THE latest increase in minimum wage from RM1,500 to RM1,700 in February has landed employers in a complex landscape of adjustments and challenges.
Among the issues facing them include increased payroll costs, wage compression, administrative and compliance burdens, and overall operational cost increases, especially in labour- intensive sectors.
“The recent minimum wage increase has inevitably contributed to higher operational costs for the Federation of Malaysian Manufacturing member companies, particularly those in labour-intensive sectors,” says FMM president Tan Sri Soh Thian Lai.
“Many manufacturers have had to absorb these additional wage costs while navigating an already challenging business landscape,” he says.
Soh: Many manufacturers have had to absorb these additional wage costs while navigating an already challenging business landscape.
Soh says it is also pertinent to highlight that manufacturers are contending with a broader set of cost pressures beyond wage adjustments.
“Companies are facing rising costs of raw materials, logistics and regulatory compliance, much of which is fuelled by persistent geopolitical tensions, including trade disruptions and global supply chain uncertainties.
“These external challenges have further intensified financial pressures on businesses, making it imperative for companies to pursue sustainable cost management strategies while safeguarding their competitiveness in both domestic and international markets.”
Malaysian Industrial, Commercial and Service Employers Association president YK Lai agrees that wage hikes directly elevate payroll expenses, squeezing profit margins especially for small and medium enterprises (SME).
“Many are compelled to either absorb these costs or pass them on to consumers, potentially affecting competitiveness.”
And while a pay hike is often associated with boosting morale among workers, it is a double- edged sword if it results in wage compression – where experienced employees earn similar wages to newcomers.
“This scenario may impact morale and retention,” says Lai.
At the same time, Lai says smaller enterprises, often with limited specialised human resource services, face challenges in updating payroll systems and ensuring compliance with the new wage regulations.
“When it comes to cash flow, the immediate need to meet higher wage bills can be straining, especially for businesses with tight operating margins. Some may seek external financing to bridge the gap.”
The increase in wages also means a series of new strategies devised by companies to cope with increasing costs.
Diverse strategies
Soh says in response, companies have adopted various strategies to mitigate rising expenses, including investments in automation and digitalisation to boost productivity, restructuring work processes, upskilling employees to enhance efficiency and optimising supply chain management.
Subsequently, Soh says FMM continues to advocate for supportive policies to assist manufacturers in navigating these challenges.
“These include continued targeted incentives to encourage automation, grants to support workforce upskilling, and measures to stabilise input costs to ensure the resilience and growth of Malaysia’s manufacturing sector.”
Lai: For SMEs, employers are gearing towards operational efficiency, cost optimisation and technology adoption. —Others
Lai says for SMEs, employers are gearing towards operational efficiency, cost optimisation and technology adoption.
“Businesses are streamlining operations, reducing waste and renegotiating supplier contracts to offset increased labour costs.
“And embracing automation and digital tools helps in reducing reliance on manual labour, thereby mitigating the impact of higher wages.”
Other strategy include outsourcing HR functions by delegating HR and payroll tasks to specialised firms to allow SMEs to focus on core activities while ensuring compliance with wage laws.
“And of course, utilising government-backed financing options, such as micro-loans from Tekun Nasional and Bank Simpanan Nasional, can assist SMEs in managing increased operational costs.”
For Soh, automation and digital transformation have become crucial strategies for Malaysian manufacturers to adapt to rising labour costs and broader operational challenges.
“By adopting smart technologies such as automation, system integration, robotics, IoT [Internet of Things], and data analytics, companies are significantly enhancing productivity, optimising resource use and reducing dependence on manual labour, helping to mitigate the impact of wage increases.”
He says according to the FMM Business Conditions Survey 2H2024, 44% of member companies have adopted factory automation and Industry 4.0 initiatives.
“The main drivers for this shift are the pursuit of greater operational efficiency and productivity [cited by 60% of respondents] and the need to reduce operating costs [58%], clearly reflecting the industry’s strategic focus on sustainable cost-saving and competitiveness-enhancing measures.”
Soh also reveals that the survey finds system integration is the most widely adopted Industry 4.0 technology (63%), followed by Cloud Computing and Autonomous Robots (45% each), IoT (43%), and Big Data Analytics (34%).
“These trends highlight an accelerating shift toward digitalisation, automation and connectivity, with manufacturers prioritising smart technologies to future-proof their operations and build resilience.”
To a question on the possible influence of the minimum wage hike over foreign investors’ perceptions of Malaysia as a competitive manufacturing hub, Soh says Malaysia continues to be regarded as a preferred manufacturing hub in the region.
“It is important to note that cost increases are being experienced across all economies, as global wage pressures, supply chain shifts and geopolitical developments impact manufacturing competitiveness worldwide.
“In this context, maintaining and enhancing Malaysia’s overall value proposition becomes even more critical.”
He says beyond cost considerations, Malaysia offers a strong foundation that continues to attract foreign investors, such as a large and growing pool of skilled and semi-skilled workers, well-developed infrastructure, a reliable and increasingly sophisticated supply chain network, attractive investment incentives and a generally business-friendly environment.
“These factors collectively position Malaysia favourably compared to other regional manufacturing locations.”
To maintain and strengthen Malaysia’s attractiveness as a manufacturing and investment destination, Soh says efforts must be intensified in several key areas.
“These include continuously upskilling the workforce to meet the needs of high-value and high-tech industries; enhancing infrastructure, particularly in digital connectivity and logistics; strengthening supply chain resilience through greater localisation and diversification; ensuring the timely implementation of competitive incentive packages; and maintaining clear, consistent, and transparent regulatory policies that promote investor confidence.
“There is also a critical need to address excessive and unnecessary regulatory burdens that weigh down the competitiveness of our industries. Reducing compliance costs, simplifying approval processes and streamlining regulatory requirements will not only improve the ease of doing business but also send a strong signal to investors that Malaysia is committed to fostering a pro-business, pro-growth environment.”
