Ni-Al2O3 functionally graded materials (FGMs) have become important for high-temperature applications due to a continuous change in composition. However, the manufacturing of Ni-Al2O3 FGMs with conventional machining methods is a long and costly process because of the insulating ceramic composition. This paper presents a new method of machining Ni-Al2O3 FGMs by self-induced electrical discharge machining (EDM). Self-induced EDM uses the conductive compositions of Ni-Al2O3 FGMs to trigger the discharges in the insulating composition. Machining characteristics of a four-layered Ni-Al2O3 FGMs drilled by self-induced EDM have been investigated, which include the material removal mechanisms, discharge properties, surface characteristics, material removal rate, and electrode wear ratio. It has been found that graded layers, 70 % Ni-graded layer and 30 % Ni-graded layer, are removed by dislodgement of Al2O3 particles, in addition to conventional melting and evaporation. Pure Al2O3 layer is melted and evaporated by utilizing conductive layer-induced discharges. The discharge properties, surface characteristics, material removal rate, and electrode wear ratio are significantly influenced by the material removal mechanisms of graded compositions. These findings demonstrate that self-induced EDM is able to effectively machine Ni-Al2O3 FGMs.