Tag Archive for: manufacturing

Australia needs to manufacture change to ensure national security

After decades of gradual decline, Australia’s manufacturing capability is no longer mission-fit to meet national security needs. Any whole-of-nation effort to arrest this trend needs to start by making the industrial operating environment more conducive to manufacturing.

The sector needs both knowledge-based capital, for innovation, and financial capital. Given the scale of investment required, the government must cooperate with the private sector and incentivise the sector’s independent efforts.

A recent report I wrote for the United States Study Centre discusses how the Australian government can better engage with the manufacturing sector and align the private capital needed to finance its revival.

It first recommends commissioning an independent federal review with a focus on the manufacturing priorities of defence and national security initiatives. The report also recommends establishing an ‘Uplift Project Office’. Such an office, inside government, would coordinate engagement between departments and the investment community.

Successive Australian government strategic documents, including the 2023 Defence Strategic Review and 2024 National Defence Strategy, have underscored the national security importance of expanded advanced capabilities. Such capabilities include hypersonic weapons, artificial intelligence, quantum technologies, autonomous systems, critical minerals extraction and processing, and related value-adding activities.

To establish a sustainable sovereign capability in these fields, or, at the very least, greater supply chain security, Australia needs to revive its domestic manufacturing base. This is a challenging prospect. Over the past two decades, when measured by exports by sector, Australian manufacturing has declined by more than 50 percent, while reliance on resource income has doubled. Manufacturing now accounts for just over 5 percent of Australia’s economic output.

The proposed manufacturing review would map the Australian stakeholder landscape and inform a whole-of-government approach to engaging the private sector to arrest the decline of Australian manufacturing. Among its priorities would be preparing the manufacturing sector to sustain any new investments.

Successful conduct and implementation of such a review would depend on effective communication between government and industry. This is where the proposed Uplift Project Office would add value.

The government would benefit from greater emphasis on private sector engagement to mobilise capital for national security objectives. The proposed office would ensure that engagement extends beyond prime manufacturers and major superannuation funds to include small and medium enterprises and dual-use start-ups, which often drive progress in advanced capability areas.

The office should also coordinate separate efforts such as AUKUS and the National Reconstruction Fund Corporation (NRFC).

The proposed office should work with the investment industry and manufacturing sector to co-develop a standard investment proposal process and identify contracting mechanisms for government projects to upskill responsible agencies in their ability to engage with sources of private capital. Collaborative and consultative engagement would optimise decision-making by better equipping officials to work with investors and industry.

The office should sit under the defence minister to ensure that national security priorities are embedded in its bottom-up activities and are aligned with top-down efforts under the 2024 Integrated Investment Program and NRFC. Ideally, the office would also be guided by an advisory council of stakeholders from Australia’s AUKUS partners to maximise its effect on Australia’s defence innovation priorities.

The office should also support the private sector in investing across different portfolios. It should work with existing government-adjacent investment vehicles, such as the Future Fund investment process and assist in developing plans to mitigate talent pipeline and skilled workforce challenges.

As the geopolitical landscape continues to shift, Australia must be able to self-sustain and contribute advanced capabilities. Industrial capability is a precondition of this. The government, together with industry partners, needs to back domestic innovators and create the conditions for participation in the development, production and global economic success of indigenous capabilities.

The revival of Australian manufacturing is a long-term project that the federal government needs to embed into its policy and practices for the betterment of Australia’s national security. The federal government needs to fine tune engagement with the private sector to ensure that necessary stakeholders can act in a concerted and coordinated manner.

Overseas investment is getting riskier. The government needs to step up

Australian companies operating overseas are navigating an increasingly volatile geopolitical landscape where economic coercion, regulatory uncertainty and security risks are becoming the norm. Our growing global investment footprint is nationally important, and the Australian government must support it more strongly.

The government needs to do this above all to counter market manipulation by China and even its seizure of Australian assets, but other risks are piling up, too.

Australia’s outward foreign investment is not just about business; it is a strategic imperative, with the country’s superannuation funds, trade stability and national security all tied to the success and resilience of its companies operating in high-risk environments around the world.

Many Australians understand the importance of inward foreign investment in driving economic growth, but far fewer appreciate the scale of Australian capital flowing overseas. Australia’s total investment abroad now stands at $3.8 trillion—82 percent as large as the stock of foreign direct investment in Australia.

Manufacturers, financial institutions and miners lead our outward foreign direct investment (FDI), the establishing or buying of businesses in other countries. It embodies Australia’s deep economic integration with global markets. Yet, as geopolitical risks intensify, Australia can no longer take the security of these investments for granted, especially in the mining sector.

Australian minerals companies have built a huge global footprint. S&P Global data shows that Australian-headquartered and ASX-listed companies operate 331 mines and downstream processing plants domestically and that 120 Australian companies manage 212 mining and processing facilities overseas.

In 2024 alone, Australian companies invested $4.6 billion in exploration, of which 53 percent spent in Australia and the rest on all other continents except Antarctica. The $195 billion in outbound mining FDI recorded in 2023 further illustrates the scale of this global presence, alongside $215 billion in manufacturing FDI, much of which is tied to minerals processing.

Australian miners have a long history of navigating complex global environments. However, rising geopolitical tensions, economic coercion and regulatory instability make risk management increasingly difficult. The sector’s dependence on foreign capital and markets leaves it vulnerable to supply chain disruptions, trade restrictions and political interference, which threaten profitability and long-term strategic resilience.

Front of mind here is China’s increasing economic coercion. China’s actions serve to reshape global minerals markets, creating risks that extend far beyond trade disruptions. Through market manipulation, aggressive acquisition tactics, and political interference, China is systematically undermining competition. It is attempting to seize control of critical minerals projects and even emboldening hostile regimes to detain Australian mining executives as leverage for financial gain.

Chinese-linked companies have used coercive tactics and state-backed influence to try to take control of Australian-owned mining operations, particularly in some African countries with weak governance in minerals. In 2024, an Australian company was awarded US$90 million in compensation after the Tanzanian government unlawfully seized a nickel deposit, highlighting the unstable regulatory environment Australian firms can face abroad.

Meanwhile, Russian-backed military regimes in Mali and Niger, combined with jihadist insurgencies in key West African mining regions, are increasing security risks for Australian businesses. The closure of US military bases in Niger in 2024 further complicated the security landscape, raising concerns about the long-term viability of Australian investment in these regions.

While the Australian government sponsors the West Africa Mining Security Conference, tangible support for Australian companies operating in high-risk regions is minimal. Unlike Canada, which maintains 17 trade offices across Africa, Australia has just one, in Nairobi. Despite Australia’s large mining and petroleum investments in West Africa, there is just one diplomatic post to service nine countries. This lack of diplomatic and commercial representation leaves Australian companies at a significant disadvantage in security and investment advocacy.

Meanwhile, escalating tariff disputes between the United States and China and retaliatory trade measures from Canada, Mexico and the European Union further complicate Australian companies’ investment and trade outlook. The full impact on Australian-controlled production at home and abroad remains uncertain but potentially severe.

Australian mining depends heavily on foreign investment and financial mechanisms, including cash-backed offtake agreements. China dominates the financing and sales mix, making it an essential partner and a strategic risk. China’s deliberate manipulation of mineral prices, particularly in rare earth markets, and its covert and coercive attempts to acquire key mining assets directly threaten Australia’s economic sovereignty.

Multiple takeover attempts of Northern Minerals and allegations of similar activities around control of Global Lithium Resources demonstrate China’s ongoing efforts to increase control over Australia’s critical minerals industry. This threatens national security and broader supply chain diversification efforts.

The Australian government must take decisive action in response to the rapid escalation of geopolitical risks.

First, a dedicated task force led by the Department of Foreign Affairs and Trade should provide real-time risk assessments and direct assistance to companies navigating complex security and regulatory environments. Second, the Australian Securities and Investments Commission must collaborate more closely with the Foreign Investment Review Board to detect and counter corporate coercion threatening Australia’s national interest. Third, Australia must prioritise deeper engagement with like-minded partners, including the US, Canada, Japan, the EU and South Korea, to accelerate the development of more secure, diverse and sustainable critical minerals supply chains.

While Australia has made cooperation commitments under multiple critical minerals agreements, implementation has been slow and inadequate. With global competition intensifying, there is no time to waste.

The strategic importance of the Whyalla steelworks

Australia has been losing so many sovereign manufacturing capabilities over the past two decades that it is hard to know where to draw the line. The Whyalla steel mill may mark the spot.

The Australian and South Australian governments certainly seem to think so. Prime Minister Anthony Albanese on Thursday said the two governments would spend an immediate $484 million, mainly to keep the works going during the period of administration that the South Australian government initiated on Wednesday.

And they allocated $1.9 billion for upgrading the plant when it is under a new owner. It has been owned by GFG Alliance, chaired by British businessman Sanjeev Gupta.

The machinery of the Whyalla steel works is antique, having started production in 1965, and it supplies, in a good year, only about 15 percent of Australia’s steel needs.

However, it is the only domestic source of long steel products, such as structural steel and rail. The steel billet it sends to Newcastle for rolling is the only domestic source of reinforcement bar for the construction industry.

Bluescope’s Port Kembla steelworks, by contrast, is focussed on coil, which is turned into flat products such as roofing.

Whyalla’s steel is relatively free from impurities, meaning it has strategic importance for military manufacturing, including for the Benalla munitions plant. Electric arc furnaces cannot match the quality of blast furnace steel. In addition to Whyalla, Sanjeev Gupta’s GFG Alliance controls arc-furnace steel operations at Laverton in Melbourne and Rooty Hill in Sydney.

The structural steel and reinforcement bar coming from Whyalla could all be imported—indeed last year a record 3.1 million tonnes of steel product was imported as distributors sought to manage their insecurity over Whyalla’s steel supplies. There is no alternative global producer of Whyalla’s rails, which are made to unique Australian standards.

There was no federal government intervention last year when chemical company Qenos shut down the last two petrochemical plants in Australia capable of making polyethylene, the essential ingredient for most plastic products. The plants are to be demolished to make way for industrial property development.

Australia’s only stainless steel plant was shut in 1996, the only tinplate plant in 2006 and the last aluminium rolling mills in 2014.

The motor industry, which was the most advanced integrated machinery manufacturing operation in the country, was shut down between 2015 and 2017.

Market forces have been allowed to bring the destruction of domestic manufacturing capability, with the standout exception being the Morrison government’s 2022 decision to extend subsidies to ensure the survival of the last two oil refineries, Viva in Geelong and Ampol’s refinery at Lytton in Brisbane. This followed the closure of Exxon’s Melbourne refinery and BP’s Kwinana refinery the previous year.

There was a strategic argument that Australia needed to preserve a domestic capability to make diesel fuel, even though the remaining refineries are only a fraction the size and efficiency of the plants in Singapore, South Korea and China that supply most of Australia’s needs more cheaply.

The government’s Future Made in Australia strategy for reviving Australian manufacturing has two streams: one devoted to sectors that will contribute to lowering carbon emissions, and an ‘economic security and resilience’ stream aimed at supporting sectors vulnerable to supply disruptions and that require support to unlock sufficient private investment.

The second stream looks tailor-made for Whyalla. While the federal government is presenting its rescue as a green-steel initiative, what is most urgently required is a reline of its existing coal-fired blast furnace. The technology for hydrogen-fuelled blast furnaces, which could make green steel, is not yet proven and would not be viable for Whyalla.

While government rescue finance is welcome, the plant needs a corporate saviour.  Buying the Whyalla works is probably not what Bluescope Steel has in mind for strategic diversification, although a national purchase would have political appeal. South Korea’s Posco was interested in Whyalla when the plant’s former owner got into financial difficulties eight years ago. The government may be able to use the strength of its relationship with Japan to entice an operator such as Nippon Steel into the fray.

What is disturbing is that the decision to provide support is reactive and ad hoc, as was the case with the decision to save the last two oil refineries. There is no strategy spelling out what manufacturing capabilities Australia possesses that must be preserved in the interests of sovereignty.

The Swiss resources group Glencore said late last year it would shut its Mount Isa copper mine but that its copper smelter in the town and its Townsville copper refinery would keep going with third party supplies. Should those operations become marginal, would an ability to produce refined copper be deemed strategic?

Diesel, steel and cement are arguably the most basic industrial inputs to national security, for which a domestic production capacity should be retained.

There is an interesting story about cement. In the early days of the Covid-19 pandemic, many Chinese businesses faced mandatory shutdowns and China’s exports plunged. Australian quarries providing the stones to turn cement into concrete soon found they could not get the cutting tools they relied upon, raising concerns about their continued ability to operate. There were other manufacturers in Germany, but there was also a rush on their supplies.  Chinese cutting products returned, but the episode showed that even concrete is vulnerable to trade disruption.

Whatever the arguments for retaining a domestic ability to make steel, dreams of self-sufficiency or autarky are not realistic.

Securing Australia’s supply chains through targeted investments in manufacturing

Australia needs a policy for delivering the minimum manufacturing capacity that would ensure national resilience, security and economic prosperity.

Unfortunately, Australia’s domestic manufacturing capacity is generally declining, except in the defence industry and, in time, maybe renewable energy transition. At the heart of our manufacturing woes are increasing competition from low-cost overseas producers, unfair trade practices, disrupted supply chains and a lack of sustained investment in advanced technologies.

The Australian government must now be clear-minded that a robust manufacturing sector is not just about job creation and economic prosperity; it is an insurance policy to protect the nation. Australia’s vulnerability during the pandemic, when global supply chains faltered and essential goods became scarce, should have served as a wake-up call.

Since then, geopolitical tensions, natural disasters and global market fluctuations have continued to expose our supply chain vulnerabilities and heavy reliance on international suppliers for essential goods and raw materials. Australia’s current shortages of IV bags and palliative care drugs highlight the country’s reliance on fragile global supply chains.

The Albanese government’s made-in-Australia policies and initiatives to boost local solar panel and battery production aim to promote domestic manufacturing in renewable energy. Focusing narrowly on that sector leaves many other manufacturers without the support needed to be competitive, let alone grow. Without addressing skills development, innovation, and supply chain resilience, these initiatives are unlikely to foster a diverse and sustainable national manufacturing capacity.

One of the most urgent priorities is to support Australian businesses in transitioning to modern manufacturing techniques through targeted subsidies, tax incentives and infrastructure improvements. A good starting point would be to bolster domestic production of medical supplies and agricultural inputs using technologies of the fourth industrial revolution. Such investments would reduce reliance on imports, mitigate risks posed by global trade disruptions and strengthen national security. Moreover, they could ensure that geopolitical tensions or economic shocks would not disrupt much of the economy.

Supporting the development of the nation’s skilled workforce is also crucial for the future of advanced manufacturing. Modern manufacturing requires specialised technical knowledge, particularly in high-tech industries, in which automation and digitalisation are rapidly changing production processes.

The government must continue to invest in education and training programs, especially in science, technology, engineering and mathematics, to drive innovation and equip workers with the necessary skills to meet the demands of advanced manufacturing. Such investments have underpinned the national resilience and economic prosperity of Taiwan and Singapore.

Innovation and technological advancement in manufacturing must be further incentivised. As global competition keeps intensifying, Australia needs to catch up in developing and adopting cutting-edge technologies. The future of manufacturing lies in the advanced production techniques of automation, artificial intelligence and 3D printing, plus many technologies still unimagined.

Modern manufacturing addresses the challenge of scale, which has bedevilled Australian business. It enables companies to optimise production processes, reduce lead times and costs and efficiently adapt to on-demand supply needs while maintaining high quality and precision. To maintain a competitive edge in these emerging fields, Australia must lead in adopting and developing these technologies.

The government has made significant strides in supporting innovation through research and development grants, tax credits and partnerships between universities, research institutions and industry. To further enhance this ecosystem, we must find innovative ways to increase funding for research and development initiatives aimed explicitly at advanced manufacturing. This should be done though expansion of tax incentives for companies investing in such technologies. Additionally, establishing regional innovation hubs focused on specific industries, such as biotech, would better support local startups and facilitate collaboration.

This is about more than what the government should do. An ability to quickly adapt to technological advancements would enhance the sector’s efficiency and output and allow Australian companies to seize new opportunities as they arose in an increasingly competitive global market. This forward-looking approach would ensure that Australia remained at the cutting edge of global manufacturing.

With targeted investments in manufacturing capabilities and innovation, Australia’s supply chains would be better protected.

Australia must define and maintain a minimum manufacturing capacity to enhance its national resilience in an age of continuous, concurrent and cascading crises. Hard choices will of course need to be made, but clearly food and health security ought to be key priorities. Through these efforts, the nation can ensure that it remains competitive, resilient and prepared for the complexities of the global economy.

Seismic shifts underway in global semiconductor market as US accelerates decoupling from China

In August, the US government made a major commitment to America’s semiconductor manufacturing sector with the announcement of US$50 billion in funding under the CHIPS and Science Act. Bolstered by this move, memory chip manufacturer Micron announced a US$40 billion investment with the potential to create 40,000 new jobs in construction and manufacturing.

But it turns out the CHIPS Act was just the start.

On 7 October, the US Commerce Department announced sweeping export controls on ‘advanced computing integrated circuits (ICs), computer commodities that contain such ICs, and certain semiconductor manufacturing items’. In addition, the Bureau of Industry and Security has added 31 Chinese institutions and corporations to its unverified list because of ‘sustained lack of cooperation by a foreign government that prevents BIS from verifying the bona fides of companies’. The restrictions apply to all US citizens who support the development or production of chips in semiconductor fabrication plants in China without a licence.

Historically, the US had the lion’s share of the global semiconductor industry (37% in 1990), but its dominance has been eroded by North Asian markets over the past three decades. In 2020, Taiwan (22%), South Korea (21%), Japan (15%) and China (15%) accounted for 73% of global semiconductor manufacturing, compared with the US’s 12%.

The Semiconductor Industry Association, which represents 99% of the US semiconductor industry, projected in its 2020 report that the US share of the market would decline to 10% by 2030, while China would boost its share to nearly a quarter (24%), closely followed by Taiwan (21%) and South Korea (19%). The report emphasised the difference between the minimal amount of US government support provided to semiconductor companies compared to most Asian countries and made a series of recommendations. Semiconductor manufacturing in China, for example, is intensely supported by government policies under the ‘Made in China 2025’ plan.

Semiconductors have become ubiquitous in many aspects of our daily lives and are important for other critical technologies such as artificial intelligence and quantum computing. Increased demand for semiconductor chips for cars, infotainment and other commodities, together with supply-chain issues driven by the Covid-19 pandemic, have led to a worldwide shortage. Memory chips have become an important share of the semiconductor manufacturing industry and sales of these devices have grown by 31% in the past three years.

The US might not hold the largest global share of semiconductor manufacturing, but it’s home to a number of critical semiconductor processing suppliers—namely, Applied Materials, KLA and Lam Research—and the export controls include services.

Most semiconductor fabrication facilities would be operating around the clock with a maintenance and service contract secured from these companies to address any faults or need for servicing in a timely manner to maximise operations and production. Service contracts are critical for most semiconductor fabrication facilities, and the restrictions introduced through the new export controls will severely affect both China’s semiconductor fabrication capabilities and, in the short term, US semiconductor processing companies like Lam Research and Applied Materials for which service contracts are a regular source of income. Applied Materials has estimated that it will make a US$400 million loss just from the announcement as US semiconductor tech companies grapple with the changes to their customer base and the rapid exit of all their staff from China.

In 2020, the Boston Consulting Group estimated that US companies could potentially lose 37% of their revenue if they were banned from selling to Chinese customers, which would affect the amount of investment in research and development and the availability of highly skilled jobs in the US semiconductor industry.

The impacts of the US export controls will go far beyond the sudden exit of traditional semiconductor companies from China. The semiconductor ecosystem is intertwined with other manufacturing sectors, such as companies that provide stainless-steel components, vacuum systems and parts (for example, US-based Varian and Swagelok) or metrology tools such as microscopes. Every company working in this broader semiconductor ecosystem will be taking stock of the repercussions.

Perhaps the greatest impact will be felt in the global 3D NAND semiconductor manufacturing sector. The 3D NAND flash memory is a technology first unveiled in 2013 by Samsung Electronics, which introduced a method of scaling the memory size by stacking several 2D NAND planar layers to form nano skyscrapers. The US controls apply to 3D NAND chips of 128 layers or more, which are fabricated through a high-precision process with more than 1,000 consecutive processing steps that require the continuous operation of a set of semiconductor processing workhorses.

The non-volatile memory industry has been revolutionised this year with the announcement first by Micron of a revolutionary 232-layer 3D NAND memory chip and then by SK Hynix of a 238-layer 4D NAND memory chip.

In August, China-based Yangtze Memory Technologies (YMTC), a newcomer to this field in 2018, threatened the oligopoly of the 3D NAND markets by announcing its own 232-layer 3D NAND product. YMTC is one of the companies expected to be severely impacted by the US government’s restrictions.

US companies like Micron will benefit from the export controls and the expected slowdown of YMTC’s rapid ascension in this competitive market. Shortly after the latest US announcements, ASML, a Dutch state-of-the-art lithography company that has a monopoly on deep UV lithography systems, put a hold on all its exports to China. Under the US ban, Applied Materials, KLA, Lam Research and ASML can no longer supply YMTC and other Chinese semiconductor companies. This will also mean that the processing and manufacturing equipment acquired from the US companies can’t be serviced for smooth operation. Under the same restrictions, US-based companies will be allowed to supply to semiconductor chip manufacturers like Samsung, SK Hynix and TSMC that have semiconductor fabrication facilities in China for one year.

It is not just businesses that are finding themselves at the pointy end of the decoupling. Universities are an important part of the R&D ecosystem for semiconductor research and there are currently close international collaborations between China and other countries in this area. The US restrictions will change the semiconductor research collaboration landscape with China in a similar way to the effects US export controls have had on research collaboration with Iran in recent years.

A sovereign missile capability for Australia is about more than economics

In 1503, Niccolo Machiavelli warned, ‘One cannot always rely on someone else’s sword. One must be prepared to fight for one’s own cause. And to be ready for this, one must have the means.’

More than 500 years later it seems that we’re still arguing the point.

In his recent Strategist article, Bradley Perrett presents a case that Australia should be stockpiling missiles instead of making them and makes an array of statements, some reasonable and some questionable. Although his economic rationalist argument is relatively new, the strategic argument is not. And an understanding of strategy is essential for understanding why developing a sovereign capability has clear advantages in replacing, or augmenting, missile stockpiling.

The essence of Perrett’s argument is that it’s cheaper and supposedly more secure to buy, and therefore it’s better to buy. We’re wasting our time in considering developing and producing missiles on Australian soil, he says. He sees only an all-or-nothing solution.

Perrett notes that we won’t be giving up stockpiling because we won’t make all the missile types we use. This is a reasonable assumption, due in part to the requirements of platform integration rather than an inability to do it. As an example, integrating a new missile into the F-35 would not be a simple task.

He also makes the reasonable point that capabilities have different operational importance, although his argument is that ‘flashy equipment gets the money’, rather than being an assessment of operational risks and the importance of mitigating those risks, particularly in times of conflict.

Taking these two reasonable points together, we therefore need to ensure that the missile types that we might want to develop are actually those with the greatest strategic impact.

The economic argument as to why this endeavour is beyond us is tenuous at best. True, Australia has a small defence force and is a very small part of the global market. But sovereignty in defence industry is not just about making money and creating jobs. It’s about addressing the capabilities and undertaking the industrial activities that mitigate the strategic risks that we cannot accept as a nation. The level of acceptable risk will depend in turn upon the level of the assessed threat. And countries such as Sweden have long adopted a policy of defence export in order to offset the domestic costs.

So, what are the risks that we need to mitigate? The ‘operational advantage’ risk depends on the specific threat, and we could, in theory, address the threat through buying and stockpiling. The ‘freedom of action’ risk is the one that Perrett bases his argument on—that is, we can simply buy, in advance, the number of missiles that we need and then forget about the whole thing. Basically, we just don’t need to resupply.

Is that right, though? The Perrett argument is that ships and planes, and the multitude of Australian Defence Force personnel who operate them, will be ‘knocked out of the fight’ after a few engagements, and missile resupply will therefore not be required. What if he’s wrong? What if, against his best calculations, the odd fighter or frigate survives longer than the time he has allocated? What if, as he points out, the missile supplier can’t fulfil our request for additional supply because it’s busy meeting it’s home country’s requirements or trade routes are interdicted? What if, as a result, we simply can’t put the ships and planes that we continue to possess into the field because the smart calculations of missile expenditure and platform longevity are wrong? We will have achieved, ourselves, the result of taking our own platforms out of the fight since we can’t usefully operate them.

So, we need some level of sovereign development and production of missile systems. Importantly, we do need to determine the types where we can maximise benefits and minimise costs. We do have the local capability, and we can develop the capacity, but we need to start now. The Covid-19 pandemic should have taught us some lessons about reliance on overseas supply chains and the importance of resilience.

Michael Heseltine, then the UK defence secretary, echoed Machiavelli’s comment in 1986 when he said:

It is quite right that … there is practically nothing you cannot buy cheaper from the United States of America because they have huge production runs, huge resources, huge research programmes, funded by the taxpayer, and if we want to cut down Britain’s industrial capability all we have to do is to go to the United States of America and they will enable us to buy the products cheaper, and they are very good products, which would satisfy most of our demands, I might add with defence as well. But it would be, in my view, totally unacceptable [because] … you should never allow the strategic control of your essential defence requirements to be outside your hands.

If we take the Perrett argument to its logical conclusion, not only would we not produce missiles in Australia, but we would not produce any defence materiel, and moreover we would be wasting our time having a defence force.

Australia should be stockpiling missiles instead of making them

The Australian government needs to explain why making guided missiles domestically is better than simply importing and holding a stock of them big enough for war. Until it does, we must wonder whether its policy of building a missile manufacturing establishment is really driven by a desire to buy votes by promising jobs.

Announcing the plan on 31 March, Prime Minister Scott Morrison said: ‘Creating our own sovereign capability on Australian soil is essential to keep Australians safe.’

No, it’s not. Keeping sufficient stocks is the other, conventional way to ensure wartime supply. The government will have to argue that making missiles locally would somehow be cheaper. In fact, stockpiling should be much cheaper than local manufacturing, which cannot conceivably achieve the volumes that foreign suppliers’ factories do. Also, the local manufacturing capability will cost $1 billion up front.

Stockpiling is not only cheaper; it’s more secure, too.

And Australia won’t be giving up on stockpiling, anyway: we’ll still need it because we can’t make all the missile types we use.

Backing the establishment of domestic missile manufacturing, ASPI’s Michael Shoebridge pointed out last year that Australia’s armed forces had run short of munitions in even limited conflicts. But that was just because the government hadn’t bought enough rounds. The mistake is emblematic of the lack of seriousness that crops up again and again in Australian defence procurement: flashy equipment gets the money, while dreary but still critical stuff—mine hunting, base hardening, dispersion of fuel supplies—is largely ignored.

The government doesn’t say what kind of missiles it plans to make. ‘The new enterprise will support missile and guided weapons manufacturing for use across the Australian Defence Force,’ Morrison said.

Defence Minister Peter Dutton said the policy would create ‘a sovereign capability to manufacture a suite of precision weapons that will meet Australia’s growing needs and provide export opportunities as a second source of supply’. So, there will be several types in production, and the government hopes exports will maintain volume and keep costs down.

For any type of missile, Australia’s requirement is likely to be a small fraction of global production and correspondingly uneconomic. Australia’s tiny share of the West’s fighter fleet implies a similarly tiny share of the total need for Western air-to-air missiles. Australia is so far buying 72 F-35 Lightnings, but Lockheed Martin is likely to build more than 2,000 for the global market.

Further, the right to export will be available only if the original manufacturer of a missile and its home government agree to it; the announcement implies that these will be US manufacturers and the US government, which is generally not generous in this area. If exports can be achieved, they will at best be a palliative to the inefficiency of producing in Australia. Export subsidies would probably be needed, meaning Australia would pay foreigners to buy its products so those products could be made more cheaply for Australia. It doesn’t sound promising.

In principle, Australia could save by buying much less than a war stock of domestically produced missiles, relying on factories to surge in wartime. But the greater the production capacity needed for the surge, the higher the cost of the factories.

We might imagine that, when it came to war, Australia just could not rely on imports, because the demand for missiles would far exceed likely availability, especially if our allies were also trying to restock. We might, for example, imagine fighters rising to battle day after day, firing missile after missile in a campaign that lasted several months. For such circumstances, no war requirement seems predictable; continuous production feeding the air bases would be needed.

But the unpleasant reality of loss exchange ratios means that a fighter will be involved in only so many engagements, firing only so many missiles, before it is itself shot down. Just four complete loads of air-to-air missiles per fighter might be enough. For Australia’s 72 F-35s, that would be 1,152 Raytheon AIM-120 AMRAAMs and 576 AIM-9 Sidewinders. So a war stock can be estimated and, in Australia’s case, the volumes are nothing like what would be needed for economical production.

The same considerations apply to other types of missiles. A destroyer isn’t likely to loose off too many loads of surface-to-air missiles before it’s knocked out of the fight.

The result, then, must be Australia paying more for weapons made in Australia than it would pay if it imported and stockpiled them. The excess cost of the weapons and the production facilities is money that could instead be spent on other defence capabilities.

Domestic missile production, previously foreshadowed and now brought forward as a priority, will be a sovereign capability, the government says. ‘Sovereignty’ has become another dreadful defence buzzword; it just means independence, in this case the ability to fight without foreign help. While adequate stockpiling can achieve just that, domestic missile production facilities cannot.

Why? First, Australia cannot conceivably make all missile types it will need in a war. If two types are made in Australia but the war can’t be fought without supplies of all other types, then we will still rely on foreign supplies—unless we have adequate stockpiles.

Second, even missiles said to be manufactured in Australia will be only partly made domestically. These products are just too complicated for the production volume that Australia can support, even if that volume is somehow doubled or tripled with exports. Consider all the bits and pieces in just the seeker of an air-to-air missile. For an AMRAAM and major surface-to-air systems, a missile’s seeker is actually an exquisite miniature radar. And, on that subject, will Raytheon and Lockheed Martin be allowed to send their latest seeker technology to Australia?

Independence from foreign supply won’t be bought by fabricating only part of a weapon in Australia and adding parts bought from abroad—if there are no imported parts, there will be no missile.

Conceivably, foreign parts could be stockpiled for future mating with domestically produced parts, assuring a degree of independent supply. What’s imported and kept in the shed would tend to be the most expensive bits, and the volume would have to meet the full wartime requirement. But that just begs the question: if stockpiling is the solution for some parts, why isn’t it good enough for complete weapons?

Also, so-called sovereignty in munitions supply vanishes in a blinding flash when a few enemy cruise missiles rub out a factory in which some part of the manufacturing chain is concentrated. Stocks, on the other hand, can be dispersed. They can be hidden, too. A missile factory can’t.