• Manufacturing sales value decreased by 1.9% YoY

• Continued drop in export-oriented output offset by sustained rise in domestic-oriented production

• Manufacturing sales declined for two consecutive quarters

• Manufacturing sector employment increased by 2.4% YoY

• Growing domestic spending to support manufacturing sales

Manufacturing sector's sales value dipped by 1.9% YoY to RM158.7bn in September, a fourth consecutive month of declined albeit at a slower pace when compared to the 3.3% deterioration in the preceding month. The decrease was predominantly influenced by the continuous 12.3% in the petroleum, chemical, rubber & plastic sub-sector (Aug: -12.3%). Additionally, the food, beverages & tobacco sub-sector contracted by 1.7 % (Aug: -6.6%) and the wood, furniture, paper products & printing sub-sector fell by 0.7% (Aug: -0.1%).

In comparison with the previous month, the sales value increased by 4.3% (Aug: +5.8%) while the seasonally adjusted sales value increased 1.7%.

The sales value of export-oriented industries which represented more than two-thirds of total sales, declined by 5.1% YoY in September after shrinking by 6.8% in August. The downturn was mainly attributed to the decrease in the manufacture of coke & refined petroleum products (Sep: -21.6%; Aug: -19.7%); manufacture of machinery & equipment n.e.c. (Sep: -10.5%; Aug: -9.7%); and manufacture of vegetable & animal oils & fats (Sep: - 8.4%; Aug: -15.1%). Nonetheless, the domestic-oriented industries sustained resilience and grew 8.1% YoY in September (Aug: 7.2%). The continuous expansion was primarily underpinned by the substantial rise in the sales value of the manufacture of fabricated metal products, except machinery & equipment which rose by 10.5%; as well as manufacture of motor vehicles, trailers & semi-trailers (Sep: 10.4%; Aug: 15.0%); and manufacture of food products at 9.5%. On a month-on-month comparison, both export-oriented and domestic-oriented industries posted an increase of 4.4% and 4.1%, respectively.

Global semiconductor sales increase 1.9% MoM in September

The Semiconductor Industry Association (SIA) announced global semiconductor sales for the month of September 2023 increased 1.9% MoM and fell 4.5% YoY. Worldwide sales of semiconductors totaled USD134.7bn during 2Q23, an increase of 6.3% compared to 2Q23 and down 4.5% compared to 3Q22. Global semiconductor sales increased on a month-tomonth basis for the seventh consecutive time in September, reinforcing the positive momentum the chip market has experienced during the middle part of this year and according to the SIA, the long-term outlook for semiconductor demand remains strong, with chips enabling countless products the world depends on and giving rise to new, transformative technologies of the future.

Hiring in manufacturing sector continue to increase. There were 2.37mn persons engaged in the manufacturing sector in September, which increased by 2.4% YoY. Compared to the preceding month, the number of employees in this sector increased by 0.8%. On the same note, the salaries & wages paid in the manufacturing sector also posted an increase by 3.2% YoY, totalling RM8.1bn in September. On a month-on-month comparison, the salaries & wages paid grew by 1.7% from RM8.0bn recorded in August. The average salaries & wages paid per employee in September went up by 0.8% YoY and increased by 0.9% MoM. The sales value per employee or productivity decreased by 4.2% YoY to record RM66,864 while the average sales value per employee increased 3.5% MoM as compared to August 2023.

Manufacturing sales declined for two consecutive quarters. In the third quarter of 2023, the sales value of the manufacturing sector continued to decelerate for two consecutive quarters, dropping by 2.7% YoY as compared to the 1.0% YoY decline registered in the previous quarter. The decrease was attributed to the Petroleum, chemical, rubber & plastic (-13.3%), Food, beverages & tobacco (-5.3%); as well as the Wood, furniture, paper products & printing (-0.5%) sub-sectors. On the other hand, the number of employees and salaries & wages paid during the quarter grew by 2.4% and 3.0%, respectively. As compared to the previous quarter, the sales value rebounded to 3.6% from negative 2.3% in the preceding quarter.

Manufacturing sector sales value moderated in 9M23. Overall performance for January to September 2023, the sales value of the manufacturing sector rose by 1.3% YoY, to register RM1.34tn. Meanwhile, the number of employees added by 2.4% YoY with salaries & wages grew by 3.0% YoY. Besides that, sales value per employee registered a decline of 1.1%.

Outlook

Sales value for manufacturing sector recorded the fourth consecutive month of contraction with growth in Malaysia's manufacturing sales declined 1.9% YoY in September. This aligns with the contraction seen in Malaysia's Industrial Production Index (IPI) which declined slightly to -0.5% in September (Aug: -0.3%). However, the manufacturing production data reveals that manufacturing component recovered to +0.4% after three months of contraction (Aug: -0.6%; Jul: -0.2%).

Manufacturing Purchasing Managers’ Index (PMI) was unchanged at 46.8 in October, which indicated further challenges for firms in the manufacturing sector, as demand conditions continued to wane. The index also remained at a contraction level for the fourteenth straight month, signalling a continued weakness of manufacturing activity. The slowdown is closely attributed to weaker demand, both from domestic and international levels. Meanwhile, Malaysia's exports deteriorated further for the seventh consecutive month but at a slower pace of -13.7% YoY in September (Aug: -18.7%) with exports of manufactured goods shrank by 11.8% YoY (Aug: -17.7%) amid some improvement in the shipments of electrical & electronic (E&E) products (Sep: -5.3%, Aug: -15.5%).

While we are heartened by the sustained monthly growth in the sales value, we cautioned that the manufacturing sector could remain downbeat in the near term given the weak external demand, likely for the rest of 2023 and into early 2024. Headwinds in the manufacturing sector could persist on tight financial conditions stemming from an elevated interest rate environment. The persistent downward trend in PMI during the beginning of final quarter raises significant concerns, as it likely mirrors the performance of crucial economic indicators, including industrial output, exports, and, ultimately, the GDP. Despite the ongoing challenges, there is optimism that the demand environment will improve over the next 12 months, boosting confidence in production outlook. Against the backdrop of a challenging global economic landscape, Malaysia's manufacturing sector appears poised to navigate the prevailing headwinds, albeit with cautious optimism. Notably, it is anticipated that this sector will echo the current cyclical downturn observed in the semiconductor industry, a domain marked by sustained challenges to growth.

According to SEMI, the global semiconductor industry appears to be nearing the end of a downcycle and is expected to begin to recover in 2024. Headwinds will continue for the semiconductor manufacturing sector in the second half of the year despite market indicators point to a semiconductor industry bottoming at the end of the first half of 2023. SEMI said that the industry has since started a recovery, setting the stage for continued growth in 2024. All segments are projected to log year-over-year increases in 2024, with electronics sales surpassing its 2022 peak. However, the slower-than-expected demand recovery will delay the normalization of inventory until the end of 2023. While semiconductor markets have seen a sharp downturn the last four quarters, SEMI said that equipment sales and fab construction have been performing much better than expected.

Meanwhile, the Ministry of Finance (MOF) foresees a 5.1% expansion in gross exports across various sectors for 2024. The manufacturing sector is forecast to expand by 4.2% in 2024, driven by better performance in both export and domestic oriented industries. The export-oriented industries are expected to benefit from the recovery of external demand with the E&E segment projected to surge, primarily driven by memory products. This is in line with the rebound in demand for technologically advanced products. The domestic-oriented industries are anticipated to remain favourable in line with robust domestic consumption and investment. In addition, it said the implementation of initiatives under the Chemical Industry Roadmap 2030, the National Energy Transition Roadmap (NETR) and the New Industrial Masterplan 2030 (NIMP 2030) will further strengthen the sector's growth.

Although the technology industry is still under pressure from rate hikes and other macroeconomic challenges, we are positive on the sector since the demand for 5G, AI, and EV-related products and services remain strong, and these are the essential enablers to ignite the digital economy globally. The semiconductor industry is significantly reliant on developing technologies for computational power we are positive on the recovery of this sector due to its sturdy mid-long-term outlook in combination with the expanding acceptance and integration of smart technologies, which encompass a wide range of industries and applications.

However, the ongoing contraction in the manufacturing PMI and continued declines in manufacturing sales and exports are causes for concern. With external demand likely to weaken further, we expect the weakness in manufacturing activity to persist for the rest of the year with multiple indicators pointing towards challenges in both domestic and international markets. The manufacturing sector is likely to remain lacklustre given the weak external demand, and therefore, the sector may continue to face uncertainty and challenges in the near future and the momentum in both manufacturing production and manufacturing sales value is expected to stay soft.

Source: BIMB Securities Research - 8 Nov 2023