Canada’s attempt to turn the largest military procurement in its history into a vehicle for automotive investment suffered its most explicit setback on Tuesday.
On the same day the German giant Volkswagen Group reported a 44% plunge in profits in 2025, the chief executive Oliver Blume said in a media session that the automaker will not allow its Canadian strategy to be shaped by a separate defence deal.
Speaking in Wolfsburg, Blume said the company does not “couple our activities to any other business deals.”
Volkswagen evaluates opportunities on their own merits, Blume said, adding that the automaker will decide individually what makes sense for its business in Canada.
The comments land at a sensitive moment for Prime Minister Mark Carney’s government, which has publicly insisted that whichever nation wins the submarine contract — Germany or South Korea — must also deliver an automotive assembly plant on Canadian soil.
The submarine contract has been valued at more than $20 billion for the vessels alone, with estimates that include 30 years of maintenance reaching as high as 60 billion Canadian dollars.
Three Deadlines
Ottawa is navigating three overlapping timelines that together will define the future of its industrial base.
The first is the submarine decision itself.
Germany’s ThyssenKrupp Marine Systems and South Korea’s Hanwha Ocean both submitted formal proposals by a March 3 deadline for the Canadian Patrol Submarine Project, a programme to replace the Royal Canadian Navy’s four ageing Victoria-class boats with up to 12 new diesel-electric submarines.
TKMS filed a supplementary 1,500-page non-binding offer on Monday, backed by the German and Norwegian governments. Multiple government and industry sources expect a decision by June.
The second is the USMCA joint review, which the three signatory governments must convene on July 1.
Automotive products represent roughly 22% of total trade under the agreement.
Components in a single finished vehicle may cross the Canada-US border seven or more times during production. The average US tariff on Canadian goods has risen from 0.1% to 5.8% over the past year, according to the Bank of Canada.
The third is Canada’s new Chinese EV import regime.
On March 1, Ottawa began issuing permits for up to 49,000 Chinese-made EVs at a 6.1% tariff, ending a 100% surtax imposed in late 2024.
The quota could rise to 70,000 units within five years, with more than half expected to carry price tags below $35,000.
Industry Minister Mélanie Joly has positioned these tracks as parts of a single industrial strategy, telling the Empire Club in Toronto on February 19 that Canada fundamentally wants a car plant and intends to use defence leverage to attract one.
Volkswagen’s Own Canadian Calculus
Blume’s rejection of the submarine linkage does not mean Volkswagen is pulling back from Canada.
The company is midway through construction of a $7 billion battery cell factory in St. Thomas, Ontario, operated by its subsidiary PowerCo.
The facility targets 90 gigawatt-hours of annual production capacity in its final phase — enough to supply cells for roughly one million EVs — and is projected to begin operations in 2027.
Ottawa has committed up to $16.3 billion over ten years to support the project through production subsidies, capital grants, and tax adjustments aligned with the US Inflation Reduction Act.
The automaker has also moved to secure Canadian raw materials.
PowerCo acquired a 9.9% stake in Quebec lithium miner Patriot Battery Metals in late 2024 through a $69 million investment and signed a binding ten-year offtake for 100,000 tonnes of spodumene concentrate per year.
Patriot’s Shaakichiuwaanaan project in northern Quebec hosts the largest lithium pegmatite resource in the Americas, and the concentrate is earmarked for the St. Thomas plant.
Blume told reporters that Canada offers significant potential in critical minerals and that future commodity agreements could benefit Volkswagen and other European automakers looking to build supply chain scale.
He declined to make specific commitments beyond the existing battery and lithium investments.
In February, Joly and German Economic Affairs and Energy Minister Katherina Reiche signed a joint declaration to expand bilateral collaboration in automotive, battery, and critical mineral sectors.
Reiche told the Globe and Mail that Germany’s car industry is willing to invest in Canada and described the country’s conditions as attractive.
She pointed to the existing PowerCo project as proof of the relationship’s strength but declined to say whether new investment would come through Volkswagen or rival automakers.
Germany’s three largest carmakers — Volkswagen, BMW, and Mercedes-Benz — all operate vehicle assembly plants in the United States. None has a vehicle production facility in Canada.
A Company Under Strain
The Wolfsburg conference where Blume drew his line on the submarine question was the same event where Volkswagen disclosed its worst annual results since the diesel emissions scandal a decade ago.
Net income fell 44% to 6.9 billion euros in 2025. Operating profit halved to 8.9 billion euros. The operating margin sank to 2.8%.
US tariffs have compounded the pressure.
The Trump administration’s duties cost Volkswagen approximately $2.5 billion in the first nine months of 2025.
Blume told Handelsblatt in January that the tariff burden had forced the company to shelve plans for an Audi assembly plant in the United States, a project that had been under discussion intermittently since 2018.
He said the automaker needs short-term cost reductions and long-term stability before it can commit capital to new North American production capacity.
Volkswagen Group trimmed its five-year investment budget to between 160 billion and 180 billion euros and guided for 2026 revenue growth of zero to 3% with an operating margin target of 4.0% to 5.5%.
A separate restructuring programme announced in late 2024 calls for eliminating 35,000 positions by 2030 through attrition.
The Broader Courtship
Volkswagen is only one piece of Carney’s multi-front industrial strategy. Ottawa is simultaneously engaged with Chinese, Korean, and Japanese automakers.
BYD is the only Chinese brand to have completed compliance work for Canadian exports under the new import quota.
Chery has started hiring engineering and certification staff targeting the market, and Geely is the third automaker confirmed to enter the country.
Joly has held separate meetings with executives from Hyundai, Volkswagen, BYD, and Chery and has discussed joint ventures between Chinese manufacturers and Canadian auto parts suppliers Magna International, Linamar, and Martinrea International.
Magna already produces XPeng’s G6 at its Austrian contract manufacturing plant and began assembling the P7+ sedan earlier this year.
On the Korean side, Hyundai Motor Group chairman Chung Euisun visited Ottawa in January with a high-level government delegation.
Seoul signed a non-binding memorandum of understanding to work with Canada on EV, battery, and hydrogen vehicle production. Hyundai has not committed to an assembly plant.
Canada’s auto sector has been shedding jobs amid the US tariff escalation.
General Motors cut positions at an Ontario plant in January.
Stellantis redirected investment from its Brampton facility toward US production.
Ottawa responded by limiting the number of tariff-free vehicles GM and Stellantis can import from the United States and allocating $3.1 billion from a strategic response fund to help the industry adapt.
The June submarine decision and the July 1 USMCA review will arrive within weeks of each other.
