By A. Stephanie
Richard Riot Jaem
The expected minimum wage increase pending cabinet approval will hit manufacturing and plantations sectors the hardest, though the weak ringgit would mitigate this impact to some extent, said a research house.
Last Friday, Human Resources Minister Richard Riot Jaem announced that the minimum wage review had been completed and submitted for the cabinet’s approval, but did not disclose the new wage rate as it was too premature.
However, The Star reported, citing a source, that the new minimum wage had been set at RM1,000 for the Peninsula Malaysia, RM900 for Sarawak and RM850 for Sabah and Labuan. The paper noted that Malaysian Trades Union Congress had proposed RM1,200 as the minimum wage, but this was turned down by employers.
Following on this announcement, research house UOB KayHian expects the manufacturing and plantation sectors to be most impacted by the wage hike, as labour costs account for 8%-12% of operating costs for manufacturers and up to 35% for planters.
“This review does not come as a surprise, and we understand that the government has been holding dialogues with manufacturers. This round of minimum wage hikes, should it materialise, will have a smaller impact on corporate profits versus the time when minimum wages were first imposed,” the analyst noted in a report released today.
UOB Kay Hian continued, “We reckon the most impacted sectors would be manufacturing and plantation which generally feature a higher proportion of labour costs, although the impact on the generally export-oriented manufacturing companies will be mitigated by the ringgit’s weakness.”
Labour costs constitute around a third of plantation companies’ operating costs, however this goes beyond minimum wage rates. Harvesters are paid for productivity on top of their base salaries, and thus estate labourers’ monthly wages constantly exceed that of the minimum wage.
The research house remarked, “As labour costs account for about 30%-35% of total cost of production, the proposed hike will effectively translate into a 2%-4% increase in total costs.
“Also, the increase in base salary is very likely to be mitigated by adjustment of the variable wage. However, assuming the base is raised by 6.5%-12.5%, net income would fall by a nominal 0.5%-1.5%,” UOB KayHian said.
Within the manufacturing sector, glove makers attribute about 9%-12% of operating expenditure to labour costs, and assuming no costs are passed on from the upwards revision of statutory minimum wages, the RM1,000 new rate will raise direct labour costs by about 10%.
This will thus lower glove makers’ 2015 through 2017 earnings by approximately 5%-12%, UOB KayHian said, adding, “Nevertheless, we expect the impact to earnings to be largely mitigated by the stronger US dollar and softer raw material prices.”
For other manufacturers, such as those in the plastics packaging industry, labour costs account for 8%-10% of operating expenditure, but profits for 2015 to 2017 will be impacted less, at around 5%-6% instead.
Like glove makers, the rest of the manufacturing sector will see the RM100 hike in minimum wage will drive expenditure on labour up 10%, mitigated by the weaker ringgit to dollar as well as cheaper raw materials, the report said.
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