Rising pressure on margins
Labour-intensive industries are on high alert as the government gears up for a reassessment of the minimum wage in Malaysia this year.
The impending review, announced by Human Resources Minister Steven Sim in the Dewan Rakyat on March 14, has sparked concern among stakeholders about the potential impact for businesses and workers alike.
While a wage increase holds the promise of improved livelihoods for workers, it poses challenges for employers’ bottom lines, particularly those operating in labour-intensive sectors. Finding the right balance between fair compensation and maintaining business viability is therefore crucial in navigating the impact of minimum wage adjustments.
CIMB Investment Bank head of research Ivy Ng Lee Fang notes the significance of wage increases in sectors such as plantation, manufacturing and services, citing that it could potentially lead to higher costs for these industries.
Ng adds that whether employers will look to pass on these costs to consumers depends on various factors, including market conditions and the level of competition.
“If supply is tight, employers can adjust pricing to cover the costs and attempt to pass on those costs.
“However, if they are in the business of overcapacity and facing stiff competition, it becomes harder to pass on the cost,” she tells Starbizweek.
The Federation of Malaysian Manufacturers (FMM) also raises concerns about a potential hike in minimum wage.
President Tan Sri Soh Thian Lai says the last review of the minimum wage order in May 2022, which saw an increase from RM1,200 to RM1,500 (see chart), has resulted in an immediate increase of between 25% and 36% in basic salary.
He says this has led to a significant knock-on effect on overall payroll costs, as salaries of staff earning near minimum wage levels had to be adjusted to maintain wage differentials between grades and seniority levels among employees.
“Another increase of a similar magnitude will certainly impact business costs again, especially given that 2024 has also seen a myriad of other costs increases including the increase in utility cost (electricity, gas and water), continued depreciation of the ringgit, increase and expansion of scope of the sales and services tax (SST) as well as the many other regulatory burdens arising from introduction of new tax measures in Budget 2024,” he notes.
Soh believes several factors will influence a company’s ability to absorb the impending rising labour costs, depending on their size, industry type and business model.
He says the level of labour-intensive operations would determine the extent of the impact of any increase in labour costs and their ability to absorb or offset it.
“Industries also have to consider whether they are able to pass on increased costs to consumers based on market forces where those operating in a highly competitive market may struggle to pass on the increased costs to consumers, thus impacting margins and profitability,” he adds.
Similarly, the Small and Medium Enterprises Association of Malaysia echoes concerns about the potential impact of minimum wage hikes on small and medium enterprises (SMES).
National president Datuk William Ng says any increase in minimum wage without corresponding increment in productivity will result in higher input costs for SMES.
“We will not be able to pass these incremental costs to consumers fully, hence we will see further margin compression. For SMES that operate in industries with low profit margins, this could spell the end of their business,” he notes.
William underscores the detrimental impact of previous wage hikes, citing a “system shock” that hindered SME growth and contributed to lacklustre economic performance in 2023.
“We have lost a window of opportunity to fully capture incremental business from the United States-china showdown. Business confidence was at its lowest in recent years due to, among others, that 25% jump in minimum wage.”
Questioning the approach, William asks: “Are we prepared to do the same again to our SMES and, by extension, our workers?”
Ng says the government must do more to create high-paying jobs instead of forcing businesses to pay more to solve the problem of rising costs.
“The way forward is to link wages to productivity. We must give the progressive wage model a chance. And to focus on retraining and upskilling our workers.”
Meanwhile, Soh underscores the importance of a holistic approach in the review process, emphasising the need for earnest engagement with stakeholders to gauge the acceptable increase under prevailing economic conditions.
He says there are several strategies that companies can employ to optimise efficiency and minimise the impact of rising labour costs on their bottom line including investing in technology and automation and improving productivity.
Soh notes that companies can also explore strategies such as lean management to streamline processes and identify inefficiencies, reduce waste and improve output.
“Investing in the upskilling and reskilling of employees can also enhance productivity by allowing workers to perform tasks more efficiently and effectively. Focusing on core operations while outsourcing non-core functions can also lower labour costs,” he adds.
Similarly, Ng highlights the importance of considering productivity enhancement to mitigate the impact of wage hikes. “Improving productivity and optimising processes can help offset rising labour costs,” she suggests.
Ng notes that companies may need to invest in automation and upskilling initiatives to enhance efficiency and maintain competitiveness in the face of higher minimum wages.