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Malaysia moving to wean itself off foreign workers

Manufacturers long reliant on cheap labor now gird for rising costs

Inside a Top Glove factory. Malaysian companies see automation a way to ease their heavy reliance on foreign workers.

SINGAPORE -- Manufacturers in Malaysia are working to reduce their dependence on an army of cheap foreign laborers as the government steps up its campaign to improve the treatment of these workers in the face of international criticism.

With a shift in government policy expected to raise the cost of employing foreign workers, manufacturers are taking various measures to cope, from greater use of automation to moving operations abroad.

Top Glove, the world's leading maker of rubber gloves, is building a factory in the city of Klang outside Kuala Lumpur. Scheduled to start operating in April, the plant will have 44 production lines -- the most among the company's plants -- and churn out 4.4 billion gloves a year. The company is using cutting-edge technology to economize on labor. The number of workers required for the facility is 400. Three years ago, the figure would have been 800.

The manufacturer plans to invest a total of 220 million ringgit ($49.4 million) by the end of August, two-thirds of which will be spent on the new facility and the rest to install robots at existing plants, among other things.

Despite controlling 25% of the world's rubber glove market, Top Glove suffered a 43% plunge in profit on the year for the September-November quarter. It has ramped up efforts to reduce the labor needed at its plants, with the aim of shrinking its workforce of 7,000 foreign workers -- about 70% of its payroll.

Top Glove will double the number of technical experts developing new equipment to 200 by next year. Technological development is the key to cutting its dependence on foreign workers, said Chairman Lim Wee Chai.

Rival Kossan Rubber Industries is also looking to reduce the nearly 3,000 foreigners on its payroll. It will install new, proprietary packaging equipment at a plant scheduled to begin operating this summer near Kuala Lumpur, which will allow just 1.8 workers to do work that used to require five.

Leading poultry producer Lay Hong is turning to Japanese technology in its efforts to shrink staff. NHF Manufacturing (Malaysia), its joint venture with Japanese food processing giant NH Foods, aims to open a new plant specializing in halal products by 2018. It is working to shift its focus from manpower to automation.

These moves all stem from a shift in Malaysian policies. The number of foreign workers registered with the government has increased 35% between 2011 and 2015 to 2.1 million. Another 2 million are said to be working illegally, meaning those from overseas account for a quarter of the country's labor force.

But the treatment of these workers has drawn heavy criticism. Many are said to be paid below minimum wage and to have their passports taken away to prevent an escape. The U.S. State Department slammed Malaysia as a destination for forced labor and human trafficking in a 2015 report. The government worries that if it fails to address the issue, it could lead to a boycott of Malaysian products.


There is also concern that Malaysia, like many other Asian countries, faces the middle-income trap -- where wages rise on economic growth and drag down the manufacturing sector before the country develops fully.

Malaysia has long relied on cheap labor from poorer neighbors to keep its factories competitive. But this has also allowed outdated products and old labor practices to survive. Few are interested in adopting labor-saving mechanisms and other technological advancements, and its manufacturing sector is losing its edge despite the cheap workers available.

Productivity among manufacturing workers in Malaysia dropped 14.6% a year between 2012 and 2014, according to a report by the World Bank last December. The average decrease across the Association of Southeast Asian Nations was much slimmer at 1.9%.

Although Malaysia's gross domestic product per capita was about the same as South Korea's until the mid-1980s, it now comes to roughly 35% of South Korea's. The country has been left in the dust by its former peer, which aggressively invested in cutting-edge technology and other fields. Even China, where wages are on the rise, has begun to economize on labor to cut costs.

The Malaysian solution

The Malaysian government is taking measures to wean companies off cheap foreign labor, such as by raising the minimum wage. It has cracked down on illegal work and minimum wage abuse. Furthermore, a new policy requires companies to shoulder an annual levy of 1,500 ringgit to 2,500 ringgit for each foreigner they employ.

An average factory worker in Malaysia earns $345 a month, according to the Japan External Trade Organization. This is comparable to Thailand, even though that country's GDP per capita is just 60% or so of Malaysia's. Tougher regulations will inevitably lift wages. Labor-intensive factories will be hit harder than heavily automated ones, like those run by Japanese electronics makers in the country.

Packaging materials maker Scientex announced in November that it will build a stretch film plant in the U.S. state of Arizona. It will invest $25 million in its first American facility, where it will be able to produce items previously exported from Malaysia closer to where they are sold.

Meanwhile, EKA Noodles last month shut down its flagship plant in Malaysia's Kedah state. The minimum wage hike last July from 900 ringgit to 1,000 ringgit a month made continued operations difficult.

Efforts to curb foreign labor will boost costs in the short term. But without these painful reforms, Malaysian manufacturing could fall far behind the rest of the world.

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