Fear of the unknown: Why Australia’s supply chain is under threat

Concern around Australia’s import-heavy trade relationships is hardly new. And infiltration of our supply chain need not be widespread to cause exponentially disruptive effects. Yet our current options are limited: even the least-worst option is prohibitively expensive and is unlikely to be implementable in the time we need.

In September 2024 hundreds of electronic pagers and walkie-talkies allegedly linked to key Hezbollah leaders exploded nearly simultaneously across Lebanon. Despite western media commentary around the ‘clever’ and ‘targeted’ attacks, the effects were hardly localised. Two children and four healthcare workers were amongst the fatalities, and close to 3000 were injured. This represented a very public demonstration of how widely-available consumer goods can be turned– literally – into ticking time bombs.

ASPI’s excellent analysis describing the implications of supply chain security for Australia offers an insight into the scale of the problem that needs to be addressed.

China currently produces over 36% of the world’s electronics, including smartphones and telecom infrastructure. The issue of course isn’t high-end and expensive products: Israel’s attacks weren’t like the Stuxnet virus that were designed to target Iran’s uranium enrichment program through disruption of its SCADA systems, but instead focused on cheap, disposable pagers that could be weaponised, traced and on-sold to targets by infiltrating the supply chain of perhaps two different countries.

A snapshot of Australia’s demand for consumer goods and electronics is a useful vignette to illustrate the size and scale of our supply chain vulnerabilities.

Australia imports over USD$70b worth of Chinese goods annually: about USD$15b is electrical and electronics equipment; close to USD$13b is machinery and industrial equipment (much of which in turn will contain significant electronic componentry). 

The consumer electronics market in China is worth close to a trillion dollars in revenue. Every loungeroom in Australia, every bedroom, every workplace and every pocket will almost certainly contain at least one Chinese-made electronics product.

For household products around 70% of Kmart’s goods, 60% of Target’s, 55% of Officeworks and 46% of Bunnings products are manufactured in China (and this is just under the Westfarmers stable of companies). Not all of these are electronics goods, but many are.

As ASPI points out, the fear is that a potential adversary such as China could subvert this dominance of the electronics supply chain for activities ranging from surveillance to sabotage.

This is not novel: the Australian Government decided in 2012 to exclude Chinese company Huawei bidding for NBN work for precisely this reason.

Of course, it is highly unlikely that a hostile state is busy planting explosives in solar-powered garden lights, flat panel TVs and smart toasters. Equally, that’s not really the point: the level of control that China exercises on the global electronics supply chain means it has the unique access, opportunity and capability to do so at a time of its choosing.

And fear itself can also be a powerful motivator. The ‘strawberry contamination crisis’ of 2018, when several punnets of strawberries were found with needles inside them, cost millions to farmers and devastated local industry. The contamination was fairly localised – the fear of contamination changed behaviours and required a federal government bailout. If regional tensions rise over the coming years, a concerted information operations campaign targeting Australian consumers is not beyond the realms of possibility. What would our response be if there were widespread fears that Electric Vehicles (EVs), games consoles and smart watches might have been compromised?

The potential problem is very clear – less so are obvious solutions that can implemented in an environment characterised by a dramatic reduction in strategic warning time.

The US is already making moves in this space to exclude some Chinese hardware and software from its market. Proposals to restrict Chinese-produced EVs with in-built internet connections are already in the works, and it is likely over the short-term they will look at more opportunities to restrict imports in key sectors. US domestic politics and trade protections are likely to carry as much as weight as security concerns over the next few years.

The US has a natural advantage to be more forward leaning given the US’ own industrial base that is orders of magnitude larger than Australia’s, especially electronics. Its domestic market has over 13,000 electronics and equipment facilities in operation, employs more than a million workers, and has reported annual sales of close to US$2T. 

In contrast, Australia’s domestic electronics market is less a total percentage of China and the US and more a rounding error: just under $50m (but growing).

This huge disparity means that simply committing to build Australia’s ‘sovereign’ industry to mitigate the risk of supply chain disruption is no small task, as laudable is it is. The capabilities needed to make even a modest dent in Chinese imports: large scale manufacturing facilities and fabrication – not to mention the core scientific and engineering skills required – is not a matter of iron will but the cold mathematics of cash and politics.

In a country still deliberating over a high-speed rail corridor sixty years after the Shinkasen bullet train first appeared in a war-ravaged Japan, Australia’s economy is still based on extractive capitalism, with productivity on par with Iceland, less domestic manufacturing than Malaysia, and an R&D budget that has fallen to its lowest proportion of GDP since 1978-79.

Developing an assurance framework for foreign-imported electronics goods is possible, but complex. The UK established a Cyber Security Evaluation Centre in 2010 to mitigate perceived risks in Huawei’s involvement in the telecommunications sector. It was expensive, with questionable value, and as a model not easily scaled to provide assurance around a much wider range of consumer goods.

In the absence of a domestic electronics sector of sufficient scale to mitigate China’s, and when regional tensions or even conflict will likely impact on the availability of key commodities, Australia find itself in a tight spot. 

Partnering with regional countries might be an option but capabilities take time to develop. Indonesia could well be the fourth largest economy in a decade or so and has identified its domestic electronics market as a major priority. We might think about what this means in terms of a closer bilateral relationship given Indonesia’s own security concerns around China’s regional intentions. 

We could also think about what supply chain security looks like in the context of AUKUS. While Pillar 2 focuses on advanced technologies such as hypersonics and directed energy weapons, a more pressing concern might be how to help grow and scale key commercial industries that could come under pressure as we move through the competition/crisis/conflict continuum. Australia is not without leverage here, and there is an opportunity to seek some immediate return on our substantial investment. 

Alternatively, the only truly effective response in the short term is unpalatable from a geostrategic position: simply avoid making ourselves a target. This aligns with the oldest rule in the playbook of global war in that the only winning move is not to play. That might buy us some time, but in the words of Timothy Snyder, “anticipatory obedience is a political tragedy”. 

We risk losing everything by doing nothing.