Yesterday the US Customs and Border Protection (CBP) issued a notice titled "Notice of Finding That Certain Disposable Gloves Produced in Malaysia With the Use of Convict, Forced or Indentured Labor Are Being, or Are Likely To Be, Imported Into the United States." You can read the full text of the notice here. Today Top Glove issued a clarification on this matter. You can read it here.

There are a few things that need to be noted based on reading through the CBP notice:

1) It refers to the withhold release order (WRO) issued on 15 July 2020. My understanding is that seizure of merchandise refers only to goods covered by that WRO and already held by the CBP. Thus, the direct financial impact on Top Glove from such a seizure will likely be minimal.

2) It refers to goods produced in Malaysia, as was the case with the WRO. Thus, Top Glove exports to the US originating from other countries (Thailand, Vietnam, China), appear to still be unaffected by this decision, as was with the WRO.

3) It refers to the historical situation, i.e. to the seizure of good produced in Malaysia before 15 July 2020 and already held by the CBP. While the document says the decision applies to future deliveries, it is unclear from this note if more recent developments and efforts on the part of the company have been taken under consideration.

According to Top Glove's Hong Kong listing filing, the revenue from the subsidiaries covered by the CBP ban represented 0% of the group's revenue for the 3 months ended 30 November 2020 (i.e. 1Q FY21). It is to be assumed that the same is valid for the company's results in 2Q FY21 since the ban was still in place. In other words the 1H FY21 financial results were achieved with the ban of exports to the US originating from Malaysia in place. Additionally, compared to other major glove manufacturers, the US is generally a smaller target market for Top Glove:

Also see here.

Thus, while the situation is not pleasant, it doesn't appear to have affected the company's financial performance so far. However, what may be affected from this decision might be that certain pending orders for future deliveries to the US (if any such orders still remain) might get canceled. This may potentially benefit other glovemakers which may be able to fulfill such orders at a short notice.

A few weeks ago, on 15 February, in response to reports from the BBC, Top Glove released a comprehensive list of remedial actions, related to the subject matter of labor issues. You can read it here. On 9 March, the appointed independend ethical trade consultancy reviewer Impactt, issued a report with the following 3 conclusions:

- Impactt found that the following Forced labour Indicators were no longer present among the Group’s direct employees: abuse of vulnerability, restriction of movement, excessive overtime and withholding of wages.

- Impactt found that further progress had been made with regard to the following Forced labour Indicators among the Group’s direct employees: retention of identity documents, abusive working and living conditions, deception, debt bondage, physical and sexual violence and intimidation.

- In Impactt’s opinion, as at January 2021, and considering the Group’s ongoing actions, these findings do not amount to systemic forced labour.

You can read the full report here. As mentioned, these conclusions are based on the present situation (as of January 2021), and not as of July 2020. Thus, if the ban will be lifted still remains to be understood. Additionally, it remains to be understood what conditions the company has not met yet, if any.

A more concerning matter are the overall implications for the Malaysian industry as a whole. Top Glove is by no means the worst employer in Malaysia, offering the worst conditions to its workers. In fact, just a few days ago, the company was named among the winners of HR Asia Best Companies to Work for in Asia 2020 (Malaysia) (see the full list here) - a list the company is included in for fifth year in a row (reference). The US recently imposed WROs on subsidiaries of FGV Holdings Berhad (on 30 September 2020) and on subsidiaries of Sime Darby Plantation Berhad (on 30 December 2020), all of them being companies relying on foreign labor as part of their operations. In this sense, it appears that Malaysian exporters to the US (the third largest export market for Malaysia) with significant part of their operations relying on foreign labor (such as manufacturing, agriculture, or even indirectly - construction) and with significant part of their production exported to the US, may suffer from some implicit downside risk or at least an increased uncertainty factor. To be sure, the big glove manufacturers are likely the ones who would financially suffer the least if this issue becomes widespread since they currently hold the capital necessary to automate their operations (see this recent cover story by The Edge on this matter in regards to Kossan's operations). In this sense, it appears that the issue goes beyond a single company, and it might require the active involvement of Malaysian government institutions before it significantly impacts entire industries in the country.

Important disclaimer: Any views expressed are for informational and discussion purposes only. None of this information is intended as, and must not be understood as, a source of advice. It is imperative that you always do your own research and that you make any decisions based on your personal situation and your own personal understanding.