Thursday, November 27, 2008

A wild thought in the wake of E&E export decline

The Electrical and Electronics (E&E) sector in Malaysia may be the first wave of challenges to face the Malaysian economy. The Bloomberg report describes a grim picture of the unfolding economic turmoil that is now lapping at Malaysian shores.

The government has announced plans for retraining of Malaysians that may be laid-off in the wake of contracting export demand.

The other challenge is how to soften the blow of reducing export demand by stimulating domestic consumption.

Perhaps it is time to consider a phased reduction of the income tax rate from the current top rate of 29% to a top rate of 18%. This plan will really have a genuine stimulus effect by releasing disposable income back into the Malaysian economy.

Consider this. Lower tax rates will generate more economic activity and consumption within the domestic economy. From a qualitative standpoint, it will create a more sustainable domestic economic base. From a quantitative standpoint, there will be greater taxable revenue collected from individuals and corporations. This is a volume proposition.

While mulling over this radical proposal, read the economic horror story below:

Nov. 26 (Bloomberg) -- Sales by U.S. electronics makers in Malaysia will fall this year and next as a global recession saps demand for Dell Inc. computers and other devices, the head of an industry group said.

Electronics manufacturers in the Southeast Asian nation will probably have to cut jobs in 2009 after reducing overtime and letting workers take longer Christmas holidays this year to lower costs, said Wong Siew Hai, chairman of the Kuala Lumpur- based American Malaysian Chamber of Commerce’s electronics industry group.

“They are very uncertain and very concerned,” Wong said in a telephone interview yesterday from Penang, a manufacturing base for Dell, Intel Corp. and other U.S. companies. “Next year you will see the real impact. If there’s a world recession and the economic impact is going to be great, they have to do something, nobody will be spared.”

Malaysia cut interest rates for the first time since 2003 this week, seeking to bolster domestic demand as recessions in the U.S., Japan and Europe hurt exports and threaten factory jobs across Asia. Retrenchments in Malaysia’s manufacturing industry jumped almost five-fold to 10,182 in the third quarter, central bank data show.

“It’s inevitable when the operating environment slows down, you should expect a rise in retrenchments,” said Lee Heng Guie, chief economist at CIMB Investment Bank Bhd. in Kuala Lumpur. Malaysia’s unemployment rate may rise to as high as 4.2 percent from 3.6 percent currently as job cuts in 2008 will likely exceed the average of the past five years, he said.

Sales Forecasts
Export sales by the American Chamber’s 17 electronics companies may decline this year, instead of growing 0.4 percent as predicted in July, Wong said. Sales, which gained 7.1 percent to 73.8 billion ringgit ($20.4 billion) in 2007, may fall further next year, he said.

“I am concerned about how this situation will impact the growth of the manufacturing sector, particularly in the immediate and short term,” Malaysian Trade Minister Muhyiddin Yassin said in a speech to manufacturers in Kuala Lumpur today.

The government, which has announced a 7 billion-ringgit spending plan to spur growth, needs to help manufacturers by cutting utility costs, Wong said. Electronics companies are only able to forecast orders weeks ahead now, down from monthly and quarterly projections previously, he said.

‘Worst Crisis’
“The visibility is very short, things are changing very fast,” Wong said. “This seems like the worst crisis so far.”

Most if not all of the industry group’s members have reduced overtime work at their factories, and more than half plan to have longer-than-normal Christmas production shutdowns, he said. Some are considering shorter work weeks and have delayed their capital investment to “conserve costs,” he added.

“It will get worse before it gets better,” Satish Lele, director of industrial technologies for Frost and Sullivan Asia Pacific, said in Kuala Lumpur today. In the worst-case scenario, the global recession could stretch “well into 2010,” he said.

Malaysia’s industrial production fell for the first time in 18 months in September. The government this month slashed its growth forecast for 2009 to an eight-year low of 3.5 percent and predicted a decline in exports next year as the worst financial crisis since the Great Depression pushed economies from Singapore to New Zealand into recession.

Intel, Motorola Inc. and other U.S. electronics makers account for about 12 percent of Malaysia’s total exports, and more than a quarter of the country’s electronics shipments.


walla said...

Hardest hit will be those in the cities where overheads are higher. Price stickiness has only kept household expenses up against static or shrunken income.

Many would have been living on credit - housing and car mortgages, credit card payments and insurance premiums to service, higher education loans for the children, school bus costs and tuition fees, and allowances for the old folks.

The tensions from resultant defaults are going to percolate into the retail and services sectors which mean many part-time jobs will fold as well. Meanwhile, expect more social unrest and crime problems.

I wonder if the same problem being faced in the traditional buyer markets will happen here - difficulties in raising L/C's.

Instructive would be to revisit the impact on Malaysia during the Asian Crisis. Thus, for example, McGinness' The Human Face of the Asian Financial Crisis in Malaysia and Indonesia argued (ref:

{{ Prior to the crisis, workers in Malaysia enjoyed rising wages as full employment was attained. (During the crisis)an estimated 221,000 jobs were lost in 1998, mostly in sectors hardest hit by the crisis: 97,000 in manufacturing; 66,000 in construction, and 11,000 in finance, insurance and business services. The official rate of unemployment in 1998 rose to 3.2 percent, compared with 2 percent in 1997 and 2.5 percent in 1996.

Jomo reiterates that these data are suspect since they do not consider unreported cases of retrenchment, other job losses (such as contract labor) or harsh treatment of employees. “Pre-crisis full employment and limited government registration of the unemployed are among other main reasons why the official unemployment rate in 1998 was not as high as expected ….”

Further, Malaysia’s official definition of employment is working at least one hour per week, understating the extent to which underemployment was reported.

Another consideration is that approximately 80 percent of the workers in the construction sector, which was most devastated by the crisis – losing an estimated 7.6 percent of the workforce – were foreign workers. An estimated 207,946 illegal foreign workers returned to their home countries following the outbreak of the crisis, according to the Home Ministry. Therefore, Malaysia had a cushion that softened the impact of the loss in employment demands.

Women were most severely affected by retrenchment. Although women comprise two-fifths of the workforce in Malaysia, 48.1 percent of retrenched workers in 1999 were women, largely from the manufacturing sector “where weak unions made them more vulnerable to coercion and exploitation.”

Female-headed families tended to have few support facilities or networks on which to fall back, making them particularly vulnerable to the crisis.

Those who were fortunate enough to keep their jobs experienced reduced
real incomes. With the reduction in economic activity, demand for labor fell, pushing down wages and reducing over-time work opportunities. In addition, price inflation and currency depreciation further decreased the value of earnings. Exploiting Malaysia’s weak labor unions, employers also were able to use pay-cuts, voluntary layoffs and voluntary separation schemes to cut labor costs. Only about 10 percent of the workforce participated in unions
due to legal restrictions and formal and informal government controls. Consequently, unions were unable to safeguard workers’ wages.

Malaysia has one of the highest savings rates in the world, at nearly 40 percent. Thus, many households drew from their savings during the crisis. However, lower-income households did not have this luxury. Further, those on
fixed incomes, particularly elderly pensioners, reported that their real incomes fell as costs of living rose and deposit interest rates fell.38 Inflation rates, which had remained low leading up to 1997, rose to 5.3 percent in 1998, with the price of food increasing more than any other category.

As a means to address the pressures of globalization and reduce spending, Malaysia has encouraged community support systems rather than state-provided social safety nets. However, those particularly vulnerable to economic downturns are often left with inadequate assistance. }}

Also see Abubakar's Migrant Labour In Malaysia: Impact and Implications of the Asian Financial Crisis

Maybe someone can cook a bright idea to start a collaboration project for all the vendors to cooperate to make things not in their lines, using equipment that will be idling for some time to come. When times become bad, people may want to buy cheaper versions of things.

de minimis said...

wow! Very good info. You've excelled even your usual high standards, walla. The data you have given and the socio-economic context of your analysis is very useful.

I like your collaboration idea. At the ASEAN level, the govts are thinking along these lines. But, closer to home, SMEs should band together and consider sharing resources. Either the industry associations like FMM should look into this or, the government. This may be one solid tactic to lessen the economic impact of any downturn.