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(Bloomberg) — Canada is on the verge of an agreement with Honda Motor Co. that would see the Japanese firm build electric vehicles and their components in the province of Ontario, according to people familiar with the matter.

The deal, expected to be announced within a week, involves a multibillion-dollar commitment by Honda for new facilities to process cathode active materials, build batteries, and assemble battery-powered vehicles — making southern Ontario a key hub of company’s EV manufacturing plans in North America. The Canadian government would subsidize a portion of the capital cost. 

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Honda has a manufacturing plant in Alliston, Ontario, about an hour’s drive north of Toronto, where it puts together Honda CR-V and Civic models. The company makes hybrid vehicles at factories in Ohio and Indiana, according to its website, and it plans to start manufacturing its first US-made fully electric vehicles in Marysville, Ohio next year. 

The Honda investment comes at an anxious moment for the auto sector, with consumer adoption of electric vehicles playing out slowly in some regions because of high prices and a shortage of charging stations. Tesla Inc. is cutting more than 10% of its global workforce, Chinese producer BYD Co. reported a sharp drop in deliveries of electric vehicles in the first quarter, and other automakers have delayed EV investments. 

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Still, manufacturers are making long-term bets. Last month, Honda and Nissan Motor Co. announced a plan to collaborate on technology for battery-based electric vehicles, including software, as they seek to keep up with Chinese rivals. 

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The negotiations between Honda and Prime Minister Justin Trudeau’s government have taken many months and centered on investment tax credits, or ITCs, as the means by which the government will help pay for the capital costs of the factories. It will differ from the agreements Canada struck last year with Volkswagen AG, Chrysler parent Stellantis NV and Sweden’s Northvolt AB, the people said; those companies were offered billions of dollars over a period of years to subsidize battery production. 

Trudeau’s government will tout the Honda deal as a success story directly related to those contracts, one government official said. Those agreements created an ecosystem around Canada’s EV supply chain, attracting other auto firms and allowing the government to transition to its own system of tax incentives, officials within the Trudeau administration will say.

In this case, the primary incentive, called the clean technology manufacturing ITC, provides a refundable tax credit for 30% of equipment costs. Finance Minister Chrystia Freeland’s budget last week also introduced a new tax credit that would apply to 10% of the cost of buildings used for electric vehicle manufacturing — if a company has significant portions of its EV supply chain within Canada.

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Freeland was closely involved in the Honda negotiations and the new EV tax credit was specifically geared to landing the Japanese firm, according to people familiar with the discussions, though other EV companies will also qualify if they build enough of their supply chain in Canada.

The Honda deal doesn’t include ongoing production subsidies of the type received by Volkswagen and Stellantis, according to people who spoke with Bloomberg about it. They declined to divulge the total estimated cost of government support.

Earlier this year, the Japanese news outlet Nikkei reported that Honda was considering a $14 billion investment in Canada, but hadn’t made a decision yet. A spokesperson for Honda in Canada did not reply to a request for comment Sunday.  

Trudeau’s government has argued that large taxpayer support for automakers is necessary to ensure that Canada maintains its share of the North American auto business after US President Joe Biden signed the Inflation Reduction Act into law in 2022, providing financial help for firms building EVs in the US. 

Read More: Subsidy Wars Heat Up With US Allies Forced to Pay Up or Lose Out

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The auto sector is particularly important to Ontario, Canada’s largest province by population and home to assembly plants owned by Ford Motor Co., General Motors Co., Toyota Motor Corp., and Stellantis, as well as scores of parts suppliers. 

“The windows of opportunity for this kind of thing are short,” Industry Minister Francois-Philippe Champagne told Bloomberg in a recent interview discussing last year’s subsidy deals. He said the government had to act after the US enacted the Inflation Reduction Act, or risk losing the plants south of the border. “That window was there and we seized it.”

Stellantis and partner LG Energy Solution are in the middle of building a battery plant in Windsor, Ontario, across the border from Detroit. Volkswagen’s proposed site is southwest of Toronto and Northvolt’s is near Montreal. Canada’s subsidy packages for those companies are being partially paid by provincial governments in Ontario and Quebec.

What Bloomberg Intelligence Says 

Japanese automakers’ new-vehicle sales in the US could increase 8% to 6 million units in 2024, we calculate, driven by improving vehicle supply, order backlogs and their aggressive new product offensive. It follows a 16% year-over-year jump to 5.54 million units in 2023 from 4.76 million units in 2022.

— Bloomberg Intelligence auto analyst Tatsuo Yoshida

For the full report, Bloomberg Terminal users can click here

—With assistance from Mathieu Dion.

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