The Malaysian government is offering tax incentives to encourage labour-intensive industries to install automation as added wage costs from a new minimum wage kick in.
Malaysia implemented minimum wages for the first time on 1 January, 2013 prompting concerns about higher operating expenses and pressure on margins but Prime Minister Najib Razak said he will offer labour-intensive industries such as rubber, plastics, wood, furniture and textiles incentives to modernise their operations, a tactic analysts say may help lift profits by up to 20 per cent.
But some manufacturers, including Top Glove, which produces one out of every four pairs of latex gloves in the world, say the incentives are not enough, while analysts say smaller companies will benefit more due to the way the benefits are structured.
"The direction is there, although it is not enough," Chairman Lim Wee Chai said in a post-earnings conference in Kuala Lumpur yesterday.
Under the new proposals of the first 4 million ringgit (£760,000) firms spend on automation between 2015 and 2017, they will be entitled to tax savings of 2 million ringgit. While that is not enough, Top Glove's chairman said, "sometimes small is also better than zero". The automation benefits will translate into an annual 2 percent rise in net profit, he said.
The removal of gloves from moulds is now carried out by robotic arms at Top Glove, cutting the number of workers per production line to four from eight, a company official says, adding that some of the packing, counting, weighing and sorting has also been automated.
But rubber glove makers such as Top Glove saw costs climb 6 to 16 per cent a year on a compound basis, Thomson Reuters calculations based on corporate income statements show.
Malaysian plastics packaging firms including Scientex, Asia-Pacific's largest stretch film producer by capacity, have seen their production costs rise 11 to 19 per cent annually over the past five years, mainly due to labour, utility and transportation costs.
Scientex may see earnings improve by less than 5 per cent from the benefits in the year ending July 31, 2015, Kuala Lumpur-based RHB Research wrote in a note to clients. Scientex was not immediately available to comment.
Smaller plastic packaging players are set to gain more, with net profit going up as much as 20 per cent next year due to their smaller earnings base, RHB Research said, adding that Karex, the world's largest condom manufacturer by volume, may see its net profit improve between 10 percent and 13 percent.
"With the incentive, I think we can see more than 1 million ringgit flow to our bottom line," Goh Miah Kiat, Karex's chief executive officer, told Reuters. "Although the quantum is still considered small, it is better than nothing and it will entice companies to go for automation."