The Abbott government has thrown a lifeline to Australian shipbuilders, announcing plans to upgrade ageing naval vessels.
But Defence Minister David Johnston has confirmed the two largest ships will be built offshore and put unions on notice, declaring other projects will suffer the same fate if the Australian industry cannot offer value for money.
Senator Johnston said the government would replace the replenishment vessels HMAS Success and HMAS Sirius, with the ships to be built in either Spain or South Korea.
The government confirmed that it would use an Australian company to construct 20 replacement patrol boats.
He also foreshadowed that construction of eight future frigates could be awarded to an overseas company, but the government's preference was for the ships to be built in Australia.
Senator Johnston said the government intended to review Australia's shipbuilding capabilities, but warned the industry that it had to compete seriously with offshore companies.
On the future frigates he said "we want to see the ships built in Australia".
"But if we can't get the level of productivity to a reasonable standard, to a world parity standard then the government will be left with no alternative but to build them overseas," he said.
Senator Johnston said the replenishment ships would be built overseas because Australia had "very limited capacity" to build such large vessels.
"A capability gap is what is at the forefront of our mind," he said.
"These replenishment ships are urgently required.
"We have been left a mess. This HMAS Success should have been changed out long ago."
But the announcement has been panned by Labor who said the government was "selling out Australian jobs" by sending construction of the two replenishment ships offshore.
Opposition Leader Bill Shorten called the decision "reckless" and said it put Australia's ship building capacity and defence capability at risk.
"Today, thousands of Australian ship building jobs have been torpedoed by the Abbott government," Mr Shorten said.
"Tony Abbott is more interested in fighting for his own job than he is for the Australian jobs.
"This did not need to occur. Labor has a clear plan for building war ships in Australia and when the Liberal government tell us that there is no way to avoid this decision, they are lying."