Australia’s manufacturing problem is not capability, it’s control

But the trend line is not encouraging: manufacturing’s share of employment fell from 7.2 per cent in March 2015 to 6.2 per cent in March 2025, real manufacturing output was down 2.6 per cent on the year to March 2025, and the Australian PMI remained deep in contraction through 2025 and into 2026, with Ai Group reporting -27.9 in March 2026, the sharpest monthly drop since April 2020. Ai Group also reports manufacturers have faced 37.5 per cent growth in input prices over five years, with gas costs 48 per cent above 2019 levels.

That matters well beyond one sector. Manufacturing still accounts for 12.4 per cent of Australia’s exports and 7.9 per cent of national capital expenditure despite contributing only around 5.1 per cent of GDP in 2024, which tells you something important: manufacturing punches above its weight in investment, capability and economic complexity.

When confidence deteriorates here, the damage does not stay neatly inside factory walls. It spills into skills retention, apprenticeships, tooling, certification, supply chains, regional employment and the wider industrial base.

A lot has already been written about the federal government’s move from 14 Sovereign Industrial Capability Priorities to seven Sovereign Defence Industrial Priorities. The old framework included a broader spread of capabilities, including land combat and protected vehicles as a stand-alone priority.

The new framework narrows the field to seven areas, including continuous naval shipbuilding, guided weapons and munitions, combined-arms land-system sustainment and enhancement, autonomous systems, battlespace awareness, and test and evaluation/certification/systems assurance.

There is a strategic logic to focus. But for many Australian manufacturers, the shift from 14 to seven is not just administrative tidying-up. It is a market signal that the aperture has narrowed.

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Still, the real issue is deeper than whether the number is 14 or seven. The real issue is this: what does “sovereign” actually mean?

On one hand, the Defence Industry Development Strategy said sovereignty now goes beyond Australian ownership alone and can include businesses with Australian-based industrial capability and an ABN, with Australian ownership being critical only in limited circumstances.

On the other hand, the Commonwealth’s updated procurement framework now defines an “Australian business” as one that is majority Australian-owned, Australian tax resident, and has its principal place of business in Australia. Those two positions are not the same.

One places the emphasis on local activity. The other recognises that ownership, tax residency and control matter.

That distinction is not academic. It goes to the heart of what we are actually building. Public procurement reporting said that in 2024–25, 88.3 per cent of Commonwealth contract value went to suppliers with an Australian address.

An Australian address is not an ownership test. It does not tell taxpayers who controls the intellectual property, where retained profits go, who decides future capital allocation, or whose national priorities come first when capacity is tight. Public reporting gives us contract value, address and broad small and medium-sized enterprise (SME) estimates. It does not give Australians a clean ownership-and-control picture of who is really receiving the largest slices of strategic expenditure.

This is why the debate over manufacturing in Australia has become so confused. Too often, we treat local activity as if it were the same thing as sovereign control. They are not the same.

Take defence as an example. Defence said its industry base supports over 100,000 Australian jobs. In 2022–23, it awarded more than $38 billion in contracts, with just over $8 billion going to SMEs. Defence also said 57 per cent of capability acquisition expenditure and 80 per cent of sustainment expenditure was spent in Australia, and that $183.8 million in grants has been made available to support Australian small and medium businesses.

All of that is real and important. But it still does not answer the harder question: how much of the strategic value chain is genuinely Australian-owned and Australian-controlled?

Look at the disclosed major programs. Rheinmetall AG, headquartered in Düsseldorf, Germany, is the prime on the $5.2 billion Boxer LAND 400 Phase 2 program. Queensland’s government describes the MILVEHCOE facility at Redbank as a $170 million site built through a long-term partnership, supporting around 650 jobs. Rheinmetall has also said that the same facility is producing Boxers for the German Army, with that export work alone worth more than $1 billion to the Australian economy.

That is a useful reminder: jobs and exports matter, but they can still exist inside a production strategy controlled offshore.

Hanwha, headquartered in South Korea, is central to Australia’s Redback infantry fighting vehicle program. The government has described the broader Redback project as being worth around $7 billion in total, including approximately $4.5 billion for acquisition and initial support, with local construction in Avalon and an estimated 2,100 jobs including about 1,800 direct jobs at peak.

Again, there is real local value here. But the balance-sheet control, parent-company strategy and ultimate capital allocation remain offshore.

BAE Systems plc, with its registered office in London, remains the prime on the Hunter Class frigate program, a project the Commonwealth previously valued at around $35 billion. Government has described the program as supporting around 3,000 direct jobs and 5,000 indirect jobs at peak, and in 2024 executed the contract arrangements for the first three ships.

Once again, local jobs and capability are real. But so is the underlying reality: Australia’s largest defence-industrial programs are often being delivered through foreign-controlled entities with Australian subsidiaries.

Even in munitions, the pattern is similar. The government selected Thales as preferred tenderer for a new 155mm M795 forging capability at the Commonwealth-owned Benalla Munitions Facility, part of a guided weapons and explosive ordnance effort backed by up to $21 billion over a decade, with at least 550 jobs linked to the project.

That may be the right program decision. But it reinforces the broader point: Australia still defaults to building sovereign outcomes through foreign-owned industrial structures.

None of this is an argument against foreign investment, foreign partnership or international collaboration. Australia should absolutely work with allies and global primes. But there is a major difference between partnering with global firms and structuring your industrial future so that the decisive control points sit offshore.

That is where the current policy environment is failing Australian-owned SMEs.

At AEP, and in many businesses like ours, we have invested millions of dollars in equipment, people, process discipline, Lean Six Sigma capability, compliance systems and ISO-aligned operating frameworks because that is what serious manufacturing requires. We have done that in the belief that Australia wanted a stronger sovereign industrial base. We are not alone. Across the country, Australian-owned SMEs have backed themselves, hired people, trained staff, bought machinery, built traceability and quality systems, and carried the overheads that come with being credible suppliers in regulated and demanding sectors.

And now? Business confidence deteriorates further. The policy signal narrows. Input costs stay high. Working capital tightens. Large programs continue to aggregate around foreign-owned primes. Public reporting still struggles to distinguish local address from local control. And Australian-owned SMEs are told, once again, to be patient.

So let’s ask the rhetorical question plainly: how are SMEs meant to survive?

The answer is: not by being congratulated for existing. Not by another speech about resilience. Not by pretending that an ABN and an Australian office are the same thing as sovereignty. And not by waiting until a business collapses before government decides it was “strategic” after all.

When governments want to intervene, they can. Queensland helped back a $170 million defence manufacturing facility at Redbank. The Commonwealth and South Australia have now assembled a package of about $2.4 billion to stabilise Whyalla Steelworks. So the issue is not whether governments have the capacity to act. The issue is which businesses, sectors and ownership structures they decide are worth saving before failure becomes irreversible.

If Australia is serious about sovereign capability, then the next phase of manufacturing policy needs to be sharper and more honest.

First, government should publish a far clearer picture of ownership and control in major procurement, not just supplier address. Australians should be able to see, in plain terms, how much strategic spending is flowing to Australian-owned firms versus foreign-owned primes with local subsidiaries.

Second, government should adopt a stronger procurement weighting for genuinely Australian-owned manufacturers in designated strategic sectors. Not a token gesture. A real weighting that recognises ownership, tax residency, local reinvestment and domestic decision making as strategic assets in their own right.

Third, Australia should stop treating grants as the main answer for SMEs while the largest platform decisions continue to concentrate capability and influence elsewhere. Grants matter, but they do not replace pipeline certainty, cash flow certainty, faster payment, sub-tier access, and investment settings that allow Australian-owned businesses to grow to meaningful scale.

Fourth, tax settings need to do more for Australian manufacturers that actually invest here. Accelerated depreciation, plant and equipment incentives, certification and standards support, and investment allowances should be aimed at firms that are building Australian-owned industrial depth, not just those large enough to win the next headline ribbon-cutting.

Finally, we need to be honest in our language. A foreign-owned corporation with an Australian subsidiary is not automatically “sovereign” simply because it employs Australians and carries out work here. That may still be good policy in some cases. But it is not the same as building Australian-owned, Australian-controlled, Australian-taxpaying industrial capability.

That distinction matters.

Because if sovereignty means anything, it must mean more than local assembly under foreign control. It must mean Australian decision making, Australian reinvestment, Australian industrial depth, Australian intellectual property where possible, and Australian resilience when supply chains fracture or strategic priorities diverge.

Australia’s manufacturing problem is not that we lack capability. We still have capability. The problem is that we have not yet decided, clearly enough, who we want to own it.

And until we do, Australian-owned SMEs will keep being told they are essential right up to the point they disappear.

Mick McMillan is managing director of AEP Engineering, with more than three decades of experience across Australian military, defence and heavy industry industries.