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How Michigan Aims to Protect Its $1 Billion Bet on EV Battery Plants

October 7, 2022

Crain’s Detroit Business
Oct. 7, 2022

Kurt Nagl, David Eggert, Rachel Watson

Michigan officials are hailing plans for a pair of EV battery factories and combined $4 billion investment as a major economic victory, but they are also hedging their taxpayer-funded bets in case the projects fail to deliver.

Over the next decade, Gotion Inc.’s $2.4 billion plant near Big Rapids and Our Next Energy Inc.’s $1.6 billion plant in Van Buren Township are expected to create a total of 4,462 jobs, according to officials, who have approved around $952 million of incentives – $213,357 per job – for the projects.

Industry experts and observers are split on whether it’s worth it.

Anderson Economic Group CEO Patrick Anderson said the taxpayer risk is too high.

“We’re ballyhooing a billion-dollar investment, and we’ve made commitments of $175 million in grants without seeing a business plan or a building schedule, and that is concerning,” Anderson said of the Gotion project. “I don’t like to see our taxpayers taken for a ride, and this thing has a bad smell about it.”

Glenn Stevens, executive director of MichAuto, sees it a different way.

“It’s just plain and simple outstanding news,” Stevens said. “Both of these are examples of where the administration, legislature, local economic development agencies, the talent, and workforce folks are all working on this together. I think that’s a significant sign for Michigan.”

Economic development officials have emphasized the urgency of landing EV and advanced manufacturing investments to protect the state’s most valuable industry amid transition. Critics have argued that spending taxpayer funds on unproven technology is bad policy.

Opportunity and Uncertainty

Michigan has a history of plunging money into EV battery projects, and not all have panned out. A decade ago, A123 Systems used a $249 million federal grant and $125 million of state funds to build a plant in Livonia, which was the largest lithium-ion plant in North America at the time. Cursed by defects and poor market timing, the company went bankrupt before being bought by a Chinese firm.

“Our elected officials cannot make these kinds of giant bets with any sort of certainty that they’re going to pay off,” said John Mozena, president of the Center for Economic Accountability. “We get so focused here in Michigan on this idea that we need to be leading the automotive industry … Maybe Michigan should be spending less time trying to chase the past.”

Both the Gotion and Our Next Energy projects come with opportunity and uncertainty. Gotion, which is backed by Volkswagen, has manufacturing in China but has no track record in the U.S. Our Next Energy, whose founder is a former executive of A123 Systems, has strong investors including BMW and billionaire Bill Gates but has yet to mass produce its lithium iron phosphate batteries or generate revenue.

Neither company has disclosed its customers in Michigan.

Michigan Gov. Gretchen Whitmer on Wednesday announces Michigan Strategic Fund approval of state investments for the Gotion Inc. and One Next Energy electric vehicle battery plants.

The Michigan Economic Development Corp., which signs off on incentives, said it structured terms with the companies to make their incentives contingent on fulfilling promises.

“It is a performance reimbursement,” MEDC CEO Quentin Messer Jr. said recently during a call with reporters. “So there is absolutely not a dime that will go out unless this company performs.”

Gotion’s Deal

Gotion, which plans to build two cathode plants and two anode plants near Big Rapids in Mecosta County, will receive a state Critical Industry Program grant worth $125 million if it meets certain milestones.

  • First, it must strike a development agreement with The Right Place Inc., an economic development organization based in Grand Rapids, and buy or be transferred all necessary land at the project site before 2024, according to terms of the agreement obtained by Crain’s. It then can start requesting reimbursement for half of construction and other capital costs, up to $95 million.
  • Second, Gotion must spend nearly $2 billion more and create 1,500 jobs by March 30, 2028. It then can seek the remaining $30 million.
  • Third, Gotion must meet its overall commitments, $2.36 billion in investment and 2,350 jobs by March 30, 2032, or repay some or all of the $125 million grant.

The term sheet includes clawback provisions. Gotion would have to repay up to 100 percent of grant funds if it does not meet the phase two requirements. The battery maker’s failure to meet the overall investment or jobs commitments would result in it repaying a portion based on how much it spends and how many people are hired.

The Right Place will get up to a $50 million Strategic Site Readiness Program grant. Expenses eligible for reimbursement include public infrastructure improvements, site development and land acquisition. It would have to repay the state if the project falls through.

Our Next Energy Inc. plans to produce 200,000 battery packs annually at its new plant in Van Buren Township by 2027.

Our Next Energy’s Deal

Our Next Energy plans to open a cell and EV battery pack factory in a recently constructed facility in Wayne County’s Van Buren Township. It will get a state Critical Industry Program grant of $200 million if milestones are reached.

  • First, by July 2023, it must secure $169 million in private financing, execute a lease agreement (which has been done), sign a joint development deal with a materials refinement partner, sign a strategic collaboration agreement with a battery manufacturer, and finalize purchase order requirements and supplier contracts for a cell prototype and training line at its Novi headquarters. It then can request reimbursement for 60 percent of eligible expenses, up to $50 million.
  • Second, before 2024 it must demonstrate receipt of $360 million in private financing total, hire a general contractor to retrofit the facility, finalize purchase order requirements and supplier specifications for the first cell manufacturing equipment line, and sign an additional customer for its Aries battery. It then can seek 60 percent reimbursement, up to $70 million.
  • Third, before October 2026 ONE must secure $560 million in private financing total, show $300 million in company revenue, invest nearly $1.1 billion, launch at least two cell manufacturing lines and initiate purchase orders to scale two additional lines. It then can get $60 million of the grant.
  • Fourth, it must create 2,112 jobs and spend $1.6 billion before 2030. It then can qualify for the remaining $20 million.

The term sheet has similar clawbacks to the Gotion deal.

Local Impact

Paul Isely, associate dean of undergraduate programs at the Seidman College of Business at Grand Valley State University in Grand Rapids and a longtime professor of economics, said it’s unknown at this point if EVs are a bridge technology or a final technology. If the former, Gotion might have to pivot away from battery production to whatever is next, such as hydrogen technology. He believes that pivot could come within the next decade.

“If the technology changes radically enough, do we have a stranded asset?” he said.

Still, he thinks it’s a risk worth taking for Michigan to stay competitive in the mobility space.

“We’re already seeing a lot more battery plants pop up in the Tennessee, Kentucky, that sort of automotive area, and if we don’t have the supply chain components here in Michigan to supply the automotive industry, the automotive industry won’t stick. So, in reality, we don’t have much of a choice if we’re trying to anchor that primary industry here,” he said. “We’re making a strategic bet that this provides the commitment to the supply chain that will keep (automotive companies) producing vehicles in Michigan. That seems like a good bet.”

In Van Buren Township, the Our Next Energy project has the potential to reshape the battery supply chain, which is why economic development officials said it was so important to secure the project. CEO Mujeeb Ijaz said the plant will be the centerpiece of a localized supply of iron, lithium, iron phosphate, graphite and other materials, spawning further job creation in the region.

“We’re ready to build an ecosystem of suppliers here in Michigan,” he told Crain’s.

The MEDC said the Van Buren Township plant will have a job multiplier of 3.33, meaning an additional 2.33 jobs will be created for every new direct job. The multiplier for Gotion was calculated to be 3.13.

“In addition, these new jobs are generating new income, much of which is spent at local small businesses throughout the community and the state,” the MEDC said in a briefing memo.

Anderson, whose firm has conducted similar job creation studies, said it is “obvious” that the multipliers cited by the MEDC are exaggerated.

“That is a stratospheric multiplier,” he said. “It’s implausible that this or any similar operation would actually generate three jobs for every job in the plant.”

An empty tract of land that encompasses the Big Rapids Airport Industrial Park is part of the 19 parcels across 523 acres on which Gotion Inc. plans to build an EV battery plant over the next decade.

Bill Stanek, Big Rapids Township supervisor, said Gotion, which hasn’t announced its developer or contractor partners, will steer the project with plenty of local oversight, as approvals will be needed at each step of the process. He said he expects Chuck Thelen, vice president of Gotion Global and leader of the company’s North American operations, will hire a local general manager and local leadership team to run the Big Rapids-area facility.

Thelen did not return a request for comment.

Stanek said he studied the Gotion proposal from all angles for about 16 months leading up to the local municipalities’ vote on whether to apply for a Renaissance Zone tax exemption, and he feels it’s a “calculated risk” to dole out these incentives.

Although the U.S. subsidiary, Gotion Inc., has only been in the U.S. conducting research and development since 2014, its 27-year-old Chinese parent company, Gotion High-Tech, is among the largest lithium-ion battery makers in the world, with customers including Volkswagen and the Chinese automobile companies SAIC and Chery. Stanek said in addition to having customers in the electric vehicle segment, Gotion High-Tech also makes power storage components for the solar energy market, although he could not name specific customers.

Green Township Supervisor Jim Chapman said Gotion’s first U.S. manufacturing plant has to be built somewhere, and he’s happy to see it land on his home turf rather than in another state.

He said if Gotion should fail to meet the state’s terms for the incentives, he’s confident the fail-safe terms and clawbacks outlined in the term sheet will protect the state’s investment.

Stanek and Chapman agree that if worse comes to worst, and Gotion doesn’t finish the project, the site could be used for something else — especially now that it’s received so much national attention.

The Gotion project is expected to create 2,350 jobs by 2031. Gotion and the local officials have said they believe those jobs can be filled by sourcing from the community and Ferris State University’s talent pool.

Job training and lifting up “geographically disadvantaged areas” are cited by the MEDC as pillars of both projects and good reason to back them financially.

Our Next Energy said it plans to work with Focus: Hope to develop a skills-based training program for its employee base. Jobs at the new factory would pay $35 per hour by year six, or 55 percent higher than the ALICE (Asset Limited, Income Constrained, Employed) target wage.

“The (Our Next Energy) facility is located close to geographically disadvantaged areas, which will provide residents with employment opportunities and the company with a talent pipeline,” according to the MEDC.

On the west side of the state, where the supplier base is not nearly as dense, a new plant would have arguably more noticeable impact, and present challenges for the company to find workers.

As of August, Mecosta County had an unemployment rate of 5.3 percent, or about 964 unemployed workers. Chapman said Gotion and The Right Place conducted three separate employment studies, and all three found that within a 45-mile radius of the site, there is a “major” potential labor force.

“Right now, it is not unusual for somebody from our area to drive to Grand Rapids to a job. That’s a 60-mile drive,” Chapman said. “If you were working in a factory in Grand Rapids and living in Big Rapids, and now there’s a plant in Big Rapids that offers the same pay rate, but you don’t have to drive an hour to work and an hour home, what would you do?”

Stanek said downsizing and closures over the past decade by Evart Products and Liberty Dairy in neighboring Osceola County left hundreds of people without jobs, and those people were forced to either move away or add to their commutes. He said he thinks there would be an appetite from those people to work at Gotion if the project pans out.

Jobs at Gotion would average $29.42 per hour, nearly 65 percent higher than the ALICE target wage.

The housing supply across Michigan remains historically low, and Chapman said that could pose a challenge as these new jobs are created. But it also could create opportunity for housing developers to step up and meet the demand.

Stanek and Chapman said that back when the housing bubble burst in 2007, two subdivisions — the Hills of Mitchell Creek and Sunrise Haven in Big Rapids — were never finished. They said those projects have the potential to be restarted with the promise of so many middle-income jobs coming to the area.

Paul Bullock, Mecosta County controller and administrator, said it’s important to remember the Gotion project is expected to happen in phases, so there will be time for the labor and housing questions to be sorted out.

“It’s not, ‘Boom, we’re there,’ right? We’ll build up to that, and that will give developers an opportunity to see exactly what the market is, and it will give them a chance to respond,” he said. “If this were, boom, we’re dropping this whole thing on you, and we’re going to build it out in a year, it would be a whole lot more intimidating than it is with a phased plan that will allow the free market to respond.”