EV transition is for real – and whether Canada, with the many billions of dollars in subsidies it has used to land manufacturing investments, should be pinning so much of its industrial future to it.

Along with the Toyota Motor Corp. TOYOF, the other Japanese auto giant, Honda is known for being less inclined than North American or European companies to jump on the latest trend. And as those two companies have hedged their bets – leaning more on hybrid vehicles as a half-step toward electrification, holding onto the possibility of hydrogen fuel cells as an alternative way of getting vehicles beyond gasoline – they’ve been held up by skeptics as evidence that EVs might never achieve the market takeover that climate-concerned governments are counting on.

So investment decisions such as the one announced this week, which qualify as a major EV embrace after unusual due diligence, suggest that the debate about the vehicles of the future is all but settled.

Canada’s oddly specific EV credits for Honda amounts to poor industrial policy

And because of the nature of the deal with the federal and Ontario governments that Honda’s approach led it toward, the same now goes for the matter of how seriously global automakers take Canada’s ambitions of building a start-to-finish supply chain for their EV scale-ups.

That question had already been answered, to some extent, by commitments from Stellantis NV and the Volkswagen Group to build massive battery factories in the Ontario cities of Windsor and St. Thomas, respectively.

But those investments came with such massive financial supports from governments to match what the companies would have gotten from production tax credits in the United States – up to $15-billion in the early years of the Stellantis plant’s operations, and up to $13.2-billion for Volkswagen’s – that they sparked concerns that Canadians might just wind up oversubsidizing branch plants that have limited value added for this country.

Honda’s commitment is very different, for a couple of reasons.

The first is that it involves four projects, rather than just one.

The battery factory and the EV assembly plant with capacity to make 240,000 vehicles annually, both of which will be at the existing Honda campus in Alliston that until now has made cars with internal combustion engines, were the biggest headline grabbers.

But plans for facilities elsewhere in Ontario to produce cathodes and separators (in partnership with Posco Future M Co. Ltd. and Asahi Kasei Corp., respectively) are key, because those battery materials go higher up the supply chain, where there’s more chance for Canada to develop competitive advantage because of its reserves of minerals that go into them.

The second reason is that the subsidies for Honda from Canadian governments are much, much lower. At approximately $5-billion, they could be less than half of what Stellantis and Volkswagen will get, despite the total Honda investment being more than double the size. Rather than matching the U.S. incentives, Ottawa is giving access to investment tax credits projected to be worth about $2.5-billion, with Ontario’s government providing up to another $2.5-billion.

Asked why he was willing to accept less government backing than his competitors, Mr. Mibe was somewhat circumspect.

“If they are willing to give us more subsidies, we always welcome it,” he said. But the main draw to Canada for EV-making, he said, is the country’s access to natural resources, its relatively clean electricity supply to power the facilities and a skilled labour force with which the company has built a strong relationship since it put down roots in Alliston in the 1980s.

There are additional explanations floating around government and industry for the apparent willingness to leave government money, which would have been available in the U.S., on the table.

One is that, while the U.S. certainly would have offered more public dollars in total, the discrepancy between the two countries for an investment with these multiple components is not as big as it would have been just for a battery factory, because Washington does not subsidize EV assembly or battery materials as excessively.

Another is political uncertainty in the U.S., given the possibility of Donald Trump winning this year’s presidential election and scrapping the subsidies while generally destabilizing the investment climate. In Canada, the partnership between the Liberal federal government and the Progressive Conservative one in Ontario has given a sense of cross-partisan consensus. And while the federal Conservatives have criticized aspects of the EV-making subsidies to date, most recently by calling for stronger conditions to limit the use of foreign workers to build factories, they have not said they would scrap the deals.

But an overarching theme, among Canada’s negotiators of this deal, is that the same corporate culture that caused Honda to move more cautiously entering the EV space also leads it to place more value on long-term fit than on near-term incentives, relative to competitors.

“They operate on their own timeline,” said federal Industry Minister François-Philippe Champagne in an interview, recalling that he was told to be patient when he pitched Honda chairman Seiji Kuraishi on EV investment back in 2022. “It took them probably two years to build their business case. But when they do it, they do it for a hundred years.”

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The more subsidized battery-plant commitments by Stellantis and Volkswagen, in the meanwhile, might have helped convince Honda’s leadership. As Mr. Champagne said, “one investment leads to another,” as an ecosystem takes shape.

The hope, in Ottawa and at Queen’s Park, will be that Honda’s investment – predicated on the long-term benefits of a Canadian EV base outweighing the short-term subsidy loss – will be strongest such signal yet. And there are certainly other companies that could follow its lead, with Toyota – the only automaker with an established Ontario manufacturing presence yet to make an EV commitment here – the most obvious possibility.

Not that Canada is in position, even now, to declare victory on the full supply chain it has promised – especially when it comes to capitalizing on the mineral reserves that have helped lure manufacturing.

Commitments such as Honda’s certainly help build the business case for battery-materials mining and refining. In fact, Mr. Mibe hinted that his company is interested in putting additional money into that side of things, saying that he “recognize[s] the need for further investment in Canada to reach our vision for the natural-resources value chain.”

Still, governments will need to improve their track record to date on permitting, infrastructure and other obstacles to make that real.

There are no guarantees on that front, nor that all else will go smoothly during the EV scale-up – domestically or internationally – in the years ahead.

That includes everything from the build-out of charging infrastructure to enable consumer confidence, to major investments in the electrical grid to ensure that the clean-power advantage that helped draw Honda isn’t ceded.

But there could hardly have been a stronger vote of confidence, in the fundamentals adding up, than the one delivered this week.