Honda Motor Co. Ltd.’s announcement last week that it’s building a $15-billion “vertically integrated” electric-vehicle and battery-cell manufacturing complex in Ontario has opened a new chapter in the country’s industrial strategy for the energy transition.

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Previously, Canada had attracted European companies to build battery cell plants here by matching the production tax credits offered in the United States through the Inflation Reduction Act (IRA).

But the federal government has turned the page by introducing a new 10 per cent tax credit for any company that invests across the electric-vehicle supply chain, including the often-ignored midstream segment of active cathode material production. That comes on top of a proposed 30 per cent tax credit on the cost of machinery and equipment needed for the plants.

The two tax credits for Honda are expected to amount to $2.5 billion in federal support, and Ontario Premier Doug Ford said his province has also agreed to provide $2.5 billion in direct and indirect support.

The combined $5 billion may fall short of what production tax credits under the IRA can offer, but Jean Marc Leclerc, chief executive of Honda Canada Inc., said it’s a compelling package.

“What needs to be said about an investment tax credit is it’s guaranteed,” he said. “What we have here is something we can actually count on.”

In contrast, he noted that Volkswagen AG and Stellantis NV had both reached deals with the federal government for production tax credits that are based on the number of batteries produced. But the value of those credits will be determined by the pace of construction and when the batteries are produced. The output rate from those factories will be determined by the price of batteries.

“What was offered to Volkswagen and Stellantis is based on their output,” Leclerc said. “It’s also based on the IRA continuing, and my understanding is that if it doesn’t continue, that support is gone.”

LeClerc said there were other issues that made Canada a compelling investment case for Honda’s top executives in Tokyo, and not just the country’s clean electricity and skilled labour force often touted by politicians.

He said the investment is akin to “marrying the country for decades,” adding there were certain intangibles that helped make the difference.

“Having governments that have objectives, whether it be climate change or the transition to clean energy being a priority, if you have alignment with the government on those objectives, and an open line of communication with government … that also resonates really well with our executive team in Japan,” he said.

The announcement was also well-received by those critics who had argued that Canada’s previous policy focused too much on the downstream segment of the battery supply chain, such as battery cell manufacturing.

For example, Bentley Allan, an associate professor of political science at Johns Hopkins University and a co-coordinator at the Centre for Net-Zero Industrial Policy, which researches Canada’s industrial policy, praised the new tax incentives for their focus on the midstream of the battery supply chain.

He said China alone has built out enough battery cell manufacturing capacity to satisfy global demand until 2030. As a result, battery cell manufacturing is likely to be oversupplied in the coming years, which will result in downward pressure on prices and erode margins.

“If you have, like Canada does, a bunch of metal, and the ability to process that metal into cathode, then you’re controlling a piece of the supply chain, and that’s where all the value is,” Allan said. “It’s critical that Canada build out the midstream and upstream because that will fuel innovation and that’s where we can compete if we really focus on it.”

Honda agreed to do just that, saying it will build a cathode active material plant, which is one of the most valuable components in a battery and a separator plant. The separator is the membrane that separates the positively charged anode from the negatively charged cathode.

The other advantage of the federal government’s proposed 10 per cent tax credit on buildings for the electric-vehicle supply chain — introduced in the 2024 budget earlier this month — is that it could entice other automakers already in Canada investment further in their supply chain here.

For example, General Motors Co. already has an EV assembly plant in Ingersoll, Ont., and is constructing a cathode active material plant in Bécanour, Que. If it constructed a battery cell manufacturing plant, too, even with a joint-venture partner, it could be eligible for a 10 per cent tax credit on all three projects.

Still, the policy is not without critics.

Together, the tax credits and other financial incentives from the province are expected to total $5 billion, and Honda said the new project will create 1,000 additional jobs.

At Honda’s announcement, Prime Minister Justin Trudeau and Doug Ford said that building out the battery supply chain will have ripple consequences that will spread throughout the economy.

Ontario Economic Development Minister Vic Fedeli on Friday said the investment will create 1,000 new jobs in Alliston, in addition to the existing 4,200 jobs. He added that there will be “significant” jobs at the two midstream plants, though the location and exact numbers haven’t been disclosed yet.

Auto vehicle manufacturing workers earn on average $1,823 per week, as of February, which amounts to more than $94,000 over a 52-week period, according to Statistics Canada.

Autos are among Canada’s largest exports, accounting for between eight per cent and 12 per cent of total exports between 2020 and 2022, according to the Canadian Vehicle Manufacturers’ Association and Statistics Canada.

The country also has a large auto-parts industry, which stands to benefit from a revived industry.

“For us, it’s always a new opportunity as the industry shifts from (internal combustion) engines,” said David Yeaman, president and co-founder of Molded Precision Components (MPC) in Shanty Bay, Ont. “We’ve been picking up a lot of new work as a result of EVs.”

MPC specializes in moulded plastics, and Yeaman said his company began researching ways to address the EV battery fires several years ago after reading about the issue. He said it devised an ”intumescent polymer” that it now sells around the globe, which can be used to separate battery cells and prevent “thermal propagation” — or fire — from spreading between cells in a battery.

But Yeaman also noted the industry is in transition.

“If you’re making a part that’s in a traditional transmission, then, yeah, your business is going to shift,” he said.

Speaking at the press conference with Honda, Trudeau doubled down on his government’s choices so far.

“Over the past number of years, we’ve made deliberate choices to build up the EV and clean manufacturing ecosystem,” he said, adding “We’re making choices to invest to draw in these important companies that will create jobs not just for now, or for the next few years but for coming generations.”

Ford added: “I look at this as a long-term investment.”

• Email: gfriedman@postmedia.com