It appears that the government invested $2.2 billion in various projects related to this sector and that, to date, $700 million has been lost. I have also written a few blog posts about the Northvolt project, probably one of the most costly and visible examples within this sector.
In my view, this painful episode for Quebec taxpayers offers several lessons.
First, governments should not get into the habit of investing taxpayers' money directly in companies; that role belongs to private investors. Governments can certainly encourage investment in strategic sectors through tax incentives without taking direct ownership stakes in businesses. In one of my blog posts about Northvolt, I wrote: "It is preferable to let the free market do its work rather than centralizing investment decisions in the hands of government. As a rule, Adam Smith's famous 'invisible hand' tends to work quite well."
Second, I believe great care must be taken when trying to move too quickly to develop a sector that appears promising. The Quebec government cut corners and bypassed several of its own governance rules in the battery sector to move faster than other jurisdictions. For example, it modified the environmental regulatory framework to avoid certain stages of public review of the project.
The government feared missing out on an economic opportunity in an industry perceived as highly promising. It was a classic case of FOMO (Fear of Missing Out). It is the same impulse that drives so many investors to rush into speculative investments because they fear missing out on an attractive story, even when it has not yet been supported by a solid economic rationale.
In my opinion, the battery sector illustrates how difficult it is to identify the companies that will ultimately emerge as winners from favourable technological trends. It seems obvious that electricity and battery-related industries have a bright future. One only must think about the shift toward electric vehicles or the growing electricity demand from data centres processing AI-related workloads. Still, identifying a promising industry is not a magic formula for achieving superior returns, especially when many other investors have identified the same opportunity and are trying to capitalize on it at any cost.
A promising industry does not always translate into a good investment, particularly when investors are in a hurry to profit from it. In investing, as in industrial policy, confusing a major trend with a sound investment decision can be costly.
Philippe Le Blanc, CFA, MBA
Chief Investment Officer at COTE 100
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