Will the minimum wage burn rubber?

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What impact will imposing minimum wages from January 2013 have on our world beating natural rubber industry and glove makers in particular? Chris Eng, Etiqa Insurance & Takaful Bhd’s Head of Research, ponders on this.

In my previous discussions with foreign investors, I tended to highlight the blessings that Malaysia enjoys, blessings that many Malaysians themselves sometimes forget. Other than the relative political stability, the lack of major natural disasters is truly something that Malaysians should be thankful for. Despite being surrounded by the Pacific Ring of Fire, we unfortunately tend to forget that we are sheltered from the earthquakes and volcanoes of Indonesia, the typhoons plaguing the Philippines and while we do get yearly floods, they are nowhere as severe as those affecting Thailand.

Another key blessing we should be thankful is the warm tropical weather that has allowed us to grow an abundance of cash crops in the form of palm oil and previously rubber. While Malaysia may no longer be the world’s largest producer of rubber, our proximity to southern Thailand means that we still have an ample supply of latex for our world beating rubber glove industry. Now dominating world supply, Malaysia’s rubber glove companies now have over 60% of market share worldwide. Other than the ample supply of latex, the rise of our rubber glove companies has been attributed to the ready supply of cheap labour (stripping the gloves off the molds is highly labour intensive) as well as the availability of cheap water for the washing of the gloves during processing. As such, the advent of the minimum wage policy in Malaysia has led some industry players to highlight the risks and rising costs faced by them.

While we will probably see a rise in labour costs for the industry given the high percentage of foreign labour involved (with Bangladesh being a major source of labour for the industry), at the moment, none of the rubber glove players are throwing in the towel just yet. Particularly for natural rubber gloves, our dominant position is just too strong and the other countries that may pose a threat, namely Thailand and Indonesia also have their own minimum wage policy and have seen recent strong hikes in the level of minimum wage.

On the other hand, the minimum wage level is already seeing a move towards automation among the industry players, thus crystallizing fairly early a key benefit of the policy that its proponents have long highlighted. That the reduction of a unnaturally cheap labour source should result in greater automation and eventually a move towards a higher value add economy. In this, we cannot risk falling behind our closest neighbours which have already implemented their own minimum wage policies. We have seen how the Thai automotive industry has progressed via the right incentives and while all policies that could have a short term negative impact need to be implemented gradually and with wisdom, the greater wisdom is to ensure that industries are given the right incentives to move themselves up the value chain while contributing both to society as well as national development.

In this aspect, the rubber glove companies should be applauded for both their willingness to kick start the automation process as well as continuing to develop the Malaysian rubber glove industry. This is of course in the face of another upcoming challenge that could be faced by the industry before the end of 2013, which is namely the reduction of fuel subsidies which will hit them via the hike in natural gas cost. It remains to be seen if this next challenge will kick start the somewhat less than aggressive adoption of biomass power and heat generation that has already been undertaken by some of the rubber glove players. In short, we expect the adoption of the minimum wage policy to actually strengthen the rubber glove players in the long run by an early adoption of increasing automation while their continued evolution and adaptation in the face of upcoming challenges should continue to sharpen their ability to compete worldwide. As the old saying goes, “What doesn’t kill you, makes you stronger”.

Image courtesy of Flickr User License Myxi

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