FMM-MIER Business Conditions Survey Reveals Sluggish Outlook for 1H2020
The sixteenth edition of the FMM-MIER Business Conditions Survey, a bi-annual collaboration between the Federation of Malaysian Manufacturers (FMM) and the Malaysian Institute of Economic Research (MIER) revealed that as uncertainties continue to weigh amid the novel coronavirus (COVID-19) outbreak, manufacturers’ outlook for business in the first half of 2020 (1H2020) is generally lacklustre. All indicators i.e. general business conditions, local and export sales, production volume, capacity utilisation, capital investment and employment with the exception for cost of production, are expected to be below the optimistic threshold level.
The survey, which drew 490 respondents nationwide was conducted from December 12, 2019 to January 31, 2020 (plus a two-week extension for respondents to assess the latest impact on outlook due to the COVID-19 outbreak), 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.
Slow Moving Outlook for Next Six Months
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. In tandem with the expected decline in sales, both production volume and capacity utilisation are also expected to decline with 33% indicating that they are likely to produce smaller volumes and 30% considering lowering their capacities.
Production cost is 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 remains positive and 24% of respondents are 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.
Impact of Covid-19 on Trade
A quick survey was conducted from February 7, 2020 to ascertain the impact of the outbreak on manufacturers and trade. The main concern of manufacturers is 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 are 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.
Progress on Automation
Findings of the 2H2016 survey showed that 34% of the respondents are automated at the 31-50% level. Three years on, there are more respondents now who are automated, with varying levels of automation. Most activities in respondents’ operations today are 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 are also automated up to 40% in 42% and 46% of the respondents’ factories respectively.
Readiness Assessment of Industry 4.0
The Readiness Assessment is a comprehensive programme launched under the Industry 4WRD National Policy on I4.0 to help firms assess their capabilities and readiness to adopt I4.0 technologies in their processes. Only 23% of the respondents have applied to participate in the RA, of which 36% were selected, 26% were not and 28% did not receive any reply from the Ministry of International Trade and Industry (MITI). For those who did not apply, limited budget and resources are the main reasons, followed by lack of in-house expertise to lead in I4.0 adoption and lack of awareness of the RA programme.
Foreign Workers Recruitment
On the issues faced in sourcing of foreign workers, higher remuneration demanded by the FWs tops the list followed by the zero-cost policy which raised recruitment cost, freeze/gender restriction by source countries and lack of interest among FWs to work in Malaysia. On the 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%-< 40%, while another 13% estimated theirs at 50%-<60%.
43% of respondents are reducing FW 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 FWs were of the view that FWs are more reliable and productive than locals. Majority do not welcome another legalisation exercise and will apply through the normal procedure of hiring FWs. There were fears that another legalisation exercise would create confusion and problems, and encourage legal FWs to abscond.
For 2019, most respondents increased the salaries of their executives and non-executives by 1-<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%-<5% and 5%-<7% respectively. For non-executives, 51% and 25% of the respondents are considering increments of 1%-<5% and 5%-<7% respectively. For both executives and non-executives, only about 10% would not be giving any salary increments for now.
US-China Trade War
The 2H2018 survey revealed that majority of respondents were not affected by the US-China trade tensions. In the 2H2019 survey, a year later, more rounds of tariffs were imposed by both countries. While it is true that the impact, both positive and negative, could be greater as a result of trade and investment diversion, it has generally not affected the businesses of most respondents. 59-74% said the trade war has no impact on their exports, imports, investments, their role in the global value chain or employment.
New Industrial Master Plan (2012-2030)
The Third Industrial Master Plan will expire in 2020 and efforts to strengthen investments are expected to continue. Most (55%) respondents opined that the emphasis on manufacturing and manufacturing-related services should be refocussed in the New Industrial Master Plan (2021-2030), and clear and straightforward investment policies and incentives should be relevant to investors (51%). 38% called for support programmes to be increased to strengthen and grow more mid-tiered firms, while others suggested having, , a graduated re-investment allowance, an alignment of Federal and State investment policies and support to realise investments, and a firm roadmap to wean labour dependency and to ease investment planning.
Sales and Service Tax
16% lamented that there was no sales tax relief on exported goods that were returned due to defect/for disposal and 15% thought that the time period for exemption of goods returned for reprocessing is too short. Tedious and time-consuming process of de-registration that requires various supporting documents, as well as the non-allowance of advance renewal of exemption certificate (Schedule B) were some of the other challenges and issues faced by respondents.