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Why Does Australia Struggle with Manufacturing?

Mar 25

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An in-depth explainer as to why Australia's manufacturing is on the decline | TDMG, 2025

A Nation That Once Built, Now Buys: The Decline of Australian Manufacturing

Australia’s manufacturing industry, once a major pillar of its economy and national identity, has undergone a steady and dramatic decline since the late 20th century. While many countries have embraced globalisation while still protecting key industrial sectors—Germany and South Korea being prime examples—Australia has largely dismantled its manufacturing capacity in favour of open markets and resource-based exports. The shift from protectionism to free trade, initiated during the Hawke-Keating era of the 1980s and 1990s, was seen at the time as a necessary modernisation to address lagging productivity and international competitiveness. Yet, this policy transformation came at a steep cost.


As tariffs, import quotas and local content requirements were stripped away, many domestic industries were left exposed to foreign competition, often from countries with lower wages and stronger economies of scale. Major manufacturers shut down or moved offshore, unable to compete with lower-cost production from Asia. This triggered a wave of job losses, particularly in working-class regions, and sparked a deep economic restructuring. Australia became increasingly reliant on extractive industries like coal, iron ore, and natural gas, alongside the rapid growth of the financial and services sectors, including education and tourism. While these sectors have delivered strong GDP figures, the hollowing-out of manufacturing has left Australia vulnerable in times of global disruption.

The Economic Pressures Undermining Local Manufacturing

At the core of Australia’s struggle to maintain a viable manufacturing sector are several interlinked economic pressures. First and foremost is the cost burden. Operating a manufacturing business in Australia is significantly more expensive than in many competing nations. Wages, commercial electricity rates, real estate prices, and regulatory compliance costs are among the highest in the world. As a result, Australian-made goods often struggle to compete on price, both domestically and internationally. It is often cheaper for retailers to import products from China, Vietnam, or Indonesia than to source from local manufacturers—even when factoring in shipping and logistics.

Moreover, Australia’s relatively small domestic population of 26 million limits the potential scale of production. Unlike China, the United States, or even Germany, Australian manufacturers cannot rely on a massive internal market to drive demand. This makes it harder to achieve economies of scale, which are essential for reducing unit costs and staying competitive in global trade. Compounding this is the country’s geographic isolation—far from the major economic centres of Asia, Europe, and North America—resulting in longer shipping times, higher freight costs, and greater vulnerability to global supply chain shocks, as seen during the COVID-19 pandemic.


Policy Failures and Missed Opportunities

Government policy has also played a role—often not in the way it was intended. While liberalisation and deregulation opened Australia’s economy to the world, successive governments have failed to implement a consistent or strategic industrial policy. The abrupt end of government subsidies for car manufacturing, culminating in the closure of Holden’s Adelaide plant in 2017, symbolised this shift. The auto industry had been one of Australia’s few high-volume manufacturing sectors, and its collapse cost thousands of jobs, disrupted communities, and wiped out decades of skills and infrastructure.

Australia’s policy environment is widely seen as reactive rather than proactive. Investment incentives for manufacturing have been inconsistent, and R&D support has lagged behind competitors. While countries like South Korea and Germany channel billions into manufacturing innovation, automation, and export development, Australia’s approach has been piecemeal. The “build it and they will come” logic has rarely translated into long-term success without policy alignment, skills investment, and financial backing.


Structural Challenges: Labour, Energy, and the Curse of Resources

Another critical constraint is Australia’s ongoing shortage of skilled labour in technical and high-value manufacturing roles. Fewer students are enrolling in STEM (science, technology, engineering and mathematics) fields, and vocational training systems have suffered from funding cuts and neglect. This limits the domestic talent pool available to fuel advanced industries like aerospace, medical technology, or clean energy systems. Many Australian firms struggle to find workers with the right skills to implement and maintain complex manufacturing processes, particularly those involving automation or robotics.

Energy costs are also a major issue. Despite abundant natural resources, Australia has some of the highest industrial electricity prices among OECD nations. The Whyalla Steelworks in South Australia—once seen as a potential national asset—fell into voluntary administration in February 2025. Management cited high input costs, including energy, and a lack of targeted government support as key reasons for its collapse. While the South Australian government has stepped in to keep the plant operating, the broader issue of uncompetitive energy pricing remains unresolved.

Australia’s reliance on mining exports has also contributed to what economists call “Dutch Disease”—where a booming resource sector drives up the value of the national currency, making manufactured exports less competitive. While resource wealth has improved national income, it has simultaneously placed pressure on other sectors, particularly manufacturing and tradable goods, which face rising costs and falling export demand.


Global Trade Agreements: A Double-Edged Sword

Australia’s embrace of free trade has delivered cheaper goods to consumers but has also opened the floodgates to low-cost imports. Free Trade Agreements (FTAs) with countries across Asia and the Pacific—such as the China–Australia Free Trade Agreement (ChAFTA) and the ASEAN-Australia-New Zealand FTA—have significantly lowered trade barriers. While this has benefited the retail and consumer goods sectors, it has placed enormous pressure on domestic manufacturers who cannot match the scale, cost-efficiency, or government-backed support of foreign competitors.

Unlike other nations that balance free trade with targeted industry protection, Australia has rarely used tariffs, anti-dumping laws, or local procurement rules to defend emerging or vulnerable sectors. Without such tools, Australian firms often face an uneven playing field, making it harder to develop strategic industries or retain jobs in manufacturing hubs like Victoria and South Australia.


Is There a Way Forward? Rebuilding Australian Manufacturing

Despite these challenges, all hope is not lost. Many economists, industry leaders, and policymakers argue that Australia can rebuild a strong and sustainable manufacturing base—but not by trying to compete on mass-market consumer goods. Instead, the country should focus on high-value, specialised sectors where scale matters less and innovation, precision, and reliability matter more.


Industries like defence technology, green energy components, battery manufacturing, medical devices, and aerospace parts offer real opportunities for Australia to compete globally. These are areas where automation, advanced skills, and intellectual property play a bigger role than labour cost alone. With appropriate public investment, subsidies for R&D, and close collaboration between universities and industry, Australia can play a meaningful role in these future-facing sectors.


Governments at both federal and state levels can also take a more active role. Reintroducing targeted protections, including time-limited tariffs, “buy Australian” procurement rules, and anti-dumping laws, could provide the breathing room needed for strategic sectors to scale up. Germany and South Korea have demonstrated that it’s possible to be pro-trade and pro-manufacturing at the same time. There’s no reason Australia can’t do the same.


Conclusion: A Fork in the Road

If Australia continues to treat manufacturing as a relic of the past, it risks becoming a country defined solely by what it extracts and consumes, not by what it creates. Sovereign capability, supply chain resilience, and economic diversity all depend on a vibrant manufacturing sector. With the right mix of smart policy, targeted support, and long-term vision, Australia could once again become a country that builds—and not just one that buys.

 

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