Why Industry 4.0? A local perspective from Southeast Asia

Last week, I spoke at the Industry 4.0 webinar in Malaysia organized by the Federation of Malaysia Manufacturers (FMM).  The theme of the webinar was “From Surviving to Thriving: The Road Ahead of Industry 4.0 for the Manufacturing Industry”.   I decide to focus the first part of my talk on why manufacturers should adopt Industry 4.0 in Malaysia, with the title “Transitioning to Industry 4.0:  The post-covid reality”.

Although the talk was focused more on the operating environment in Malaysia, I thought that I share the key elements as it is applicable to many countries in the region as Covid-19 affected the whole region and had similar impact in most countries.

The post-Covid reality

We are now moving into the post-covid reality.   The Covid-19 pandemic is now beginning to be treated as endemic in many countries, and we will need to adjust to this new reality.   All of us have experienced disruptions caused by Covid-19 in the past 2 years – the disruptions in the supply chain due to demand spikes and shortfall, material shortages, labour shortages due to changing health regulations, etc.   I would like to focus more on the impact of labour, specifically labour costs in the manufacturing sector in Malaysia.

Labour

Labour in manufacturing

Impact of Covid-19 on the labour market

If we look at the labour market in Malaysia, especially in manufacturing, there has been a sharp drop in the available labour resources.  The number of legal foreign workers in Malaysia dropped by almost a million workers because of COVID-19, and even higher if you include the unregistered workers.  Foreign workers which forms a significant pool of resources for the manufacturing industry returned home to be with their families because of the pandemic.  This have had a severe impact in manufacturing, especially in the booming market of electronics and health and medical devices.

In December 2021, FMM estimated that there will be a 600,000 shortfall in foreign labour resources for 2022, if we are comparing with pre-pandemic levels just for manufacturing alone.   These are not small numbers and represents a huge gap that the local manufacturers have to grapple with.

Changing customer expectations on labour conditions

On top of that, the changing customer expectations in terms of labour conditions has put on additional cost pressures on local manufacturing companies.  Some manufacturing companies are under pressure to improve worker conditions in Malaysia as there have been reports of working conditions that are not up to internationally recognised standards.   Companies have to incur additional expenses just to be compliant with their customers requirements, to avoid losing their business.  These are not small expenses, and there were incidences of millions of dollars paid just to stay compliant.   Some companies lost their anchor customer because of these issues.

This will not be a one-time requirement, and you can expect that this will further increase the labour costs for local manufacturers in future.

Labour costs and productivity trends

Let’s look at how labour costs has changed historically.   If we take a look at the the historical monthly minimum wage in Malaysia, it has increased by about 1.2 times over the last 5 years (2016-2020), and the relevant Ministry is looking at potentially increasing it to 1500 RM per month for 2022, an increase of 25% over the current minimum wage.  The average manufacturing wage growth (2016-2020) before the pandemic was around 1.3 times, and although there was a fall in wages due to the pandemic, this is set to grow back quickly post pandemic.

However, if you look at the historical labour productivity growth over the same period, the yearly productivity increase ranged from 1.8%-4.0%.   That is equivalent to a 1.1 to 1.2 times increase over 5 years. It is not enough to offset the increase in wage costs!

A productivity gap

Productivity%20Gap

Productivity Gap

Let me summarise what I have shared:

  1. Average wage increase over 5 years – 1.2 to 1.3 times
  2. There’s also the cost of improving labour conditions, which can be pretty significant, but this will be different for each company
  3. Potential cost of constrained labour force (shortage of labour post-pandemic will drive up costs further – wages, recruitment fees, etc)
  4. Historical labour productivity increase over the same time period – 1.1 to1.2 times only

So what we have is a Productivity Gap!  The historical labour productivity increase is not even enough to offset the average wage increase for manufacturing.  Manufacturing productivity needs to increase significantly in Malaysia to stay competitive in view of future labour cost increases.  

Addressing the productivity gap

If you have been asking yourself, why should I go to Industry 4.0, this is where it comes in.  Industry 4.0 offers a way to address the productivity gap for labour.    Studies have shown that implementing Industry 4.0 projects, such as smart factories, can increase manufacturing productivity by more than 1.2 times over 5 years, with some studies projecting a jump of 10-25% productivity in the first year alone.

And this goes beyond improving labour productivity.  The numbers gets better when you include KPIs like increased factory throughput, reduced inventory, faster customer responsiveness, etc.  I have seen payback periods of less than a year for Industry 4.0 projects.

Why Industry 4.0 in Malaysia?

So, why should Malaysian manufacturers adopt industry 4.0?  In the past 2 years, we have experienced dramatic disruptions in global supply chain, which was mainly caused by Covid19, which also affected the workforce and potential markets.   All this leads to productivity and cost pressures for the company.

What industry 4.0 can give you is the visibility to react to changes, and the automation to drive up productivity and flexibility in your operations.  What we see is that the cost pressures will still be there post-pandemic, and Industry 4.0 offers you a way to address the productivity gap that you are going to face going forward.

Sources:

https://www.theedgemarkets.com/article/state-nation-malaysias-continuous-struggle-foreign-labour

https://www.nst.com.my/news/nation/2021/12/751263/fmm-manufacturing-sector-needs-600000-foreign-workers

https://www.bloomberg.com/news/articles/2022-01-10/investing-titans-can-no-longer-ignore-malaysia-s-labor-abuses

https://tradingeconomics.com/malaysia/minimum-wages

https://tradingeconomics.com/malaysia/wages-in-manufacturing

https://www.ceicdata.com/en/indicator/malaysia/labour-productivity-growth

https://www.kearney.com/operations-performance-transformation/article/?/a/the-state-of-industry-4.0-article