There's a powerful narrative running through Australian boardrooms right now, and it goes something like this: global supply chains are broken, China is too risky, tariffs are making imports expensive, the government is offering incentives, and we should be making more things here — or at least closer to here. It's a narrative with genuine merit. But it's also a narrative that glosses over the economics, underestimates the complexity, and risks leading organisations into decisions they'll regret.
The reshoring conversation in Australia has intensified significantly since 2020. The pandemic exposed just how dependent the country had become on extended global supply chains — for PPE, for pharmaceuticals, for basic manufactured goods. Then came the geopolitical tensions with China, the Red Sea shipping disruptions, and the tariff shocks of 2025. Each new disruption reinforced the same message: distance is risk, and dependence on a single source is dangerous.
The Australian government has responded with policy settings that explicitly encourage domestic manufacturing. The Future Made in Australia Act, introduced in the 2024 federal budget, allocates approximately $22.7 billion over ten years to support clean energy and advanced manufacturing — including production tax credits for critical minerals processing and renewable hydrogen. The National Reconstruction Fund provides $15 billion in financing for projects that diversify and transform Australian industry, though it has faced criticism for slow deployment. A $5 billion Net Zero Fund, announced in September 2025 and delivered through the NRF, targets industrial decarbonisation.
Meanwhile, the Ai Group's 2025 Trade and Supply Chain Survey shows that 44% of Australian manufacturers intend to increase supply chain investment in 2026, with digital technologies and AI a focus. HKTDC's sourcing analysis confirms that many Australian businesses are adopting a China-plus-one strategy, diversifying their supplier base to reduce single-source reliance, with some considering reshoring operations and investing in local suppliers.
All of this creates momentum. And momentum, without rigorous analysis, is where expensive mistakes get made.
The unit cost trap
The most common mistake in reshoring analysis is comparing the wrong numbers. Specifically, comparing the unit manufacturing cost of a product made in Australia (or Vietnam, or Indonesia) against the unit cost from China — and concluding that the gap is too large to justify a move.
This comparison is misleading in both directions.
It understates the true cost of offshore sourcing by ignoring the hidden costs that accumulate across an extended supply chain: international freight and insurance, customs duties and tariff exposure, inventory carrying costs driven by long lead times, quality inspection and rework costs, travel and communication costs for supplier management, intellectual property risk, compliance management across jurisdictions, and the opportunity cost of slow responsiveness to market changes.
The Reshoring Initiative in the United States has documented this consistently. Their research shows that making sourcing decisions based solely on unit price typically results in a 20-30% understatement of true offshoring costs. When organisations conduct a proper total cost of ownership analysis — accounting for freight, duty, inventory, quality, risk and overhead — roughly 25% of what is currently sourced offshore would be more profitably reshored, even without tariff protection.
But the unit cost comparison can also overstate the case for reshoring by ignoring the genuine cost disadvantages of domestic production. Australian manufacturing labour costs are among the highest in the world. Energy costs have been rising. The domestic supplier base for many components and materials is thin or non-existent. Regulatory compliance costs are significant. Scale economies that exist in Chinese or Southeast Asian manufacturing clusters are difficult to replicate in a market of 26 million people. The Productivity Commission has cautioned that supporting industries without long-term competitive advantage can lead to ongoing costs — a warning that deserves attention in the current policy environment.
The honest answer, for most Australian businesses, sits somewhere in the uncomfortable middle: reshoring makes sense for some products, in some categories, under some conditions — and not for others. Getting that assessment right requires analytical rigour, not enthusiasm.
What total cost of ownership actually means in the Australian context
A proper TCO analysis for an Australian business considering reshoring or nearshoring should account for at least the following cost categories, each of which plays out differently depending on the product, the source market, and the supply chain configuration.
Manufacturing cost differential. The starting point, but only the starting point. Australian manufacturing wages are significantly higher than alternatives in Southeast Asia. But productivity differences, automation potential, and quality costs can narrow the gap substantially. For highly automated production where labour content is low, the wage differential matters less. For labour-intensive production, it matters enormously.
Logistics and freight. Australia is an island continent. Everything that arrives from offshore comes by sea or air, through a relatively small number of ports and airports. Freight costs from China to Australia have been volatile — spiking during the pandemic, normalising, then spiking again during Red Sea disruptions. But the baseline cost of shipping from Southeast Asia is actually lower than many assume for standard containerised goods. The logistics cost advantage of domestic production is real but often overstated for shelf-stable, non-perishable products. It's most significant for bulky, low-value items where freight is a large percentage of landed cost, and for products requiring temperature control or other special handling.
Inventory carrying costs. This is where the economics get interesting, and where many organisations undercount the cost of offshore sourcing. When your supply chain involves 4-6 month lead times from Asia (common for many Australian importers), you need to carry substantially more inventory than if you were sourcing domestically or from a nearby region. At current capital costs — the Reserve Bank cash rate has been elevated, and weighted average cost of capital for most Australian businesses sits between 8-12% — carrying excess inventory is expensive. A business with $50 million in inventory is spending $4-6 million per year just on the cost of capital tied up in stock. If domestic or nearshore sourcing could reduce that inventory by 30% through shorter lead times and more frequent ordering, that's $1.5-1.8 million in annual savings to offset against any unit cost premium.
Tariff and trade policy exposure. The tariff landscape has been volatile. Australian exporters paid approximately A$1.4 billion in additional duties following US tariff impositions, and the full effects of trade policy changes are still flowing through. The February 2026 US Supreme Court ruling that the use of IEEPA for tariffs was unlawful, and the subsequent replacement with 15% Section 122 tariffs, illustrates the unpredictability. For Australian importers, tariff exposure works differently — but the principle is the same: trade policy can change the economics of your supply chain overnight, and concentrated sourcing from a single geography amplifies that risk.
Quality and compliance costs. Managing quality across distance is expensive. Inspection regimes, factory audits, sample testing, rework and returns all cost more when your supplier is thousands of kilometres away. For products subject to TGA regulation, food safety requirements, or other Australian compliance standards, the cost of ensuring offshore suppliers meet requirements — and demonstrating that compliance to regulators — adds meaningfully to the total cost. Modern slavery reporting requirements add another layer of due diligence cost for extended supply chains.
Responsiveness and speed to market. This is harder to quantify but often strategically decisive. When your supply chain has 4-6 month lead times, you're making production decisions based on forecasts that are inherently uncertain. When demand shifts — a product takes off unexpectedly, a competitor launches, a promotion overperforms — you can't respond quickly. You either miss the opportunity or you've overcommitted to stock you can't sell. Domestic or nearshore sourcing with shorter lead times allows smaller, more frequent orders, better matching of supply to actual demand, and faster response to market changes. For businesses in categories with short product lifecycles, seasonal patterns, or promotional intensity, this responsiveness has real financial value.
Risk and resilience. The cost of supply chain disruption is notoriously difficult to quantify in advance but very real when it happens. The Ai Group found that 81% of Australian businesses that experienced supply chain disruptions reported increased costs, and 44% said disruptions constrained their growth. A diversified supply base — which might include some domestic or nearshore sourcing — reduces concentration risk. The question is whether the premium for that diversification is worth paying as a form of insurance, and the answer depends on how much disruption would actually cost your business.
The geography that matters: why "reshoring" for Australia is really "nearshoring to Southeast Asia"
When American companies talk about reshoring, they often mean bringing production back to the United States — a market of 330 million people with deep manufacturing capability, an extensive domestic supplier base, and massive government incentives. When Australian companies talk about reshoring, the reality is more nuanced.
Australia's manufacturing sector accounts for roughly 5.7% of GDP. The domestic supplier base for many manufactured components is thin. ABS data shows the sector employed approximately 902,000 people at June 2024, and while Industry Value Added grew modestly to $134.8 billion, EBITDA actually declined by $3.6 billion — highlighting the profitability pressures that make cost competitiveness a genuine challenge.
For most Australian businesses, the practical supply chain reconfiguration opportunity is not "bring everything back to Australia" — it's a combination of strategic decisions about what to make domestically, what to source from nearby alternative markets in the Asia-Pacific region, and what to continue sourcing from established offshore suppliers with better risk management.
The alternative markets have different profiles, and understanding those differences matters.
Vietnam has become the most common first alternative to China for Australian importers. It offers competitive labour costs, a growing industrial base, government support for export manufacturing, and improving infrastructure. It's also a member of both CPTPP and RCEP, providing preferential trade access. But capacity constraints are real — particularly for complex products — and quality consistency can be variable. Shipping times to Australia are somewhat shorter than from China, but not dramatically so for most trade lanes.
Indonesia is closer to Australia than any other major manufacturing economy, which creates genuine freight cost and lead time advantages. It has a large domestic market, competitive labour costs, and government interest in developing export manufacturing capability. But the manufacturing base is concentrated in certain categories, the regulatory environment requires careful navigation, and infrastructure outside Java can be challenging. The proximity advantage is most significant for bulky, low-value goods where freight cost is decisive.
India offers enormous scale and a strong engineering base, particularly for pharmaceuticals, chemicals, and IT-enabled services. But inland logistics infrastructure remains challenging, bureaucratic complexity is real, and quality consistency across suppliers varies widely. It's typically a stronger option for businesses with the resources to invest in supplier development and ongoing relationship management.
Domestic Australian manufacturing makes the strongest case in specific circumstances: where quality control and IP protection are paramount (defence, medical devices, specialised industrial products); where speed to market is a competitive differentiator; where the product is bulky and low-value relative to freight cost; where government procurement requirements mandate or incentivise local content; or where automation can offset labour cost disadvantage. The National Reconstruction Fund and Future Made in Australia incentives can shift the economics for certain product categories — particularly in clean energy, critical minerals processing, battery manufacturing, and medical technology.
The right answer for most Australian businesses is a deliberate portfolio approach: different products and components sourced from different locations based on a rigorous assessment of total cost, risk, responsiveness, and strategic importance. Not a wholesale shift in any one direction, but a conscious diversification of the supply base.
The five mistakes organisations make
Having set out the analytical framework, it's worth naming the specific mistakes we see most often when Australian organisations approach reshoring or supply chain reconfiguration.
Mistake one: comparing unit costs instead of total cost of ownership. We've covered this, but it bears repeating because it's so common. The unit price from the factory gate is the starting point of the analysis, not the answer. Organisations that make sourcing decisions on unit cost alone consistently underestimate the true cost of offshore supply by 20-30% — and overestimate the premium for domestic or nearshore alternatives by a corresponding margin.
Mistake two: underestimating the transition cost and timeline. Qualifying a new supplier — whether domestic, nearshore, or in an alternative offshore market — takes time. For simple products, six months might be sufficient. For complex manufactured goods, medical devices, food products, or anything with regulatory requirements, twelve to eighteen months is more realistic. And that's just qualification — building genuine dual-source capability, where the alternative supplier can reliably deliver at volume and quality, takes longer still.
During the transition, you're typically carrying cost in both the old and new supply chains: dual tooling, parallel testing, additional inventory buffers, project management overhead, travel costs. These transition costs are routinely underestimated and can be significant — enough to eliminate the projected savings from the switch for the first two to three years. Organisations that don't budget for the transition realistically either abandon the project partway through or deliver it over budget and behind schedule.
Mistake three: treating reshoring as an all-or-nothing decision. Some products should be reshored or nearshored. Others shouldn't. Treating the entire product portfolio the same way — either moving everything or moving nothing — misses the opportunity for a smarter, more nuanced approach. The most effective supply chain strategies segment the portfolio: critical components, high-risk categories, and products where responsiveness matters most get prioritised for diversification; commodity inputs where cost is the primary driver and supply risk is manageable stay with established low-cost sources.
Mistake four: ignoring the procurement capability required. Managing a diversified supply base across multiple countries is harder than managing concentrated sourcing from a single market. It requires more sophisticated procurement capability — in supplier identification and qualification, contract management, quality assurance, logistics coordination, trade compliance, and supplier relationship management. Many Australian organisations have procurement teams that are already stretched managing their existing supplier base. Adding new suppliers in new markets, with different languages, different regulatory frameworks, different quality systems and different commercial practices, requires capability investment that needs to happen concurrently with the sourcing transition.
Mistake five: making the decision reactively rather than strategically. The worst time to diversify your supply base is during a crisis — when you're scrambling for alternatives, your negotiating position is weak, and you don't have time for proper due diligence. The best time is before you need to, when you can assess alternatives methodically, qualify suppliers properly, negotiate from a position of strength, and build optionality into your supply chain before it's urgently needed.
The organisations that are best positioned right now began their diversification programs in 2022 or 2023, giving alternative suppliers time to qualify, build capacity, and prove their reliability before disruption hit. Organisations starting now are already behind — but starting late is better than not starting at all, because the forces driving supply chain reconfiguration (geopolitical tension, tariff volatility, Scope 3 reporting requirements, regulatory complexity) are structural, not cyclical. They're not going away.
What the policy environment means for Australian supply chain decisions
The Australian government's industrial policy settings are the most interventionist in a generation, and they create real incentives that can shift the economics for specific categories.
The Future Made in Australia Act commits approximately $22.7 billion over ten years. This includes production tax credits for critical minerals processing and renewable hydrogen, substantial funding through ARENA for clean energy technology manufacturing (batteries, electrolysers, solar components), and a $5 billion Net Zero Fund targeting industrial decarbonisation. The NRF's recent investments — including $75 million in Alpha HPA's alumina facility in Gladstone and $20 million in Diraq's quantum technology — signal the types of projects being supported.
For businesses operating in the targeted sectors — critical minerals, clean energy, battery manufacturing, medical technology, defence — these incentives can genuinely change the reshoring calculus. A production tax credit that covers a material portion of the cost disadvantage versus offshore production can make domestic manufacturing viable where it otherwise wouldn't be.
But there are important caveats. The incentives are concentrated in specific sectors. If your business makes consumer electronics, textiles, general industrial components, or other products outside the priority areas, the government support is limited. The NRF has faced criticism for slow deployment — stakeholders have noted that much of the funding remains unutilised. And the Productivity Commission has warned about the risks of supporting industries that don't have long-term competitive advantage, cautioning that the era of getting the most competitively priced goods on the global market is coming to a close, with consumers and businesses paying more as supply chains duplicate and fragment.
For supply chain leaders, the policy environment is a factor in the analysis, not the answer. Government incentives can shift the economics at the margin, and they should be factored into any TCO assessment. But they don't eliminate the underlying cost disadvantage of Australian manufacturing for most product categories, and they introduce their own risks — policy settings change with governments, sunset clauses expire, and eligibility criteria evolve. A reshoring decision that only works with a government subsidy is a decision that carries political risk alongside the commercial risk.
The Scope 3 connection
One dimension that's increasingly relevant but rarely integrated into reshoring analysis is the interaction with Scope 3 emissions reporting. Under AASB S2, large Australian organisations will be required to report Scope 3 emissions from their second reporting year — which for the first tranche (revenue exceeding $500 million) means mid-2026.
This changes the reshoring conversation in a subtle but important way. Transport emissions are a significant component of Scope 3 for most importers. Sourcing from Southeast Asian alternatives — particularly Indonesia, which is closer to Australia than China — reduces transport emissions compared to longer trade lanes. Domestic sourcing eliminates international transport emissions almost entirely.
At the same time, the emissions profile of manufacturing itself varies enormously by country. Manufacturing in a country with a coal-heavy energy grid may generate higher production emissions than manufacturing in Australia (which has a growing renewable energy share) or in a country with a cleaner energy mix. A proper Scope 3 analysis needs to consider both transport and production emissions — not just proximity.
The practical implication is that Scope 3 reporting requirements are adding another variable to the total cost of ownership calculation. Organisations subject to mandatory reporting will need visibility into the emissions profile of their supply chain, and sourcing decisions will increasingly need to account for emissions alongside cost, quality, risk and responsiveness. This doesn't automatically favour reshoring — but it does favour supply chain transparency, supplier engagement, and the kind of rigorous analysis that most organisations haven't yet invested in.
What a good reshoring assessment looks like
If your organisation is considering supply chain reconfiguration — whether that's reshoring to Australia, nearshoring to Southeast Asia, or diversifying away from concentrated offshore sourcing — the assessment should follow a structured approach.
Start with supply chain mapping. Before you can assess alternatives, you need to understand your current supply chain in detail. Where are your tier-one suppliers located? What about tier-two and tier-three? Where are the concentration risks — multiple products or components sourced from a single supplier, a single region, or a single trade lane? What percentage of your spend goes through your top ten suppliers? How many critical items are single-sourced? Many organisations can't answer these questions without significant data gathering across fragmented procurement systems and business units.
Segment your portfolio. Not every product or component needs the same supply chain strategy. Segment based on a combination of supply risk (concentration, geopolitical exposure, lead time vulnerability, supplier financial health), strategic importance (revenue impact, customer impact, substitutability), and value characteristics (unit cost, freight sensitivity, shelf life, quality criticality). High-risk, high-importance categories are the priority for diversification. Low-risk commodity inputs with well-functioning competitive supply markets are not.
Conduct total cost of ownership analysis for priority categories. For the categories you've identified as priorities, model the true total cost across alternative sourcing scenarios — current state, nearshore alternative, domestic alternative, diversified portfolio. Include all the cost categories discussed earlier: manufacturing cost, logistics, inventory carrying costs, tariff exposure, quality and compliance, responsiveness value, and risk premium. Be honest about the transition costs and timeline.
Assess alternative markets and suppliers. For each priority category, identify potential alternative suppliers in target markets. Assess them against capability, capacity, quality, financial stability, ESG compliance, and willingness to invest in the relationship. This is where deep procurement expertise matters — identifying and qualifying suppliers in unfamiliar markets requires knowledge of those markets, established networks, and structured evaluation frameworks.
Develop a phased transition plan. Don't try to move everything at once. Prioritise based on the combination of risk urgency, financial impact, and readiness (both your readiness and the alternative supplier's readiness). Plan for dual sourcing periods where you're running both old and new supply chains in parallel. Budget for the transition costs realistically. Set clear milestones and decision gates.
Integrate with broader supply chain strategy. Reshoring and nearshoring decisions don't sit in isolation. They connect to your network design (where are your distribution centres relative to where you're now sourcing?), your planning processes (shorter lead times from nearshore sourcing change inventory parameters and planning horizons), your warehousing and distribution configuration, your Scope 3 reporting obligations, and your resilience strategy. The best outcomes come from treating supply chain reconfiguration as an integrated strategic exercise, not a standalone procurement project.
The honest conclusion
Reshoring and nearshoring are real, strategically important options for Australian businesses. The forces driving supply chain reconfiguration — geopolitical volatility, tariff uncertainty, regulatory complexity, Scope 3 requirements, and the painful lessons of recent disruptions — are structural and enduring.
But the decision to reconfigure your supply chain should be based on rigorous analysis, not narrative momentum. The economics are more complex than most commentary suggests. The transition is harder, slower, and more expensive than most business cases assume. The right answer is almost always nuanced — a portfolio approach that puts different products and components in different places based on a clear-eyed assessment of total cost, risk, responsiveness, and strategic importance.
The organisations getting this right are treating it as a multi-year strategic program, not a reactive response to the latest disruption. They're investing in the analytical capability to make good decisions, the procurement capability to execute them, and the supply chain design thinking to integrate sourcing decisions with network, planning, and distribution strategy.
How Trace can help
At Trace, we work with Australian organisations across FMCG and manufacturing, retail and consumer, resources and energy, health and human services, and government and defence on exactly these decisions. Our work spans supply chain risk assessment and exposure mapping, total cost of ownership analysis across alternative sourcing scenarios, market analysis and alternative supplier identification, procurement strategy that integrates diversification with cost and service objectives, supplier qualification and evaluation frameworks, transition planning and project management, and network design that reflects the new sourcing configuration.
We're independent — we don't have commercial relationships with suppliers, logistics providers, or technology vendors that would influence our recommendations. Our advice is based entirely on what's right for your organisation.
We've written previously about how tariff disruption is affecting Australian businesses and about the broader challenges shaping Australian supply chains in 2026. If you're considering supply chain reconfiguration and want a rigorous, independent assessment of what makes sense for your business, get in touch.
Trace Consultants is an Australian supply chain and procurement consulting firm. We help organisations make better supply chain decisions — grounded in data, informed by deep operational experience, and independent of any vendor or supplier interest. Visit our insights page for more on the challenges shaping Australian supply chains.
