Malaysia lacks c.1.3m workers with the shortage being acute in manufacturing, construction and palm oil. In comparison, approved foreign workers intake total 390k, of which only 47k have arrived. While allegations of forced labour may have impeded its intake, Malaysia has proactively taken remedial steps. Labour cost will inevitably rise with the scarcity, pushing adoption of less labour intensive methods – we see beneficiaries in precast players (used in IBS) and providers of automation solutions. Owners of Act 446 compliant dorms offer good exposure to Malaysia’s efforts in improving foreign workers’ welfare.

Pandemic induced labour scarcity. Covid-19 has exposed the extent of Malaysia’s dependence on foreign labour. Data from MEF shows that the number of registered foreign workers in Malaysia declined -44.7% from 2.0m in 2019 (pre-pandemic) to 1.1m in 2021. This decline would be larger if undocumented foreigners are taken into account – judging from RRP and LRP registrations, there were at least 712.4k illegals in Malaysia between Nov-20 to Jun-22. In a nutshell, foreign workers that returned home after losing their job were not replaced as a result of the intake halt (Mar-20 to Feb-22), and subsequently with economic reopening, a labour shortage ensued.

Hardest hit. Reuters reported that Malaysia lacks close to 1.3m workers across manufacturing (600k), construction (550k), palm oil (120k) and others (27k). Survey results by ACCIM and job vacancy data (a gauge for labour shortage) by SOCSO also suggests the scarcity is most acute in manufacturing, construction and agriculture/ palm oil. This perhaps explains the pedestrian performance in 2Q22 for agriculture/ palm oil (-2.4%/-3.9% YoY) and construction (+2.4%) despite strong headline GDP (+8.9%) – though noting that manufacturing was robust (+9.2%) despite labour woes.

No easy fix. As of late-Aug, it was reported that approvals for the intake of foreign workers totalled 390k, of which only 47k have arrived. This dwarfs in comparison to the abovementioned labour shortage of 1.3m. Even if the entire approved quota of 390k arrive, this would only resolve 30.1% of the estimated shortage. Still, the situation should continue to see a gradual reprieve as Indonesia has lifted its freeze while Bangladesh has agreed to send 500k workers over the next three years. Closing the labour void entirely though, could prove to be a Herculean task.

Forced labour allegations. Since the pandemic, several allegations of forced labour use by Malaysian companies have cropped up, which may have impeded its foreign labour intake. US-CBP currently lists six active WROs and one Finding in Malaysia, while the 2022 TIP report placed the country in Tier-3 (the lowest tier). Unfortunately and unfairly, the other side of the coin is rarely reported by international media with the same extent and depth – that Malaysia has been proactively taking remedial steps. These include (i) introducing/ amending several laws – Act 446 (minimum standards of accommodation), Act A1664 (human trafficking and migrant smuggling) and Employment Act 1955, (ii) WFW app which allows workers to lodge complains without fear of retribution, (iii) NAP on Forced Labour with the aim to eliminate it by 2030, (iv) ratification of ILO’s Protocol 29 and (v) minimum wage increase to RM1.5k.

Investment implications. We believe the labour shortage numbers point towards an inconvenient inevitable for businesses – that labour cost is set to rise. This should push businesses to embark on less labour intensive methods. In this regard, (i) greater IBS composition in construction should benefit precast players such as Kimlun and SunCon, while (ii) acceleration in automation of manufacturing lines will be a boon to companies like Cnergenz, Genetec and Pentamaster which specializes in smart factory and integrated manufacturing solutions. Separately, soon-to-be listed AME REIT offers good exposure to Malaysia’s efforts to increase foreign workers welfare given its dormitory assets, which adhere to the standards under Act 446.

Source: Hong Leong Investment Bank Research - 15 Sept 2022