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Manufacturers gloomy on outlook as Covid-19 weighs

FMM In the News - THE STAR, KUALA LUMPUR, Monday, March 9, 2020: Malaysian manufacturers expect sales to be on the decline in the first half of this year due to the continued uncertainties and the outbreak of the Covid-19 coronavirus, according to the 16th edition of the FMM-MIER Business Conditions Survey.

General business conditions, local and export sales, production volume, capacity utilisation, capital investment and employment with the exception for cost of production, were expected to be below the optimistic threshold level, the findings of the survey showed.

“Sales projections for 1H2020 are gloomy with both local and domestic sales on a decline, a sign that tough times are ahead. Only 17% and 20% of the respondents are forecasting higher local and export sales respectively for 1H2020, ” said Federation of Malaysian Manufacturers (FMM) president Tan Sri Soh Thian Lai.

He said due to the expected decline in sales, both production volume and capacity utilisation were also expected to decline with 33% indicating that they are likely to produce smaller volumes and 30% considering lowering their capacities.

The survey is a bi-annual collaboration between the FMM and the Malaysian Institute of Economic Research (MIER).

Soh said the survey, which drew 490 respondents nationwide was conducted from Dec 12, 2019 to Jan 31,2020 (plus a two-week extension for respondents to assess the latest impact on outlook due to the Covid-19 outbreak).

It tracked business confidence via the FMM-MIER Business Conditions Index (FMM BCI) covering the actual performance in the second half of 2019 and outlook for 1H2020.

The survey revealed that as uncertainties continue to weigh amid the Covid-19 outbreak, manufacturers’ outlook for business in the first half of 2020 (1H2020) was generally lacklustre.

Production cost was likely to be higher in 1H2020 with 51% of respondents projecting an increase in their cost, up from 43% previously.

The top increases in production cost are input costs of materials (50% of responses), non-wage labour costs (45%), wages and salaries (25%), and utilities (electricity, fuel, natural gas and water) (21%).

Capital investment remained positive and 24% of respondents were looking to increase their capital investments in the months ahead. Recruitment is likely to remain relatively flat in 1H2020 with only 17% of respondents planning on increasing headcount soon.

As for the impact of Covid-19 on trade, Soh said a quick survey was conducted from Feb 7,2020 to ascertain the impact of the outbreak on manufacturers and trade.

The main concern of manufacturers was the impact on production due to reduced supply of raw materials from China including moulded and metal press parts, iron and steel products, ingredients for food and beverage production, parts and components for machinery, paper and packaging material, plastic materials including resin, etc. Similarly exports to China were also affected by reduced demand.

The main sectors impacted in terms of domestic sales are food products; construction materials; motor vehicles, trailers and semi-trailers; electrical machinery & apparatus; basic metal & fabricated metal products; and chemical and chemical products.

Exports most affected include machinery and equipment, automotive components, electrical and electronic products, toiletries, steel products and processed food products.

As for the manufacturers' progress in automation, there was an increase from two year ago.

Recall that the 2H2016 survey showed 34% of the respondents were automated at the 31%-50% level. Three years on, there were more respondents which had increased their automation at varying levels.

Most activities in respondents’ operations today were automated up to 40%, namely, assembly, inspection and testing, material handling, packaging and warehousing, as reported by 53%-59% of the respondents.

Process control and information management were also automated up to 40% in 42% and 46% of the respondents’ factories respectively.

On the issues faced in sourcing of foreign workers, higher remuneration demanded by these workers topped the list followed by the zero-cost policy which raised recruitment cost, freeze/gender restriction by source countries and lack of interest among foreigners to work in Malaysia.

On the issue of processing of applications by local authorities, the top three issues affecting respondents were the stringent processing by the Labour Department and tedious documentation (lengthy process) causing delays to the process.

Of those affected, half estimated the impact on their businesses at 10%-less than 40%, while another 13% estimated theirs at 50% to less than 60%.

Also 43% of respondents were reducing foreign workers with automation as their most popular initiative.

Some are stepping up efforts to recruit locals including some who are offering better pay packages and benefits to attract locals.

“Most who do not implement any initiative to reduce foreign workers were of the view that foreign workers are more reliable and productive than locals.

“Majority do not welcome another legalisation exercise and will apply through the normal procedure of hiring foreign workers. There were fears that another legalisation exercise would create confusion and problems, and encourage legal foreign workers to abscond, ” he said.

As for pay raise, he said that for 2019, most respondents increased the salaries of their executives and non-executives by 1% to less than 5%.

“The situation is expected to continue into 2020 as well, with somewhat the same rates being planned for staff.

“For executives, 53% and 25% of the respondents are considering increments of 1% to less than 5% and 5% to less than 7% respectively. For non-executives, 51% and 25% of the respondents are considering increments of 1%to less than 5% and 5%- less than 7% respectively. For both executives and non-executives, only about 10% would not be giving any salary increments for now, ” he said. 

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