Recent news which reported the Deputy Human Resource Minister as having said that the resumption on the hiring of foreign workers next year will be limited to construction, plantation and agriculture sectors have caused some anxieties among investors in the gloves sector. While not immediately damaging in our view, such labour policy and the recent detention order by the US CBP over labour issues highlight the urgency for glove manufacturers to address their foreign labour dependency - raising question whether a business model that is so highly dependent on cheap foreign labour can be sustainable. A complete revamp of factory labour force from cheap foreign to local wage equivalent will significantly compromise profitability but Top Glove nevertheless remains a sustainable business entity under such a condition in our view. Of course, a transition away from cheap foreign labour – if management chooses such a route - will be a gradual process and so will the financial impact. Automation and future expansions in regional countries where labour is abundant are other viable alternatives. With choices at hand, Top Glove can sustain as a global industry leader in our view. It will learn from these unsettling experiences. Labour management should improve as may other aspects of ESG management. If so, it will come out smelling of roses.

Scope of foreign workers hiring needs to be looked at beyond being strictly confined to construction, agriculture and plantation. The Ministry of Human Resource clarified via a press statement issued shortly following the news last Thursday that it would consider applications to allow employers in sectors that are in urgent need of foreign labour such as construction, agriculture and plantation. We interpret this to mean that it would not exclude applications from other sectors next year when the hiring freeze is lifted. (Due to Covid19, there is a blanket foreign hiring freeze till the year-end.) In any case, rubber products come under the purview of the Malaysian Rubber Export Promotion Council (MREPC) – a unit under the Ministry of Primary Industries often identified to oversee the plantation sector. Given that the rubber gloves industry is one of few that is thriving currently, which provides badly needed support to the Malaysian economy and stock market, it is unlikely in our view, that the government would not heed the views of the lobbyists within the FMM where rubber products manufacturers are well represented, to allow more sectors within the manufacturing industry to employ foreigners while they strategise long-term plans to reduce the dependency.

Many of the main labour issues were being addressed since beginning of last year. Top Glove had to bear the brunt of a detention order issued on 16th July by the US Custom and Border Patrol related to labour management issues that Top Glove have, allegedly, failed to comply with international labour standards – the very same issues that they were last alleged to have committed by the Guardian in a news article dated 9th December 2018. Both allegations suggested conditions at Top Glove would meet several of the International Labour Organisation’s criteria for modern slavery and forced labour, including withheld identity documents, debt bondage and excessive overtime.

Top Glove conceded that while it may have fallen short by ILO standards, it is generally compliant with local labour laws. Given the significance of Top Glove as a major manufacturer, the government has made checks on Top Glove following the incident. While the RMCO Taskforce found Top Glove failing to implement adequate social distancing practices for which a compound was issued by the Health Ministry, and a compliance notice issued by the Ministry of Housing and Local government over crowded living environment in workers quarters, the Human Resource Ministry detected no forced labour

Source: Kenanga Research - 3 Aug 2020