Volkswagen and Mercedes line up tariff-friendly battery supplies in deals with Canada

The memorandums of understanding will be signed Tuesday in Toronto, with German Chancellor Olaf Scholz and Canadian Prime Minister Justin Trudeau in attendance said the people, who asked not to be identified discussing confidential information.

VW’s agreement is designed to shorten supply chains for its facilities in the US and avoid difficulties linked to tariffs and tax regulations, said one of the people. The move has partly been prompted by new rules that US President Joe Biden signed into law last week, the person added.

A spokesperson for VW said the carmaker and its dedicated unit for its battery business, called PowerCo, are working on ramping up their battery activities, “especially reliable and sustainable supply chains.”

“This holds true for the very promising North American market as well,” the spokesperson said by email. A spokesperson for Mercedes declined to comment.

The Biden administration’s Inflation Reduction Act allows consumers to continue getting as much as $7,500 in tax credits for electric vehicles if manufacturers meet new content requirements. Minerals must be extracted from or processed in countries the US has a free trade agreement with, and a large percentage of battery components need to be manufactured or assembled in North America.

Automakers including VW, Mercedes and Stellantis NV have embarked on ambitious plans to make batteries. VW is planning six facilities in Europe alone, while Mercedes has joined Stellantis in a 7 billion-euro ($7 billion) battery venture and is pursuing a total of eight facilities globally.

VW is also considering setting up an in-house battery cell manufacturing operation in North America, Johan De Nysschen, chief operating officer of Volkswagen of America, said in June.

The goal would be to ease a coming battery shortage by supplementing suppliers with its own production, De Nysschen said in an interview at the company’s new battery testing lab in Chattanooga, Tennessee. The board was still weighing the idea, and no final decision had been made, he added.

A business delegation including VW Chief Executive Officer Herbert Diess is traveling with Scholz on his Canada trip, his first there since he took office at the end of last year. Diess, who will be replaced as CEO on Sept. 1, said last month that the company was looking at sites for a US battery facility that would supply packs to its auto plant in Chattanooga.

Scholz will hold several meetings with Trudeau as the Group of Seven and NATO partners move to deepen cooperation in areas including energy and security.

The German leader, who is also accompanied by Economy Minister Robert Habeck, wants to enlist Canada to help Europe’s biggest economy reduce its reliance on Russia for energy and raw materials.

Canada “has similar rich natural resources as Russia — with the difference that it is a reliable democracy,” Scholz told reporters during the flight over.

“This opens up new fields of cooperation,” he added. “We want to cooperate closely, especially when it comes to building a hydrogen economy.”