This article first appeared in Forum, The Edge Malaysia Weekly on December 13, 2021 - December 19, 2021

For years, Malaysia has been fighting to climb out of the middle-income trap, where the workforce is largely employed in low-skilled work and consequently receives low wages.

Moving up the value chain in the production cycle has been the objective of both business and the government for a long time, but not much headway has been made in that direction. Plantation companies and manufacturers always highlight the need to enhance mechanisation and automation to increase efficiency, and point to technology as the way to raise productivity and wages.

But the desire to achieve these goals and reduce dependence on cheap foreign labour has always taken a back seat to maximising profits within the shortest period of time.

As for the government, foreign labour is big business for every entity in the migrant labour supply chain. The well-connected are reported to grease the palms of the authorities so they will approve large quotas for the import of foreign workers. On the ground, enforcement of the law is hampered by corruption among officers who often see foreign workers as easy pickings.

In the last year, the tide has turned against companies that rely on a large foreign labour base because of human rights issues. Their managements 

now have no choice but to incur a higher cost of maintaining a large foreign workforce.

The pain point for these firms lies in the danger that their products may not get into export markets. Those championing the rights of foreign migrant workers have the ears of enforcement agencies such as US Customs and Border Protection, which has the power to prohibit imports from factories that allegedly exploit their workers.

Human rights activists such as Andy Hall have managed to make an impact on companies that allegedly exploit foreign workers. For years, trade unions, non-governmental organisations and national human rights commission Suhakam have been fighting for better standards of living and working conditions for workers, including foreign labourers.

But their efforts have by and large been unsuccessful because they did not hit the companies where it hurts most — their profits. Now, companies that are dependent on cheap labour are feeling the heat.

The pressure started at the plantations where the worker shortage has impacted profits even though crude palm oil prices are at record highs. Owing to the shortage, plantation companies have been struggling to keep up with their collection of fresh fruit bunches (FFB).

This has forced planters to expedite their mechanisation plans, especially at the palm oil mills. Planters have also introduced more incentives for their workers to increase the collection of FFB.

Manufacturers face bigger problems and the prospect of incurring losses in order to accommodate the pressure to improve the working and living conditions of their foreign workers.

Glove manufacturers such as Top Glove Corporation Bhd and Supermax Corporation Bhd had their products barred from entering the US because of the alleged exploitation of workers in their factories in Malaysia. These import restrictions have caused a drop in the values of the companies.

In recent weeks, electronic companies such as ATA IMS Bhd, VS Industries Bhd and SKP Resources Bhd have been embroiled in issues related to the alleged exploitation of their foreign workers.

The three companies are part of a slew of manufacturers in the electronics industry that rely on foreign labour. ATA IMS, VS Industries and SKP Resources provide electronic manufacturing services (EMS) for the production of electronic chips. The EMS business is more labour-intensive than other segments of the industry, hence their dependence on foreign workers.

Some of the companies in this segment have been slammed with allegations of worker exploitation, including forcing them to work more hours than allowed under international labour laws.

ATA IMS has rebutted the allegations, stressing its commitment to observing higher labour standards. It has gone through two reviews of its employment policies and working conditions, and has stated that some of its workers have left the company because they did not get enough overtime work.

But ATA IMS’s reassurances were to no avail. Dyson of the UK has given notice for the termination of its contract with ATA IMS from June next year, causing the company’s market capitalisation to drop by RM2.4 billion within a month.

The Dyson effect on ATA IMS has caused the share prices of both VS Industries and SKP Resources to come under pressure. The companies have seen a drop in share value of about 20%.

ATA IMS has made it known that it may relocate to another country where it would not face labour issues. If ATA IMS does so, it would not be the first. Many other manufacturers have started to relocate to other countries where the cost of production is lower. For example, a favourite destination among furniture manufacturers is Vietnam.

Labour issues are not only impacting Malaysian companies. Garment manufacturers in the UK are bearing the brunt of allegations of “modern-day slavery”. The suppliers to Boohoo Group Plc of the UK saw their contracts terminated after allegations surfaced that they were exploiting cheap labour.

The suppliers in turn said they were forced to pay low wages to stay competitive because customers such as Boohoo want their purchase prices reduced. The suppliers complained that the minimum wage and other associated costs keep rising and they would not be able to operate if wages were high.

Manufacturers in Malaysia face similar constraints. Their customers want lower prices for components. The manufacturers in turn have to move up the value chain to introduce more automation and mechanisation in their processes if they are to stay relevant.

It is something that most of them have known all along. Unfortunately, the urgency is setting in only now because workers’ rights issues are hitting their pockets. The motivation to move up the value chain should have come from the companies themselves, and not because of Andy Hall.

M Shanmugam is contributing editor at The Edge

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's AppStore and Androids' Google Play.