KUALA LUMPUR: The manufacturing sector’s second half of 2025 (2H 2025) is projected to be softer due to persistent cost pressures and weaker demand expectations, according to the Federation of Malaysian Manufacturers (FMM).
Its president Tan Sri Soh Thian Lai said the expansion of the sales and services tax (SST) effective July 1, 2025, coupled with the imposition of United States (US) tariffs and higher electricity tariffs for the industrial sector could weigh on the industry.
"Firms are also shifting from caution to consolidation. Industry players are now more defensive with less push for expansion.
"They are prioritising efficiency and risk management due to geopolitical tensions and global trade shifts resulting from the US tariffs,” he told reporters at the FMM Business Conditions Survey for 1H 2025 here on Wednesday.
Soh noted that the semi-annual survey was conducted on July 2, 2025, with 627 respondents nationwide.
He added that the SST expansion will drive higher costs and compliance challenges. This has affected manufacturers significantly with close to half reporting substantial impacts ranging from higher operating costs to added compliance burdens and operational complexities.
Most companies are grappling with issues such as product classification, treatment of mixed supplies, and unclaimed input exemptions, which risk eroding efficiency and competitiveness, particularly for small and medium enterprises (SMEs).
"Rising costs from newly taxed services, difficulties in securing exemptions, and broader compliance challenges, including system upgrades, customs rulings and transaction treatment were cited as key pain points," he said.
Thus, manufacturers are calling for targeted government action, with top priorities being expanding exemptions for essential inputs, clearer classification guidance, stronger transitional support, and advisory assistance.
Soh also said that the ongoing China-US trade war, still unresolved, may impact local industry players, especially if the US were to impose higher taxes on Chinese goods. China’s exports to the US would be reduced, forcing its producers to seek alternative markets.
"ASEAN will be one of their main targets. Not only China, but countries such as Japan, South Korea and the European Union trading bloc will target ASEAN. Malaysia could face cheap imports from China, creating very challenging competition for local SMEs," he said.
Meanwhile, FMM said Malaysia’s 1H 2025 manufacturing sector performance had weakened. Business activities and sales and production indices slipped from the earlier 2024 gains, weighed down by rising costs and fragile demand.
Despite these challenges, employment remained broadly stable, with most firms retaining their workforce. Capital investment continued at a moderate pace, although expansion appetite had weakened.
"Cost pressures persisted as the production cost index rose to 158 from 144, reflecting a sustained but moderating input price increases.
"About two-thirds of the respondents reported higher costs, although more firms than before cited stable conditions.
"Overall, manufacturers in 1H 2025 shifted from cautious optimism to a more defensive stance. They are focusing on consolidation and operational continuity while managing fragile demand and elevated costs," he added.- Bernama
