Study on the Impact of Various Costs Increase on the Malaysian

Plastics Industry Malaysian Plastics Manufacturers Association (MPMA)

March 2014

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Respondents’ Background

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1. Years in operation

% of respondents

Respondents’ Background

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2. Size of companies

Based on the 2014 definition by SME Corp: SMEs manufacturing companies with sales turnover not exceeding RM50 million OR full-time employees not exceeding 200 workers.

Respondents’ Background

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3. Employment breakdown by local/foreign workers

% of respondents

Respondents’ Background

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4. Breakdown of Market Sales

% of respondents

Impact of Minimum Wage Policy

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% of

respondents

Impact of Minimum Wage Policy

• Labour cost is one of the major cost components for the manufacture of plastic products

• More than three quarters (77%) of the respondents indicated that labour cost constitutes at least 10% of their total manufacturing costs.

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Impact of Minimum Wage Policy

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Impact of Minimum Wage Policy

• After the implementation of the minimum wage policy, half of the respondents (50%) indicated that their direct labour cost has increased by 20% or more.

• Only 23% of the respondents informed that their increase in direct labour cost is less than 10%. This is because they employ more local workers than foreign workers (refer Slide No. 4, 32% of the respondents employ more local workers than foreign workers).

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Measures Taken to Mitigate the Impact of Minimum Wages

10 Note: Individual respondent may have taken more than one measure

Other Costs Increase

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Rate of cost increase

Other Costs Increase

• Other than the higher labour cost, plastics manufacturers also suffering from the 17% increase in electricity tariff beginning January 2014, an average 10% increase in raw material cost in Q1 2014 compared to Q4 2013 due to higher price for crude oil and gas.

• Transportation cost has increased by about 10% following the surge in fuel cost in September 2013.

• The chain effects had also led to an approximate 8% increase in packaging materials and other operational costs.

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Impact on Total Manufacturing Cost

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Impact on Total Manufacturing Cost

• As a result of the various costs increase, approximately 60% of the respondents have suffered an increase in manufacturing cost by more than 10% (45% respondents with cost increase between 11% to 15% and 14% respondents with cost increase by more than 15%). This includes the 10% surge in raw material cost in Q1 2014.

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Impact of All Costs Increase on Sales

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% of respondents

Impact of All Costs Increase on Sales

• 36% of the respondents suffered more than 10% decline in sales.

• However, another 36% indicated that their sales are not affected.

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Measures Taken to Mitigate the Cost Increase

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Measures Taken to Mitigate the Cost Increase

• 36% of the respondents did not pass any of the cost increase to their customers, they absorb all the cost increase to maintain customers. This probably explained why their sales are not affected.

• 64% of the respondents were able to pass on part of the cost increase to their customers, mainly on new products.

• Non of the respondents is able to pass on all the cost increase. 18

Impact of Costs Increase on Profit Margin

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Impact of Costs Increase on Profit Margin

• Since majority (60%) of the respondents have suffered an increase in manufacturing cost of more than 10% (Slide No. 13) and most of them are unable to pass on the cost increase to their customers, half (50%) of them are suffering a severe reduction in their profit margin by more than 10%.

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ADDITIONAL MEASURES TO MITIGATE THE CHALLENGES FACING THE PLASTICS INDUSTRY

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Efficiency (Increase)

• Stricter controls of operations.

– Maintenance (for example, seal leaking air circuits, stop leaking oils, maintain/replace key machine components …reduce rejects, etc.

– Transportation (“synchronise” trips for deliveries , etc.)

– Use of equipment (for example, don’t need a MTC, crusher, for each machine)

• Reduce wastage.

– Material

– Manpower (eg. Simplify operating manual for tasks such as ISO procedures)

– Electricity/water

– Space

– Equipment (optimise machine performance)

Re-engineer your Business

• Move from lower margin jobs to higher margin jobs (may need to acquire additional skill sets! …)

• Downsize to retain higher margin jobs and discard low margin jobs (apply principle of 20/80 rule)

• Supplier support - renegotiate prices (costdown)? …better terms?...

• Alternative materials (cheaper, shorter lead times=less stock)

• Bankers support - better borrowing rates? • Government support?....need to advocate!!

“Relocate” your Business

• “Relocate” your business… (to different sectors, different markets (not necessarily geographically) – Different products mix (for example, from E&E to

industrial?)

• Different geographical markets – Higher cost countries

• Singapore, Latin America • Australia, Middle East • New Zealand, Europe • USA, Canada…etc.

– Lower tech countries – Introduce new products, etc.

Strong Leadership

• Concerted effort by the whole company to meet the challenges

– Management to lead and drive cost saving plans

– Factory leadership from Factory Managers, Supervisors to Line Leaders, Technicians, etc, to ensure plans are put into effect

– Change in mind-set to drive organisation to be more efficient/productive

– Leadership is important to ensure full and effective implementation of changes

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Increase Marketing/Sales Activities

• Find new markets

• Find new customers

• Add value to customers

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Keep Workers ‘Happy’

• Underpaid workers will affect productivity/bottom line which in turn will also affect morale of workers

• Staff must therefore be compensated equitably

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Mergers/Automation

• JV/Merge with a bigger company

– A bigger business entity will provide opportunities to re-negotiate on prices with suppliers

• Automation

– Automation will take time but moving forward now maybe a good time to start

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Conclusion

• The impact of the various costs increase, i.e, minimum wages, electricity tariff, transportation, raw materials, packaging and other operational costs to the plastics industry is severe.

• The inability for the plastics manufacturers to pass on the cost increase to their customers and failure to implement effective measures to reduce their manufacturing cost will result in many companies suffering severe losses.

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Thank you

Malaysian Plastics Manufacturers Association

37, Jalan 20/14, Paramount Garden 46300 Petaling Jaya Selangor, Malaysia

Tel: 03-7876 3027 Fax: 03-7876 8352