KUALA LUMPUR: The Middle East crisis has worsened conditions in the Malaysian manufacturing industry, says the Federation of Malaysian Manufacturers (FMM).
FMM president Jacob Lee (pic) said their findings in a second survey confirm that conditions have deteriorated since the first findings were published on April 7 this year.
"What began as a freight and logistics cost disruption has now spread across the manufacturing value chain, affecting raw material availability, order volumes, cash flow, investment decisions and employment.
"Based on our second survey, 72% of 225 respondents reported that their overall operating conditions have worsened since early April this year with 22% describing the deterioration as significant.
"Only 5% reported some improvement, mainly companies that had managed to secure alternative supply sources.
"Only 20% reported no change, indicating they continue operating under the same pressures highlighted in the earlier survey," he said in a statement on Thursday (May 7).
He commended the Federal Government for the seriousness and urgency with which it has responded to the Middle East crisis.
"The establishment of a Crisis Management Taskforce and weekly meetings of the National Economic Action Council (NEAC) chaired by the Prime Minister reflects a whole-of-government commitment that the industry has both welcomed and actively supported.
"We have been actively exploring alternative raw material supply sources to support the government's efforts to diversify away from disrupted supply chains.
"Three measures recommended in the first survey have since been announced and implemented, which is an exemption from import duty and sales tax on reimported
Malaysian goods that could not complete delivery due to the conflict.
"The other two are the government-facilitated supply arrangements to secure critical raw material feedstock from alternative origins and the Bank Negara Malaysia Small Medium Enterprises Stabilisation Relief Facility of RM5bil with applications opening through participating financial institutions from May 15, 2026," he said.
He said FMM will continue to engage the government actively as this situation evolves.
"While the efforts are needed, our findings show further urgent action is required.
"Raw material shortages are reaching critical levels as 70% of respondents report that their raw material supply situation has worsened since early April, with 20% describe the deterioration as significant.
"Widely affected categories are resins and polymers, petrochemical feedstock including naphtha and benzene, industrial chemicals and solvents, metals and alloys and packaging materials.
"These are core production inputs with no ready substitute," he said.
Lee said the inventory position is of immediate concern as 40% of respondents hold only one to two months of their critical affected materials, while 29% hold between two and three weeks and 6% hold less than two weeks.
He said 72% of respondents cite China as their primary alternative sourcing country.
"Domestic suppliers are being explored by 40% and India and Thailand are cited by 16% each.
"The most common barrier is quality or specification mismatch, cited by 48%.
"So far 13% have fully secured an operational alternative supplier and 18% have identified an alternative but say the cost premium makes it commercially unviable, while 13% have found no viable alternative despite active efforts," he said.
He said currently freight and logistics costs remain severely elevated with 87% of respondents report higher freight costs since Feb 28 this year.
"Freight costs have risen 20% to 50% above pre-conflict levels.
"Some 86% are experiencing additional transit times due to vessel rerouting via the Cape of Good Hope, with routes to Europe now taking 35 to 45 days rather than 25 to 30 days.
"We have 49% of respondents report increased domestic transport costs, making it the most cited logistics problem in this survey, ahead of port congestion, cargo rollovers and container shortages," he said.
He said hauliers in key industrial corridors are prioritising higher-paying cargo and declining existing rate contracts.
"The breakdown in haulage connectivity between Pasir Gudang and the Port of Tanjung Pelepas is cited as a serious bottleneck.
"The root cause in many cases is diesel quota exhaustion.
"Some 10% have had export cargo returned, abandoned or redirected due to port access restrictions in the Gulf, with commercial losses per company ranging from several hundred thousand US dollars to over US$1mil," he said.
He said their working capital and cash flow is under increasing stress with 13% say the pressure is severe enough to affect their ability to pay suppliers or fulfil orders.
"Extended transit times compound this further, as payment from buyers can only be triggered upon delivery.
"For manufacturers with limited cash reserves, the resulting shortfall is increasingly difficult to bridge with some banks tightening lending conditions or requesting additional collateral," he said.
Lee said 50% report that the conflict has affected demand within Malaysia, as higher retail prices weaken consumer purchasing and squeeze manufacturer margins and 60% have deferred or cancelled investment, automation or expansion plans.
"These effects will not be felt immediately, but they will show up in productivity and industrial competitiveness over the next two to three years.
"Jobs are at risk as many respondents have made or are planning workforce adjustments.
"The most common responses are reduced overtime or shortened working hours, implemented by 40% of respondents and hiring freezes in place at 33% with 5% having announced or implemented retrenchment.
"If cost and supply pressures continue without
adequate relief, reduced hours and suspended operations will move toward permanent workforce reductions.
"The risk is most acute among small and medium enterprises with fewer than 75
employees, who make up 35% of survey respondents," he said.
Lee said based on the survey, recommendations that can help manufacturers include duty and tax exemptions on alternative-origin raw materials.
He said 65% of respondents cited duty and tax exemptions on alternative-origin raw materials as the most urgent outstanding measure, particularly for resins and polymers, petrochemical feedstock, industrial chemicals, metals and packaging materials sourced outside the Middle East due to the conflict.
He then called for further tax deductions on crisis-related freight surcharges, war risk insurance premiums, rerouting charges and demurrage fees for the 2025 and 2026 tax years.
"Respondents also called for a targeted industrial fuel subsidy or cost stabilisation mechanism for manufacturers using diesel in production processes such as kilns, furnaces, boilers and ovens as these manufacturers are excluded from the diesel subsidy and are absorbing full market-rate fuel price increases with no offset.
"We urge the government to expand diesel quota allocations as well for licensed hauliers serving key industrial and port feeder routes, particularly along the Pasir Gudang to Port of Tanjung Pelepas corridor, to reduce surcharges and delivery disruptions.
"We urge the government to defer all remaining port tariff increases for at least 12 months or until freight rates return to pre-conflict levels," he said.
He said that the Transport Ministry should require shipping lines operating at Malaysian ports to disclose surcharge categories, applicable rates and calculation methods, while establishing a formal complaints channel for cargo owners as currently shipping lines continue to impose port fuel adjustment surcharges outside contracted rates.
"The government needs to fast-track regulatory approvals for alternative raw material sources and expand government-to-government supply arrangements to additional countries including Kazakhstan and Canada as well as other potential sources for sulphur, ammonia, fertiliser inputs and selected polymer grades.
"We propose for targeted, time-bound wage or employment retention support for affected companies, particularly SMEs and export-oriented manufacturers, conditional on retaining employees during the crisis period," he said.
