Kuala Lumpur – The twentieth 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 the manufacturing sector ended the year 2021 on a positive note as economic activities resumed with the easing of containment measures and recovery of global demand for manufactured goods. Both current and forward looking indicators in the latest survey picked up pace from the first half of 2021 (1H2021), an indication that confidence among manufacturers generally improved in the second half of 2021 (2H2021), and the sector is poised for further strengthening of its recovery momentum in the first half of 2022 (1H2022).
The survey, which drew 702 respondents nationwide, was conducted from January 5 to February 10, 2022, prior to the Russia-Ukraine War, and tracked business confidence via the FMM-MIER Business Conditions Index (FMM BCI) covering the actual performance in 2H2021 and outlook for 1H2022.
Manufacturing activity rose in 2H2021, as reflected in the general business activity index which, at 107, had gained 42 points from 1H2021. Its surge past the 100-point optimism threshold suggests that the level of respondents’ confidence on their businesses had improved substantially in the past six months. 36% of the respondents in 2H2021 replied favourably, while 35% did not see any change in their business activity, up from the prior period’s 19% and 27%, respectively.
Local and export sales picked up in 2H2021 with the local sales index rising to 94 from 56 in 1H2021, while the index for export sales climbed to 96 from 71 previously. 39% and 38% of the respondents managed to maintain their local sales and export sales, respectively, in 2H2021, up from 30% and 31% in 1H2021, respectively. Those who sold more domestically rose to 28%, more than doubling the 13% in 1H2021. Among those who export, 29% reported higher sales in 2H2021, up from the previous period’s 20%.
Production and capacity utilisation rose in tandem with sales in recent months with the indexes for both these indicators soaring above the optimism level in 2H2021. The current index for production volume rose to 105 from 61 previously, with 36% having increased their production in 2H2021, doubling that of 1H2021. The index for current capacity utilisation also climbed to 101 from 59 in 1H2021, with 31% of the respondents reporting higher capacities in 2H2021, up from 16% in the prior period.
Manufacturing cost rose again in 2H2021, as reflected in the index for cost of production which, at 174, is the highest reading since the inception of this survey in 1H2012. An all-time high of 77% of the respondents reported higher production costs in 2H2021. The capital investment index shifted higher above the optimism threshold to 105 from 78 previously, implying that capital expenditure (CAPEX) has grown lately, indicated by 25% of the respondents in 2H2021, up from 14% in 1H2021 and 17% in 2H2020. Hiring resumed in 2H2021 with the employment index rising to 99 from 82 previously. 20% of the respondents increased their headcount in 2H2021 while 59% maintained their headcount.
Heading into 2022, growing external demand is expected to bolster recovery in the manufacturing sector amid continuing domestic and external headwinds. All forward-looking indicators are back in the black with readings above the threshold level of optimism, portending that the near-term prognosis for the manufacturing sector is positive. The expected business activity index soared to 122 from 60 previously, implying that business activity is expected to gain further momentum in the next six months. 39% of the respondents believed that business activity will pick up soon, while 17% were pessimistic in this aspect, which is in sharp contrast to 55% who replied similarly in the previous survey.
The indices for expected local and export sales also improved considerably from the prior, at 113 and 111, respectively, it shows that expectations on sales outlook are looking up in the coming months. 33% of those who sell locally and 33% of those who export are optimistic of higher sales soon, up from 10% and 18% in the prior survey, respectively.
The expected indices for production and capacity utilisation rose to 122 and 117, respectively, from 62 and 60 previously, suggesting that higher production and capacity are in the pipeline. 41% and 37% of the respondents are planning to step up their production and capacities soon, respectively, up from 17% and 15% previously. The expected cost of production index rose to an all-time high of 179, an implication that production cost is set for another increase in 1H2022, as envisaged by 81% of the respondents. The index for capital investment also increased and at 125, the index gained 44 points from the preceding survey, a connotation that a rise in CAPEX is imminent. 39% of the respondents will likely increase their CAPEX soon, up from 18% previously. Recruitment is also expected to beef up in early 2022, as depicted by the index for expected employment which rose to 121 from 87 previously. 34% are planning to expand their workforce soon.
TOP 3 INCREASES OF COST OF PRODUCTION – The top three increases of production costs in 2H2021 were cost of input materials, labour and logistics. Cost of materials topped the list of increase, with 84% of the respondents citing it. While labour costs, (headcount change, salaries & wages, and sub-contract costs) was confirmed by 60% and logistics (mainly due to freight rates) received 55% responses. Higher cost of utilities (electricity, energy/fuel, natural gas and water) was also noted by 16% of the respondents.
ECONOMIC RECOVERY IN 2022 – In terms of the country’s economic recovery, 31% are confident of a recovery in 2022, while 46% are unsure and 23% responded negatively. DOMESTIC INVESTMENT/RE-INVESTMENT – 54% of respondents responded favourably that they will carry out domestic investment or re-investment such as adding in more advanced machines & expanding operations, including building additional factories, etc in the coming months, while 26% do not have such plans for now, and 20% are unsure.
BUSINESS RECOVERY IN 2022 – Insofar as their own business recovery is concerned, 61% are confident of this eventuality in 2022, 30% were unsure while 9% were pessimistic. Among those who responded positively, 35% believed that their businesses will recover to pre-Covid levels in 2022, while 32% are even optimistic that their recovery will be better than pre-Covid levels. 33% are reportedly still at Covid levels but they are expecting their businesses to recover to pre-Covid levels, or better, from 2H2022 to March 2023.
POTENTIAL RISKS TO GROWTH IN 2022 – Labour shortages was voted by most (63%) respondents as the potential risk to growth within the domestic economy, followed by supply chain disruptions (59% responses) and the Covid-19 pandemic (50%). High freight rates and inflation were pointed out by 49% and 43% of the respondents, respectively. IMPACT OF END OF BANK MORATORIUM ON BUSINESS SUSTAINABILITY – 71% of the respondents indicated that the ending of the bank moratorium in March 2022 will have no impact on them. For those who will be impacted, 12% will likely undertake business merger and acquisition to sustain their business.
WORKING FROM OFFICE (WFO) vs WORKING FROM HOME (WFH) – Effective 1 January 2022, employees of more than three quarters of the respondents are back to working from the office (WFO). 59% estimated the proportion of their employees WFO at >80-100%, while 9% of the respondents have >50%-80% of their staff WFO. Another 10% reported that 40-50% of their employees are working from the office.
SALARY INCREMENT AND BONUS PAYOUT IN 2021 AND 2022 – Salary increments in 2021 for both executives and non executives were mainly at a quantum of 1 – <5% and this was disclosed by 48% and 49% of the respondents. For 2022, respondents will be more generous as most are planning salary increments of 1-7% for all staff. In 2021, non-contractual bonuses are being paid by more respondents than contractual ones. Executives of 43% of the respondents and non-executives of 42% of respondents are awarded non-contractual bonuses in 2021, of which the majority were giving a quantum of 0.5 <1.5 months. Contractual bonuses in 2021 are also awarded to executives by 15% of the respondents while 18% of respondents were granting the same for their non-executives, of which majority were giving a quantum of 0.5-<1.5 months.
Bonus plans for 2022 are expected to be lower than 2021. 13% and 15% of the respondents planned to reward their executives and non-executives contractual bonuses, respectively, down from 15% and 18% in 2021, respectively. Non-contractual bonuses are on the agenda of 41% of the respondents for their executives, while 39% are contemplating the same for their non-executives, compared to 43% and 42% in 2021, respectively.
MINIMUM WAGE (MW) – With the review of the minimum wage due in 2022, a clear majority of 72% of respondents did not agree to an increase to RM1,500 from the current RM1,200. Of this proportion, most (39%) opined that RM1,300 is a more acceptable rate. PROGRESS ON AUTOMATION – Automation of operations in 2H2021 has generally remained the same as in 2H2019. 65.2% of the respondents are automated up to 40% to date, little changed from the 65.1% tabulated two years ago. Automation of 41-50% was reported by 13.5% of the respondents this time, compared to 13.9% in 2H2019. Those whose automation is at 51-100% totalled 15.1% currently, relative to 15.9% in 2H2019.
By activity, most of them are still in the early stage of automation (1-10%), especially warehousing, material handling and assembly, as disclosed by 27-30% of the respondents who are involved in such activities. Those who estimated the automation of their warehousing and material handling activities at 11-40% totalled 47% each. Automation of information management, machining and process control at 41-90% was also reported by 41%, 40% and
36% of the respondents, respectively. Among those activities which are automated at 91-100%, process control and information management topped the list, as indicated by 4% of respondents. COMPLIANCE TO ACT 446 – About 58% of the respondents are subject to the Employees’ Minimum Standards of Housing and Amenities Act 1990 (Act 446). 42% of those who have to comply to the Act maintained that they have completed and received the CFA, while 20% confirmed that their application is pending endorsement/approval from the local councils. Another 18% have submitted their CFA application online with all supporting documents and awaiting audit by the Labour Department, but 16% have yet to submit their application. RECENT FLOOD SITUATION – 31% of the respondents were indirectly impacted by the recent floods that hit several states in Peninsular Malaysia, while 9% were affected directly. In addition, total losses to companies that were indirectly impacted by the floods were estimated at more than RM238 million while for those who were affected directly, total losses amounted to more than RM220 million.
Most of the companies that were directly impacted by the floods reported the following: damage to property, assets and goods (65% responses), employees unable to report for work due to damage to their homes (63%) and halt in production for damage assessment, cleaning and repair works. Losses in replacement and repair of plants, machinery and equipment were reported by 47% of the respondents, while 37% had to deal with business losses due to production delays and supply chain disruptions. Those who were indirectly impacted reported the following: supply chain disruptions due to suppliers/ warehouse/ third party logistic providers being affected by the floods (66% responses); employees were also unable to report for work due to their homes being affected by the floods (56%); affected by closure of roads, including those leading to the ports and airports, which delays their production (48%); and suffered business losses due to production delays and supply chain disruptions (31%).
BUSINESS STRATEGIES/ACTION IN THE NEXT 6 MONTHS – In the first six months of 2022, the most popular productivity-related strategy/action that most respondents will undertake is training and upskilling (67%); 45% will increase their technical workers; 43% will implement lean manufacturing; while 13% will allow flexi-hours and employees to work from home. Where technology-related strategies are concerned, 74% are planning to adopt Industry 4.0, while 65% and 44% are considering automation and digitalisation, respectively. Other strategies include: market expansion (61% responses), new product introduction (48%responses), deployment of research and development and innovation (28%), expansion of local supply chain (26%) and business diversification (26%).