Minimum wage policy in MY - any downsides?

Investors

For investors, I cannot see serious downsides, because most of them have already introduced higher wages in Malaysia. Furthermore, many of these corporations are in high-tech manufacturing and not cheap-labour mass production. If there is any downside, then I would expect that there will be a gradual increase for minimum wages throughout the coming years. Consequently, Malaysia can become another expensive labour market in the future. With the policy in place and starting low, most investors have a lot of time to adapt. On top, we should not forget that foreign workers, besides other exceptions, are not covered by the new minimum wage policy.

Malaysian Industries

Glove industry margin trends

Rubber gloves have become one of the main export products of Malaysia and have been profiting from the low wages paid so far. The leading companies such as Top Glove or Hartalega pay their employees about RM 600 in peninsular Malaysia. As industry research indicates, labour costs account for about 7% - 9% of the total production costs. Having said this, we might not see a major consolidation in the market, but a small surge in prices to handle the higher production costs. Some companies consider to renegotiate certain allowances to deal with the costs, which could become a drawback for the employees. (The Edge 3 May 2012: Glovemakers face short-term margin squeeze by higher wages) 

Palm Oil

While the rubber industry and related products are  important sectors bound to suffer, we will experience similar issues all over the agricultural sectors. The second dominant product line would be palm oil. Malaysia has been the largest exporter of palm oil for many years, but lost this title to Indonesia in recent years. A price hike due to low wages in this industry is as likely as for the rubber and rubber glove industries. However, similar strategies are expected. Most companies will pass the higher labour costs to their customers. (The Borneo Post 26 April 2012: Mixed reactions to minimum wage implementation). An interesting question arises in regard to Indonesia. Will Malaysia lose more market shares to its neighbour or is the pricing effect rather marginal? Of course, it should be noted that often foreign workers are employed in these sectors, who are excluded from the minimum wage policy. 

My final remark on the whole issue of newly introduced minimum wages in Malaysia goes to the potential of modernisation and automation. Several analysts mentioned that labour intensive industries could feel enticed to modernise their operations, instead of relying on more expensive hands. From my current perspective on this market, I cannot see this shift happening. Firstly, as mentioned before, many of these industries are likely to employ foreigners, which do not benefit from the new policy. Secondly, Malaysian corporations are pampered by the government and would expect an extensive economic support program to sideline modernisation in affected industries. So far, I did not hear anything about such a program. It would certainly be another opportunity to collect voters for this election. Let us observe what will happen.

Leaving minimum wages aside, I am heading to murder, money and Chinese politics. Don't forget the involvement of French and English folks as well as scary financial liabilities. Certainly, some might ask, what is this to Malaysia? Wait and see. Are you ready for the thrill?